The CIP must include procedures for responding to circumstances in which the broker-dealer cannot form a reasonable belief that it knows the true identity of a customer. These procedures should describe:. A When the broker-dealer should not open an account ;.
B The terms under which a customer may conduct transactions while the broker-dealer attempts to verify the customer 's identity;. C When the broker-dealer should close an account after attempts to verify a customer 's identity fail; and. D When the broker-dealer should file a Suspicious Activity Report in accordance with applicable law and regulation. The CIP must include procedures for making and maintaining a record of all information obtained under procedures implementing paragraph a of this section.
At a minimum, the record must include:. A All identifying information about a customer obtained under paragraph a 2 i of this section,. B A description of any document that was relied on under paragraph a 2 ii A of this section noting the type of document, any identification number contained in the document, the place of issuance, and if any, the date of issuance and expiration date;.
C A description of the methods and the results of any measures undertaken to verify the identity of a customer under paragraphs a 2 ii B and C of this section; and. D A description of the resolution of each substantive discrepancy discovered when verifying the identifying information obtained.
The broker-dealer must retain the records made under paragraph a 3 i A of this section for five years after the account is closed and the records made under paragraphs a 3 i B , C and D of this section for five years after the record is made.
Despite the latest no-action-relief guidance from the SEC, brokerages must enhance third-party due diligence capabilities.
A dynamic and data-driven investigative public records tool helps brokerages navigate complex fund structures, isolating unsuitable RIAs and mitigating AML risks across the spectrum. Building a broker-dealer compliance program. For brokerages seeking to actualize a best-in-class culture of compliance in , the following considerations are essential: Empower your chief compliance officer Design a risk-based AML strategy, with an emphasis on third-party RIA risk Supplement CIP and UBO initiatives with regtech Protect whistleblowers Ensure that transaction-monitoring systems are adequate.
Ensure that transaction-monitoring systems are adequate While recent penalties against delinquent brokerages suggest more human error than technological deficiency, the first-ever fine issued against a BD for failing to file SARs is a wake-up call for the entire sector. Conclusion Despite the latest no-action-relief guidance from the SEC, brokerages must enhance third-party due diligence capabilities.
Small entities are likely to have a relatively small number of accounts; therefore, they will incur the ongoing costs of individual customer identifications relatively infrequently. Agency Action to Minimize Effect on Small Entities Treasury and the Commission considered significant alternatives to the amendments that would accomplish the stated objective, while minimizing any significant adverse impact on small entities.
In connection with the proposed amendments, we considered the following alternatives: 1 the establishment of differing compliance or reporting requirements or timetables that take into account the resources of small entities; 2 the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for small entities; 3 the use of performance rather than design standards; and 4 an exemption for small broker-dealers from coverage of the proposed amendments or any part thereof.
The final rule provides for substantial flexibility in how each broker-dealer may meet its requirements. This flexibility is designed to account for differences between broker-dealers, including size. Nonetheless, Treasury and the Commission did consider alternatives indicated above. Treasury and the Commission believe that the alternative approaches to minimize the adverse impact of the rule on small entities are not consistent with the statutory mandate of Section In addition, Treasury and the Commission do not believe that an exemption is appropriate, given the flexibility built into the rule to account for, among other things, the differing sizes and resources of broker-dealers, as well as the importance of the statutory goals and mandate of section Money laundering can occur in small firms as well as large firms.
As noted above, the final rule parallels the requirements of section of the Act. Accordingly, a regulatory impact analysis is not required. The authority citation for part continues to read as follows: Authority: 12 U. Subpart I of part is amended by adding For the purposes of this section: 1 i Account means a formal relationship with a broker-dealer established to effect transactions in securities, including, but not limited to, the purchase or sale of securities and securities loaned and borrowed activity, and to hold securities or other assets for safekeeping or as collateral.
C 77a et seq. C 78o b A broker-dealer must establish, document, and maintain a written Customer Identification Program "CIP" appropriate for its size and business that, at a minimum, includes each of the requirements of paragraphs b 1 through b 5. The CIP must be a part of the broker-dealer's anti-money laundering compliance program required under 31 U.
The CIP must include risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable. The procedures must enable the broker-dealer to form a reasonable belief that it knows the true identity of each customer. The procedures must be based on the broker-dealer's assessment of the relevant risks, including those presented by the various types of accounts maintained by the broker-dealer, the various methods of opening accounts provided by the broker-dealer, the various types of identifying information available and the broker-dealer's size, location and customer base.
At a minimum, these procedures must contain the elements described in this paragraph b 2. The CIP must contain procedures for opening an account that specify identifying information that will be obtained from each customer. Except as permitted by paragraph b 2 i B of this section, the broker-dealer must obtain, at a minimum, the following information prior to opening an account: 1 Name; 2 Date of birth, for an individual; 3 Address, which shall be: i For an individual, a residential or business street address; ii For an individual who does not have a residential or business street address, an Army Post Office APO or Fleet Post Office FPO box number, or the residential or business street address of a next of kin or another contact individual; or iii For a person other than an individual such as a corporation, partnership or trust , a principal place of business, local office or other physical location; and 4 Identification number, which shall be: i For a U.
NOTE to paragraph b 2 i A 4 ii : When opening an account for a foreign business or enterprise that does not have an identification number, the broker-dealer must request alternative government-issued documentation certifying the existence of the business or enterprise.
B Exception for persons applying for a taxpayer identification number. Instead of obtaining a taxpayer identification number from a customer prior to opening an account, the CIP may include procedures for opening an account for a customer that has applied for, but has not received, a taxpayer identification number.
In this case, the CIP must include procedures to confirm that the application was filed before the customer opens the account and to obtain the taxpayer identification number within a reasonable period of time after the account is opened. The CIP must contain procedures for verifying the identity of each customer, using information obtained in accordance with paragraph b 2 i of this section, within a reasonable time before or after the customer's account is opened.
The procedures must describe when the broker-dealer will use documents, non-documentary methods, or a combination of both methods, as described in this paragraph b 2 ii. A Verification through documents. For a broker-dealer relying on documents, the CIP must contain procedures that set forth the documents the broker-dealer will use.
These documents may include: 1 For an individual, an unexpired government-issued identification evidencing nationality or residence and bearing a photograph or similar safeguard, such as a driver's license or passport; and 2 For a person other than an individual such as a corporation, partnership or trust , documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, a partnership agreement, or a trust instrument.
B Verification through non-documentary methods. For a broker-dealer relying on non-documentary methods, the CIP must contain procedures that set forth the non-documentary methods the broker-dealer will use.
C Additional verification for certain customers. The CIP must address situations where, based on the broker-dealer's risk assessment of a new account opened by a customer that is not an individual, the broker-dealer will obtain information about individuals with authority or control over such account. This verification method applies only when the broker-dealer cannot verify the customer's true identity using the verification methods described in paragraphs b 2 ii A and B.
The CIP must include procedures for responding to circumstances in which the broker-dealer cannot form a reasonable belief that it knows the true identity of a customer. These procedures should describe: A When the broker-dealer should not open an account; B The terms under which a customer may conduct transactions while the broker-dealer attempts to verify the customer's identity; C When the broker-dealer should close an account after attempts to verify a customer's identity fail; and D When the broker-dealer should file a Suspicious Activity Report in accordance with applicable law and regulation.
The CIP must include procedures for making and maintaining a record of all information obtained under procedures implementing paragraph b of this section. At a minimum, the record must include: A All identifying information about a customer obtained under paragraph b 2 i of this section, B A description of any document that was relied on under paragraph b 2 ii A of this section noting the type of document, any identification number contained in the document, the place of issuance, and if any, the date of issuance and expiration date; C A description of the methods and the results of any measures undertaken to verify the identity of a customer under paragraphs b 2 ii B and C of this section; and D A description of the resolution of each substantive discrepancy discovered when verifying the identifying information obtained.
The broker-dealer must retain the records made under paragraph b 3 i A of this section for five years after the account is closed and the records made under paragraphs b 3 i B , C and D of this section for five years after the record is made. In all other respects, the records must be maintained pursuant to the provisions of 17 CFR The CIP must include procedures for determining whether a customer appears on any list of known or suspected terrorists or terrorist organizations issued by any Federal government agency and designated as such by Treasury in consultation with the Federal functional regulators.
The procedures must require the broker-dealer to make such a determination within a reasonable period of time after the account is opened, or earlier if required by another Federal law or regulation or Federal directive issued in connection with the applicable list.
The procedures also must require the broker-dealer to follow all Federal directives issued in connection with such lists. The CIP must include procedures for providing customers with adequate notice that the broker-dealer is requesting information to verify their identities.
Notice is adequate if the broker-dealer generally describes the identification requirements of this section and provides such notice in a manner reasonably designed to ensure that a customer is able to view the notice, or is otherwise given notice, before opening an account.
For example, depending upon the manner in which the account is opened, a broker-dealer may post a notice in the lobby or on its website, include the notice on its account applications or use any other form of oral or written notice. What this means for you: When you open an account, we will ask for your name, address, date of birth and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. The CIP may include procedures specifying when the broker-dealer will rely on the performance by another financial institution including an affiliate of any procedures of the broker-dealer's CIP, with respect to any customer of the broker-dealer that is opening an account or has established an account or similar business relationship with the other financial institution to provide or engage in services, dealings, or other financial transactions, provided that: i Such reliance is reasonable under the circumstances; ii The other financial institution is subject to a rule implementing 31 U.
The Commission, with the concurrence of the Secretary, may by order or regulation exempt any broker-dealer that registers with the Commission pursuant to 15 U. The Secretary, with the concurrence of the Commission, may exempt any broker-dealer that registers with the Commission pursuant to 15 U. In issuing such exemptions, the Commission and the Secretary shall consider whether the exemption is consistent with the purposes of the Bank Secrecy Act, and in the public interest, and may consider other necessary and appropriate factors.
Nothing in this section relieves a broker-dealer of its obligation to comply with any other provision of this part, including provisions concerning information that must be obtained, verified, or maintained in connection with any account or transaction. Treasury simultaneously published 1 jointly with the banking agencies, a proposed rule applicable to banks as defined in 31 CFR Treasury, the Commission, the CFTC, and the banking agencies received approximately comments in response to these proposed rules.
Many of those commenters raised issues similar to those we received in connection with the proposal respecting broker-dealer customer identification programs.
These persons will be subject to the customer identification rule being issued by the CFTC. A, 67 FR at However, the introducing firm and the new clearing firm would need to meet the requirements in paragraph b 6 such as entering into a contract and providing certifications to the extent they intend to rely on each other to undertake CIP requirements with respect to customers that open accounts after the transfer.
Exchange Act Release No. In addition, the due diligence procedures required under other provisions of the BSA or the securities laws may require broker-dealers to look through to owners of certain types of accounts. Several commenters emphasized that requiring an individual employee to disclose personal information to all of the employer's financial institutions may be an unwarranted intrusion into the privacy of those individuals, increasing their risk of becoming victims of identity theft.
Accordingly, a broker-dealer's CIP will apply to any foreign offices, affiliates, or subsidiaries of such entities that open new accounts. Since the final rule is being codified in 31 CFR Part , it will incorporate the definition in section Therefore, the citation has been removed from the final rule.
The definition of "person" in section However, if the customer is a non-U. B, 67 FR at - Reliance under this paragraph is optional. C, 67 FR at - The broker-dealer must determine, based upon appropriate risk factors, including those discussed above, whether the information presented by a customer is reliable.
We recognize that a foreign business or enterprise may not have an identification number. Therefore the final rule notes that when opening an account for such a customer, the broker-dealer must request alternative government-issued documentation certifying the existence of the business or enterprise. See 26 CFR C, 67 FR at D, 67 FR at See , e. Other documents, such as the trust certificates and legal opinions suggested by one commenter, also may be appropriate for verification.
The list in the rule is meant to be illustrative. Final rule, paragraph b 2 ii A 1. For a person other than an individual, these documents may include documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, a partnership agreement, or a trust instrument.
Final rule, paragraph b 2 ii A 2. Ultimately, it will depend on the circumstances and the broker-dealer's assessment of the relevant risk factors.
The final clause acknowledges that there may be circumstances, beyond those specifically described in this provision, when a broker-dealer should use non-documentary verification procedures. G, 67 FR at In response to one of the commenters, we limited this requirement to "substantive" discrepancies to make clear that records would not have to be made in the case of minor discrepancies, such as those that might be caused by typographical mistakes.
However, there may be cases where a broker-dealer's affiliate is subject to a CIP rule issued by Treasury and one of the other Federal functional regulators. For example, broker-dealers already should have compliance programs in place to ensure they comply with Treasury's Office of Foreign Assets Control rules prohibiting transactions with certain foreign countries or their nationals.
F, 67 FR at However, in such a case, the broker-dealer remains solely responsible for assuring compliance with the rule, and therefore must actively monitor the operation of its CIP and assess its effectiveness. Accordingly, the contract and certification requirement in the final rule applies equally to affiliate and non-affiliate reliance. The reference to firms that register under 15 U.
The Commission arrived at this estimate by considering: 1 the total number of accounts at the year-end ,, as reported by broker-dealers on their FOCUS Reports; and 2 the annualized growth rate in total accounts for the years through ten percent.
The Commission also estimates that the number of accounts that are closed each year equals five percent of the total number of accounts. Accordingly, the Commission estimates that the total annualized growth rate for new accounts each year is fifteen percent.
Therefore, starting with the total of ,, and using an annualized growth rate of fifteen percent, the Commission estimates that 16,, new accounts will be added in , 18,, in and 20,, in The final rule will be effective only for the last quarter of This estimate seeks to account for the fact that many firms already have customer identification and verification procedures and that discrepancies in size and complexity will result in differing time burdens.
The Commission believes that broker-dealers will have senior compliance personnel draft their CIPs and that this will take an average of 16 hours.
The Commission anticipates that in-house counsel will spend on average 4 hours reviewing the CIP. As of September 30, , there were approximately 5, broker-dealers that engaged in some form of a public business.
The Commission believed broker-dealers would have a compliance manager implement the necessary changes. The Commission believes broker-dealers will have a compliance manager implement the necessary changes.
The Commission estimates computer programmers will do this work. The Commission estimates that generally systems changes will need to be made only by broker-dealers that carry or clear customer accounts. FOCUS report data indicates that there are approximately such broker-dealers. For non-resident aliens, the SIA Committee recommended that the broker-dealer obtain, in addition to the information above, a passport number or other valid government identification number. The SIA Committee also made a number of recommendations with respect to customers that are not natural persons.
Generally then, most broker-dealers that carry customer accounts are members of the NASD and subject to Rule These firms likely already obtain the required identifying information from their customers. Therefore, requiring that each piece of identifying information be obtained should not impose a significant additional burden. As indicated previously, the Commission estimates that the number of new accounts in the upcoming years will be: 16,, in , 18,, in and 20,, in The Commission further estimates that the average time spent verifying an account will be five minutes.
The Commission estimates that the number of new accounts in the upcoming years will be: 16,, in , 18,, in and 20,, The Commission understands that most of these firms have automated processes for complying with many regulatory requirements. Accordingly, the Commission estimates that it will take broker-dealers on average thirty seconds to check whether a person appears on a government list. The Commission estimates that the number of new accounts in the upcoming years will be: 16,, in , 18,, in and 20,, in This estimate takes into consideration the fact that many small firms will be able to provide adequate notice by hanging signs in their premises.
Larger firms will be able to provide notice by updating account opening documentation or electronic account opening systems. The Commission believes that broker-dealers will have an attorney draft the appropriate notice, and that this will take approximately one hour. The Commission believes that broker-dealers will have a compliance manager implement the notice, and that implementation will take approximately one hour.
This estimate takes into account the fact that many broker-dealers already make and maintain many of the required records and that the requirements in the final rule have been modified. Home Previous Page. See 31 U. Brokers or dealers that limit their securities business to effecting transactions in securities futures products may register with the Commission pursuant to 15 U.
A foreign financial institution includes: i a foreign bank including a foreign branch or office of a U. Broker-dealers also must take steps to ensure that they are not indirectly providing correspondent banking services to foreign shell banks through foreign banks with which they maintain correspondent relationships.
To assist institutions in complying with the prohibitions on providing correspondent accounts to foreign shell banks, FinCEN has provided a model certification that can be used to obtain information from foreign bank correspondents. The due diligence program must include appropriate, specific, risk-based policies, procedures, and controls reasonably designed to enable the broker-dealer to detect and report, on an ongoing basis, any known or suspected money laundering conducted through or involving any foreign correspondent account Section of the PATRIOT Act.
A related rule covers when enhanced due diligence on foreign financial institutions is required. FinCEN maintains instructions for filing the form, which detail, among other things, the minimum information requirements for the form. Broker-dealers must maintain a copy of any SAR filed and supporting documentation for a period of five years from the date of filing the SAR.
In situations that require immediate attention, such as terrorist financing or ongoing money laundering schemes, broker-dealers should immediately notify law enforcement in addition to filing a SAR. FBARs are filed using Form One provision requires broker-dealers to respond to mandatory requests for information made by FinCEN on behalf of federal law enforcement agencies.
The other provides a safe harbor to permit and facilitate voluntary information sharing among financial institutions. If the broker-dealer identifies an account or transaction identified with any individual, entity or organization named in the request, it must report certain relevant information to FinCEN.
Voluntary Information Sharing Among Financial Institutions: Section b : A separate safe harbor provision encourages and facilitates voluntary information sharing among participating financial institutions. The safe harbor provision, added to the BSA by Section b of the USA PATRIOT Act, protects financial institutions, including broker-dealers, from certain liabilities in connection with sharing certain AML related information with other financial institutions for the purposes of identifying and reporting activities that may involve terrorist acts or money laundering activities.
This may be done by checking a list that FinCEN makes available. OFAC is an office within Treasury that administers and enforces economic and trade sanctions based on U. OFAC acts under presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under U. As a tool in administering sanctions, OFAC publishes lists of sanctioned countries and persons that are continually being updated.
Its list of Specially Designated Nationals and Blocked Persons SDNs lists individuals and entities from all over the world whose property is subject to blocking and with whom U. Broker-dealers must report all blockings and rejections of prohibited transactions to OFAC within 10 days of their being identified and annually. In addition to the blocking sanctions described above, OFAC maintains several sanctions programs that prohibit U. OFAC has the authority to impose substantial civil penalties administratively.
If transactions originate from or are routed to any FATF-identified countries, it might be an indication of suspicious activity. FinCEN also adopted a number of AML requirements, including the requirement to obtain beneficial ownership information. See 81 Fed. Customer comparisons to lists issued by OFAC involve separate and distinct requirements.
These publications include: statistics regarding SAR filings and trends; an industry forum highlighting compliance issues and practices prepared by private sector members of the Advisory Group; and guidance regarding practical issues relevant to SAR filing and reporting.
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