8See 31 CFR 1010.230(d) (definition of «beneficial owner») and 31 CFR 1010.230(e) (definition of «customer of a legal entity»). FINRA continues to see challenges in some companies` compliance with their anti-money laundering (AML) obligations under FINRA Rule 3310 (Anti-Money Laundering Compliance Program), the Bank Secrecy Act (BSA), and U.S. Treasury Department regulations.17 In addition, FINRA notes that FinCEN`s Customer Due Diligence Rule (CDD) came into effect on May 11, 2018 and requires companies to identify the beneficial owners of clients of legal entities. understand the nature and purpose of client accounts, conduct ongoing monitoring of client accounts to identify and report suspicious transactions, and update client information based on risk.18 FINRA has observed that some firms are facing new challenges and continue to address the issues addressed in FINRA`s 2017 Audit Report of Findings. The appropriate procedures for the verification aspect of an ICP are governed by a risk-based assessment. A PIC should include risk-based procedures to verify the identity of each client where appropriate and practicable. The procedures shall be based on the broker`s assessment of the relevant risks, including those arising from the different types of accounts held by the broker-dealer, the different methods used to open an account, the different types of credentials available, and the size, location and customer base of the broker-dealer. 12. Is it appropriate to rely on the fact that a potential customer is a personal acquaintance of a registered agent to fulfill his identity verification obligations? 13. Is there an obligation to verify the identity of persons with an authorization to trade via an account? In particular, the customer due diligence rule focuses in particular on the second component by adding a new requirement requiring covered financial institutions to identify and verify the beneficial ownership of all customers of legal entities when opening a new account, subject to certain exclusions and exceptions. The customer due diligence rule also addresses the third and fourth components by amending the existing anti-money laundering program rules for targeted financial institutions to explicitly include these elements as a new «fifth pillar» in anti-money laundering programs. For example, rule (31 CFR 1023,220(a)(2)(ii)(C) requires a CIP to address situations where, based on the risk assessment of a new account opened by a client who is not an individual, the broker-dealer receives information about who has authority or control over that account. This verification method only applies if the broker-dealer is unable to verify the true identity of the client using documentary and non-documentary verification methods.

In addition, a broker-dealer should consider obtaining information on the beneficial owners of high-risk accounts. (See NASD Notice to Members 03-34, Takeover Clearance for the Broker-Dealer CIP Rule, and Common Guidance on Obtain and Retain Owner Information.) A broker-dealer is generally not required to look for its beneficiaries in an escrow account or similar account and only needs to verify the identity of the designated account holder. The CIP rule includes a provision for additional controls for specific customers. The adoption communiqué explains that while companies may be able to adequately screen the majority of customers through both documentary and non-documentary methods, there may be instances where these methods are inadequate. The risk that a company will not know the true identity of the customer may be increased for certain types of accounts, such as: in the case of an online account, an account opened in the name of a company, partnership or trust established in a jurisdiction or carrying on significant activities that has been designated by the United States as a primary money laundering company or that has been designated as a non-cooperative by an international body. or a tax haven. The Treasury Department and SEC emphasize that a company must take additional steps to identify customers who are at increased risk of not being properly identified. A company`s CIP should include additional measures that can be used to obtain information about the identity of individuals associated with the customer if standard documentary methods prove inadequate.

With respect to non-documentary verification, the rule requires that records include a description of the methods and results of any action taken to ascertain a client`s identity. 18. Is there a regulation or guideline that requires member companies to obtain information on the source of funding for accounts? For example, for business accounts such as a foundation, charity, or not-for-profit organization, would regulators expect member firms to document the source of funds as part of their CIP or overall due diligence requirements, or would this be a best practice based on assessing the risks of the business on behalf or the company? The CIP rule does not include persons with the authority to make transaction accounts in the definition of «customer». Therefore, the broker-dealer does not have to verify the identity of these individuals. However, the rule recognizes that situations may arise where a broker-dealer must take additional steps to verify the identity of persons with trading power. In these cases, an AAP is required to address situations where the broker-dealer takes additional steps to verify the identity of a client who is not an individual by obtaining information about individuals with authority or control over the account in order to verify the client`s identity. (See 31 CFR 1023,220(a)(2)(ii)(C).) In addition, the dealer-dealer must comply with FINRA Rule 4512(a)(1)(E) which states that, if the client is a corporation, partnership or other legal entity, the names of all persons authorized to carry on business on behalf of the company must be obtained. An AAP must include procedures to create and maintain a record of all information received to verify a client`s identity. The file must contain at least all identifying information collected by the company about a customer.

The PIC Rule defines «Client» as: (a) a person opening a new account; and (b) a natural person who opens a new account for a natural person that is not legally capable or for a legal person that is not a legal person. With respect to verification, a firm`s records must include a description of each document covered to verify the client`s identity, indicating the type of document, the identification number contained in the document, the place of issue and, if applicable, the date of issue and the expiry date. A broker-dealer must retain all identifying information received from the client for five years after the account is closed. In addition, records of information verifying a client`s identity should not be retained until five years after the file is created. In addition, records must be retained in accordance with the provisions of SEC Rule 17a-4. (See Notice to NASD Members 03-34.) The customer identification requirements of 31 CFR 1023.220 apply to all customers who open a new account, as defined in the Bank Secrecy Act and regulations, including DVP accounts. Organizations may use documentary, non-documentary, or a combination of both methods to verify the identity of DVP accounts. The materials that may be used may vary widely, including, but not limited to, certified laws, government-issued business licenses, partnership agreements, or trust formation records. Some companies use third-party providers to perform non-documentary verification of DVP accounts.

Depending on the type of account and the risks involved, companies can perform additional due diligence on these types of accounts and obtain beneficial ownership information. For more information, see FinCEN`s Guide to Obtaining and Retaining Beneficial Ownership Information and SIFMA`s Proposed Due Diligence Practices for Hedge Funds. No. The adoption communiqué states that it would be inappropriate to give special treatment to personal acquaintances. In addition, the adoption communiqué notes that the rule is flexible enough to make identity verification as discreet as possible for personal acquaintances. Notwithstanding the requirement that the other financial institution be subject to a rule that implements the requirements of the Bank Secrecy Act`s anti-money laundering compliance program, SEC employees must treat entities that treat a registered investment adviser as if the registered investment adviser were subject to do so for purposes of paragraph (a)(6) of the PIC rule or paragraph (j) of the due diligence part. customer beneficial ownership requirements for customers of legal entities, 31 CFR 1010.230 («Beneficial Ownership Requirements»). Enforcement of inaction is contingent on compliance with other provisions of the PIC Rule or beneficial ownership requirements and other conditions described in the relief relief.

To implement an appropriate risk-based anti-money laundering compliance program, a member firm may document the source of funds as part of general due diligence based on the risk assessment of the account or firm. Except in the case of private bank accounts, there are no specific regulations or guidelines that require member companies to obtain information on the source of funding for the account.