The Commodity Futures Trading Commission (CFTC) has filed and settled charges against CHS Hedging LLC, a registered futures commission merchant (FCM), for lapses in anti-money laundering (AML ) provisions, risk management, and supervision.

CFTC Finds CHS Hedging Lapsed in AML Procedures

Announced on Tuesday, the company has been ordered to pay a civil monetary penalty of $6.5 million and undertake remedial measures related to the violations.

"The Commodity Exchange Act and accompanying regulations require FCMs to have and actually implement adequate AML and risk management policies and procedures," said CFTC's Acting Director of Enforcement, Gretchen Lowe. "These are critical components to ensure customers are protected from fraud, and the CFTC will not hesitate to take action and require significant sanctions and remediation."

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CHS Hedging Falls Short in Providing Adequate AML

The violations on the part of CHS Hedging were due to its failure to implement an adequate AML program, specifically on the futures and options trading accounts of one of its customers who owned and controlled a ranching company and other related businesses.

The CFTC's official press release detailed that the particular customer of CHS engaged in speculative trading from January 2017 through December 2020, losing millions of dollars. The customer and his ranching company made more than $147 million in margin payments over the four years. The role of CHS came into question as it received the margin payments without adequately investing the source of the funds or even failed to report the transactions as suspicious activities to the Department of Treasury.

Furthermore, CHS failed to implement risk-based limits for the trading of that particular customer. The imposed limits were inconsistent with the customer's financial resources and hedging needs. Additionally, the customer frequently exceeded the set limits, and CHS raised those limits at times, allowing the customer to continue trading and sustain losses.

In addition, the FCM was blamed for failing to maintain certain mandatory records for pre-trade communications and could not produce certain required records "promptly or in the form requested by CFTC staff."

Regulators globally are taking action against financial companies for AML lapses, primarily imposing heavy fines. The British financial market supervisor recently fined Santander UK £107.7 million for several AML breaches over the years. It was only one of the FCA's many hefty fines as it penalized Standard Chartered Bank £102.2 million, HSBC Bank plc £63.9 million, and NatWest £264.8 million, all for AML breaches.