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[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48328-48338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-704]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB90

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA34


Customer Identification Programs for Futures Commission Merchants
and Introducing Brokers

AGENCIES: Financial Crimes Enforcement Network, Treasury; United States
Commodity Futures Trading Commission.

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: Treasury, through the Financial Crimes Enforcement Network
(FinCEN), and the United States Commodity Futures Trading Commission
(CFTC or Commission) are jointly issuing a proposed regulation to
implement section 326 of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA PATRIOT) Act of 2001 (the Act). Section 326 of the Act
requires Treasury to jointly prescribe with the CFTC a regulation that,
at a minimum, requires

[[Page 48329]]

futures commission merchants and introducing brokers to implement
reasonable procedures to verify the identity of any person seeking to
open an account, to the extent reasonable and practicable, maintain
records of the information used to verify the person's identity, and
determine whether the person appears on any lists of known or suspected
terrorists or terrorist organizations provided to the futures
commission merchant or introducing broker by any government agency.

DATES: Written comments on the proposed rule may be submitted on or
before September 6, 2002.

ADDRESSES: Because paper mail in the Washington, DC area may be subject
to delay, commenters are encouraged to e-mail or fax comments. Comments
should be sent by one method only. Futures commission merchants and
introducing brokers (and their respective trade associations) are
encouraged to submit comments only to the CFTC. Other commenters are
encouraged to submit comments only to FinCEN. All comments will be
considered by Treasury and the CFTC in formulating the final rule.
    CFTC: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, Attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521, or by e-mail to
[email protected]. Reference should be made to "Proposed Section 326
Rule " Customer Identification."
    FinCEN: Comments may be mailed to FinCEN, Section 326 Futures
Industry Comments, PO Box 39, Vienna, VA 22183, or sent to Internet
address [email protected] with the caption "Attention:
Section 326 Futures Industry Rule Comments" in the body of the text.
Comments may be inspected at FinCEN between 10 a.m. and 4 p.m. in the
FinCEN Reading Room in Washington, DC. Persons wishing to inspect the
comments submitted must request an appointment by telephoning (202)
354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT:
    CFTC: Office of the General Counsel, (202) 418-5120, Commodity
Futures Trading Commission, 1155 21st Street, NW., Washington, DC
20581.
    Treasury: Office of the Chief Counsel (FinCEN), (703) 905-3590;
Office of the Assistant General Counsel for Enforcement (Treasury),
(202) 622-1927; or the Office of the Assistant General Counsel for
Banking & Finance (Treasury), (202) 622-0480.

SUPPLEMENTARY INFORMATION:

I. Background

A. Section 326 of the USA PATRIOT Act

    On October 26, 2001, President Bush signed into law the USA PATRIOT
Act.\1\ Title III of the Act, captioned "International Money
Laundering Abatement and Anti-terrorist Financing Act of 2001," adds
several new provisions to the Bank Secrecy Act (BSA), 31 U.S.C. 5311 et
seq. These provisions are intended to facilitate the prevention,
detection, and prosecution of international money laundering and the
financing of terrorism.
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    \1\ Pub. L. 107-56.
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    Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318
that requires the Secretary of the Treasury (Secretary) to prescribe
regulations setting forth minimum standards for financial institutions
and their customers regarding the identity of the customer that shall
apply in connection with the opening of an account at the financial
institution.
    Section 326 applies to all "financial institutions." This term is
defined very broadly in the BSA to encompass a variety of entities
including banks, agencies and branches of foreign banks located in the
United States, thrifts, credit unions, brokers and dealers in
securities or commodities,\2\ futures commission merchants, insurance
companies, travel agents, pawnbrokers, check-cashers, casinos, and
telegraph companies, among many others. See 31 U.S.C. 5312(a)(2),
5312(c)(1)(A).
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    \2\ Treasury has previously expressed the opinion that
introducing brokers are "brokers or dealers in commodities" and
therefore come within this definition of "financial institution."
See Financial Crimes Enforcement Network; Anti-Money Laundering
Programs For Financial Institutions, 67 FR 21110, 21111 n.5 (April
29, 2002) (citing 31 U.S.C. 5312 (a)(2)(h)). Nonetheless, Treasury
takes this opportunity to clarify formally that section 5312
(a)(2)(H) includes "introducing brokers" within the definition of
"financial institution."
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    For any financial institution engaged in financial activities
described in section 4(k) of the Bank Holding Company Act of 1956
(section 4(k) institutions), the Secretary is required to prescribe the
regulations issued under section 326 jointly with each of the CFTC, the
Securities and Exchange Commission (SEC), and the banking agencies,
namely, the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, and the National Credit
Union Administration (collectively referred to as the banking
agencies). Final regulations implementing section 326 must be effective
by October 25, 2002.
    Section 326 provides that the regulations must require, at a
minimum, financial institutions to implement reasonable procedures for
(1) verifying the identity of any person seeking to open an account, to
the extent reasonable and practicable; (2) maintaining records of the
information used to verify the person's identity, including name,
address, and other identifying information; and (3) determining whether
the person's name appears on any lists of known or suspected terrorists
or terrorist organizations provided to the financial institution by any
government agency. In prescribing these regulations, the Secretary is
directed to take into consideration the various types of accounts
maintained by various types of financial institutions, the various
methods of opening accounts, and the various types of identifying
information available.
    The following proposal is being issued jointly by Treasury, through
FinCEN, and the Commission. It applies only to persons registered, or
required to be registered, with the Commission as either futures
commission merchants or introducing brokers under the Commodity
Exchange Act (CEA) (7 U.S.C. 1 et seq.), except persons who register
pursuant to section 4f(a)(2) of the CEA. Accordingly, this rule does
not apply to persons who register, or are required to register, as
futures commission merchants or introducing brokers solely because they
effect transactions in security futures products. These section
4f(a)(2) futures commission merchants and introducing brokers must be
registered with the SEC as brokers or dealers, and they are therefore
the subject of rules issued jointly by Treasury and the SEC
implementing section 326. Regulations governing the applicability of
section 326 to other financial institutions, such as those regulated by
the banking agencies, are also the subject of separate regulations.
    Treasury, the Commission, the SEC and the banking agencies
consulted extensively in the development of all rules implementing
section 326 of the Act. All of the participating agencies intend the
effect of the rules to be uniform throughout the financial services
industry.
    The Secretary has determined that the records required to be kept
by section 326 of the Act have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, to protect against
international terrorism.

[[Page 48330]]

B. Codification of the Joint Proposed Rule

    The substantive requirements of the joint proposed rule will be
codified with other Bank Secrecy Act regulations as part of Treasury's
regulations in 31 CFR part 103. To minimize potential confusion by
affected entities regarding the scope of the joint proposed rule, the
CFTC is also proposing to add a provision in its own regulations in 17
CFR part 1 that will cross-reference the regulations in 31 CFR part
103. Although no specific text is being proposed at this time, the
cross-reference will be included in a final rule published by the CFTC
concurrently with the joint final rule issued by Treasury and the CFTC
implementing section 326 of the Act.

II. Section-by-Section Analysis

A. Section 103.123(a) Definitions

    Section 103.123 (a)(1) Account. The proposed rule's definition of
"account" is intended to include all types of futures and commodity
option accounts maintained or introduced by futures commission
merchants and introducing brokers. These include, but are not limited
to: accounts to purchase or sell contracts of sale for future delivery,
options on contracts of sale for future delivery, or options on
physicals in any commodity; cash accounts; margin accounts; prime
brokerage accounts that consolidate trading done at a number of firms;
and accounts for repurchase and commodity loan transactions.
    Section 103.123(a)(2) Commission. The proposed rule defines
"Commission" as the United States Commodity Futures Trading
Commission.
    Section 103.123(a)(3) Commodity. The proposed rule defines
"commodity" as any good, article, service, right, or interest
described in Section 1a(4) of the Commodity Exchange Act, 7 U.S.C.
1a(4).
    Section 103.123(a)(4) Customer. The proposed rule defines
"customer" as any person who opens a new account at a futures
commission merchant or is granted authority to effect transactions with
respect to an account at a futures commission merchant. Where an
account is introduced to a futures commission merchant by an
introducing broker, a person opening the account or granted authority
to effect transactions with respect to the account is a customer of
both the futures commission merchant and the introducing broker.
    Under this definition, a person who has an account at the futures
commission merchant prior to the effective date of the proposed rule
would not be a "customer." However, such a person becomes a
"customer" if the person opens a different account thereafter.
Moreover, a person becomes a "customer" each time they open a
different type of account at a futures commission merchant.
    Similarly, an outside advisor with trading authority prior to the
effective date of the regulation is not a "customer." However, such a
person being granted trading authority after the effective date is a
customer. This is true even if the person is granted authority with
respect to an account that existed prior to the effective date or the
person had been granted authority for another account prior to the
effective date.
    The requirements of section 326 apply to "customers" (i.e.,
persons opening new accounts or certain persons being granted trading
authority), but do not apply to persons seeking information about an
account such as a schedule of transaction fees, if an account is not
opened. In addition, transfers of accounts from one futures commission
merchant to another that are not initiated by the customer, for example
as a result of a bankruptcy, merger, acquisition, or purchase of assets
or assumption of liabilities, fall outside of the scope of section 326,
and are not covered by the proposed rule.\3\
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    \3\ However, there may be situations involving the transfer of
accounts where it would be appropriate for a futures commission
merchant to verify the identity of customers associated with the
accounts it is acquiring. Therefore, Treasury and the Commission
expect procedures for transfers of accounts to be part of a futrures
commission merchant's overall anti-money laundering program required
under section 352 of the USA PATRIOT Act.
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    Section 103.123(a)(5) Futures Commission Merchant. The proposed
rule defines "futures commission merchant" as (and therefore applies
to) any persons registered, or required to be registered, with the
Commission as futures commission merchants under the CEA, except
persons who register, or are required to be registered, solely because
they effect transactions in security futures products. These latter
futures commission merchants, who register with the Commission pursuant
to section 4f(a)(2) of the CEA, will be subject to regulations issued
jointly by Treasury and the SEC implementing section 326.
    Section 103.123(a)(6) Introducing Broker. The proposed rule defines
"introducing broker" as (and therefore applies to) any persons
registered, or required to be registered, with the Commission as
introducing brokers under the CEA, except persons who register, or are
required to be registered, solely because they effect transactions in
security futures products. These latter introducing brokers, who
register with the Commission pursuant to section 4f(a)(2) of the CEA,
will be subject to regulations issued jointly by Treasury and the SEC
implementing section 326.
    Section 103.123(a)(7) Option. The proposed rule defines "option"
as an agreement, contract or transaction described in Section 1a(26) of
the Commodity Exchange Act, 7 U.S.C. 1a(26).
    Section 103.123(a)(8) Person. The proposed rule defines "person"
as having the same meaning as provided in section 103.11(z). Thus, the
term includes natural persons, corporations, partnerships, trusts or
estates, joint stock companies, associations, syndicates, joint
ventures, any unincorporated organizations or groups, Indian Tribes,
and all other entities cognizable as legal entities. This means that
any such entity will be considered a "customer" for the purposes of
this rule if, after the effective date, the person opens an account or
is granted trading authority with respect to an account.
    Section 103.123(a)(9) U.S. person. The proposed rule defines "U.S.
person" because U.S. citizens and persons incorporated under U.S. laws
will be required to provide U.S. tax identification numbers whereas
other persons, who may not have a U.S. tax identification number, will
be required to provide other similar numbers. Thus, the rule defines
"U.S. person" to mean a U.S. citizen or, for persons other than
natural persons, an entity established or organized under the laws of a
State or the United States. The terms "State" and "United States"
are defined in sections 103.11(ss) and 103.11(nn), respectively. A non-
U.S. person is defined in Sec. 103.123(a)(10) as a person who does not
satisfy these criteria.
    Section 103.123(a)(11) Taxpayer identification number. The proposed
rule provides that the provisions of Section 6109 of the Internal
Revenue Code and the regulations of the Internal Revenue Service
thereunder determine what constitutes a taxpayer identification number.

B. Section 103.123(b) Customer Identification Program

    As indicated above, section 326 requires the Secretary and the
Commission to prescribe regulations requiring futures commission
merchants and introducing brokers to implement "reasonable
procedures" for: verifying the identity of customers "to the extent
reasonable and practicable;" maintaining records associated with

[[Page 48331]]

such verification; and consulting lists of known or suspected
terrorists or terrorist organizations. Paragraph (b) of the proposed
rule sets forth the requirement that futures commission merchants and
introducing brokers must develop and operate a customer identification
program (CIP).
    Paragraph (b) also sets forth certain requirements that each CIP
must possess. These factors include the type of identifying information
available and six assessments based upon the business operations of the
futures commission merchant or introducing broker.
    The first factor identified in paragraph (b) is the type of
identifying information available. Thus, in implementing and updating
their CIPs, futures commission merchants and introducing brokers should
consider the type of identifying information that customers can
provide. They should also consider the methods available to verify that
information, and should consider on an on-going basis whether any
additional information or methods are appropriate, particularly as they
become available in the future.
    The six business-operations-based risk factors include assessments
of the futures commission merchant's or introducing broker's (1) size;
(2) location; (3) methods of opening accounts; (4) types of accounts
and transactions; (5) customer base; and (6) reliance, if any, on
another futures commission merchant or introducing broker with which it
shares an account relationship. These specific factors are discussed
below in general terms.\4\
    The first risk factor to consider is the futures commission
merchant's or introducing broker's size. For example, a large futures
commission merchant or introducing broker that opens a substantial
number of accounts on any given day will have different risks than one
that opens a new account no more than once or twice a month. The same
is true when comparing a futures commission merchant or introducing
broker that has many branches with one that has a single office.
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    \4\ This discussion of the risk factors is included because we
believe it is helpful in providing some meaning and context with
respect to the factors. However, we are not attempting to provide
comprehensive definitions of these risk factors or an exhaustive
description of the considerations involved in assessing them.
Instead, we intend our discussion to serve as a starting point for
defining and assessing them.
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    The second risk factor is the location of the futures commission
merchant or introducing broker. Futures commission merchants and
introducing brokers should assess whether they are located or have
offices in areas where money laundering activities have been known to
exist or that otherwise increase the risk that attempts will be made to
open accounts for money laundering purposes.
    The third risk factor is the method by which customers open
accounts. Accounts opened exclusively on-line present different, and
perhaps greater, risks than those opened in-person on the premises of
the futures commission merchant or introducing broker.
    The fourth risk factor is the type of accounts and transactions
that are offered by the futures commission merchant or introducing
broker. Futures commission merchants and introducing brokers should
assess whether there are different risks (and degrees of risk)
associated with the various types of accounts they provide to customers
(e.g., futures, options on futures, prime-brokerage) and transactions
they execute in those accounts (e.g., longs, shorts, spreads).
    The fifth risk factor to be considered is customer base. Futures
commission merchants and introducing brokers should assess the risks
associated with different types of customers. For example, futures
commission merchants and introducing brokers should examine whether
they are opening accounts for customers located in countries the
Secretary determines to be of "primary money laundering concern"
pursuant to section 311 of the Act. In addition, certain legal entities
may pose greater risks (e.g., a closely-held corporation as opposed to
one that is publicly traded).
    Each CIP also should address the risks that may be posed by
different types of intermediated accounts. With respect to
intermediated accounts, such as omnibus accounts and accounts for
commodity pools and other collective investment vehicles,\5\ a futures
commission merchant or introducing broker may have little or no
information about the identities and transaction activities of the
underlying participants or beneficiaries of such accounts.\6\ In most
instances, given Treasury's risk-based approach to anti-money
laundering programs for financial institutions generally, it is
expected that the focus of each futures commission merchant's and
introducing broker's CIP will be the intermediary itself, and not the
underlying participants or beneficiaries. Thus, futures commission
merchants and introducing brokers should assess the risks associated
with different types of intermediaries based upon an evaluation of
relevant factors, including the type of intermediary; its location; the
statutory and regulatory regime that applies to a foreign intermediary
(e.g., whether the jurisdiction complies with the European Union anti-
money laundering directives or has been identified as non-cooperative
by the Financial Action Task Force); the futures commission merchant's
or introducing broker's historical experience with the intermediary;
references from other financial institutions regarding the
intermediary; and whether the intermediary is itself a BSA financial
institution required to have an anti-money laundering program.\7\
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    \5\ The term "collective investment vehicle" is not defined in
regulations under the CEA but is commonly used to describe an entity
through which persons combine funds (i.e., cash) or other assets,
which are invested and managed by the entity. See generally 65 FR
24127 (April 25, 2000) (CFTC rule regarding exclusion for certain
persons from the definition of the term "commodity pool
operator").
    \6\ Similarly, when a customer has given a commodity trading
advisor discretionary trading authority over its account, the
commodity trading advisor and not the futures commission merchant
(or introducing broker) may be the financial institution with the
most information regarding the customer. Treasury, however, has
temporarily exempted commodity trading advisors from the requirement
to establish anti-money laundering programs as required by section
352 of the Act. 67 FR 21110, 21112 (April 29, 2002). At such time as
Treasury proposes or promulgates regulations requiring commodity
trading advisors to establish anti-money laundering programs, it
will provide guidance regarding the permissible interrelation
between commodity trading advisors and futures commission merchants
(or introducing brokers) in order to satisfy their respective BSA
obligations.
    \7\ Treasury's interim final rule requiring mutual funds to
establish anti-money laundering programs provided for similar
treatment of omnibus accounts. 67 FR 21117 (April 29, 2002); see
also proposed 31 CFR 103.131.
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    The sixth risk factor requires an assessment of whether the futures
commission merchant or introducing broker can rely on another futures
commission merchant or introducing broker, with which it shares an
account relationship, to undertake any of the steps required by this
proposed rule with respect to the shared account.\8\ A shared account
relationship may occur in at least two different circumstances: (1) An
introducing broker introduces a customer to a futures commission
merchant and (2) an executing futures commission merchant executes a
customer's order and then "gives up" this filled order to a clearing
futures

[[Page 48332]]

commission merchant who carries the customer's account.\9\ We
anticipate that futures commission merchants and introducing brokers
sharing accounts may realize efficiencies by dividing up the
requirements in this proposed rule pursuant to either their introducing
agreements (in the context of introduced business) or give-up
agreements (in the context of give-up business).\10\ For example, the
introducing broker may undertake to obtain the identifying information
from customers as required in paragraph (c) and the futures commission
merchant may undertake the verification procedures as required in
paragraph (d). Or, in another example, the clearing futures commission
merchant may undertake the procedures required for paragraphs (c) and
(d) both for its own behalf and on behalf of the executing futures
commission merchant. Nonetheless, in both examples, each financial
institution would still be responsible for ensuring that each
requirement in the proposed rule is met with respect to a customer.
Accordingly, a futures commission merchant or introducing broker must
assess whether the other firm can be relied on to fulfill its allocated
responsibilities. Moreover, a futures commission merchant or
introducing broker is expected to cease such reliance if it is no
longer reasonable.
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    \8\ Treasury and the Commission recognize that a related issue
arises in the context of a firm that is registered both with the SEC
as a broker-dealer and with the Commission as a futures commission
merchant or introducing broker. Neither Treasury nor the Commission
intend the effect of this proposed rule to require that both the
securities and futures firm identify, and verify the identity of,
their customers. For example, if a futures firm has a bifurcated
compliance department handling, respectively, the securities and
futures sides of its business, the futures firm could perform the
required customer identification and verification procedures and the
securities firm could rely on it.
    \9\ Although no formal survey has been conducted, the Commission
has been advised that a significant percentage of all customer
trades on U.S. exchanges are effected using an executing futures
commission merchant. A customer may elect to use one or more
executing futures commission merchants for a number of reasons. In
certain circumstances, the customer's carrying futures commission
merchant may not be a member of a particular exchange on which the
contract in question is listed for trading. In others, particularly
in the case of larger institutional customers, the customer may
elect to use one or more executing futures commission merchants in
order not to disclose its intentions to other market participants.
Finally, certain futures commission merchants simply develop a
reputation for being able to execute transactions in particular
contracts well.
    \10\ An executing futures commission merchant subject to this
proposed rule could obtain from a clearing futures commission
merchant, either as part of a give-up agreement or on a transaction-
by-transaction basis, a certification that the latter has performed
the required customer identification or verification functions. For
example, the U.K."s Joint Money Laundering Steering Group (JMLSG),
an association of U.K. Financial Services Industry Trade
Associations, recommends that its members employ a variation of the
certification approach. For give-up business, the JMLSG's Money
Laundering Guidance Notes state: "Where an executing broker and a
clearing broker are undertaking an exchange transaction on behalf of
the same customer, the clearing broker should provide the
appropriate written assurance that it will have obtained and
recorded evidence of the identity of the underlying client." See
http://www.jmlsg.org.uk.
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    Paragraph (b) also requires that the identity verification
procedures must enable each futures commission merchant and introducing
broker to form a reasonable belief that it knows the true identity of
its customers. This provision makes clear that, while there is
flexibility in establishing these procedures, each futures commission
merchant and introducing broker is responsible for exercising
reasonable efforts to ascertain the identity of each customer.
    Finally, paragraph (b) requires that futures commission merchants
and introducing brokers incorporate their CIPs into their overall anti-
money laundering programs required under section 352 of the Act (31
U.S.C. 5318(h)) and National Futures Association (NFA) Compliance Rule
2-9(c).\11\ This requirement is intended to make clear that the CIP is
not a separate program, but is merely one component of each futures
commission merchant's and introducing broker's overall anti-money
laundering program that is designed to ensure compliance with all other
applicable rules and regulations promulgated under the Act and the BSA.
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    \11\ Section 352 requires financial institutions to establish
anti-money laundering programs that, at a minimum, include (1) the
development of internal policies, procedures, and controls; (2) the
designation of a compliance officer; (3) an ongoing employee
training program; and (4) an independent audit function to test
programs. On April 23, 2002, the Commission approved rule changes
submitted by the NFA setting forth for member futures commission
merchants and introducing brokers the minimum requirements for these
programs.
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C. Section 103.123(c) Required Information

    The first step in verifying identity is obtaining identifying
information from customers. Paragraph (c) of the proposed rule provides
that each futures commission merchant's and introducing broker's CIP
must specify identifying information that customers are required to
provide. It also sets forth certain information that must be obtained
at a minimum and provides that the CIP must require the futures
commission merchant and introducing broker to obtain this minimum
information before an account is opened or trading authority is
granted.
    The minimum information that must be obtained from each customer is
(1) name, (2) date of birth, if applicable, (3) address, and (4) U.S.
taxpayer identification number (e.g., social security number or
employer identification number) or if the person is not a U.S. person,
a U.S. taxpayer identification number, an alien identification card
number, or the number and country of issuance of any other government-
issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.\12\ The term "similar safeguard" is
included to permit the use of any biometric identifiers that may be
used in addition to, or instead of, photographs. With respect to the
address requirement, each customer must provide both a mailing and
residence address (if a natural person) or principal place of business
(if not a natural person).
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    \12\ Treasury and the Commission understand these categories of
identification numbers for foreign citizens generally are applicable
to natural persons. Accordingly, we seek comment on the types of
numbers that could be provided by other persons.
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    The rule only specifies the minimum identifying information that
must be obtained from each customer. Futures commission merchants and
introducing brokers, in assessing the risk factors in paragraph (b),
should determine whether additional identifying information is
necessary to form a reasonable belief as to the true identity of each
customer. There may be certain types of customers or circumstances
where it is reasonable to obtain other identifying information in
addition to the minimum. If a futures commission merchant or
introducing broker, in examining the nature of its business and
operations, determines that additional information should be obtained
in certain cases, it should set forth guidelines in its CIP indicating
when this shall occur.
    Treasury and the Commission recognize that a new business may need
access to an account at a futures commission merchant or introducing
broker before it has received an employer identification number from
the Internal Revenue Service. For this reason, the proposed regulation
contains a limited exception to the requirement that a taxpayer
identification number must be provided prior to establishing or adding
a signatory to an account. Accordingly, a CIP may permit a futures
commission merchant or introducing broker to open or add a signatory to
an account for a person other than an individual (such as a
corporation, partnership, or trust) that has applied for, but has not
received, an employer identification number. However, in such a case,
the CIP must require that the futures commission merchant or
introducing broker obtain a copy of the application before it opens or
adds a signatory to the account and obtain the employee identification
number within a reasonable period of time after an account is
established or a signatory is added to an account. Currently, the IRS
indicates that the issuance of an employer identification number can

[[Page 48333]]

take up to five weeks. This length of time, coupled with when the
person applied for the employer identification number, should be
considered by the futures commission merchant or introducing broker in
determining the reasonable period of time within which the person
should provide its employer identification number to the futures
commission merchant or introducing broker.

D. Section 103.123(d) Required Verification Procedures

    After obtaining identifying information from a customer, futures
commission merchants and introducing brokers must take steps to verify
the accuracy of that information in order to reach a point where they
can form a reasonable belief as to the true identity of the customer.
Accordingly, paragraph (d) of the proposed rule requires each futures
commission merchant's and introducing broker's CIP to have procedures
for verifying the accuracy of the identifying information provided by
the customer. Because the proposed rule requires futures commission
merchants and introducing brokers to form a reasonable belief that they
know the true identity of each customer, the extent of the verification
for each customer will depend on the steps necessary for futures
commission merchants and introducing brokers to form such a belief.
    Paragraph (d) requires that the verification procedures must be
undertaken within a reasonable time before or after a customer's
account is opened or a customer is granted authority to effect
transactions with respect to an account. This flexibility must be
exercised in a reasonable manner, given that verifications too far in
advance may become stale and verifications too long after an account is
opened may provide money laundering opportunities to persons who would
not have had such opportunities if verification occurred sooner. The
amount of time it will take a futures commission merchant or
introducing broker to verify the identity of a customer may depend on
the type of account opened, whether the customer opens the account in
person, and on the type of identifying information available. In
addition, although an account is opened, a futures commission merchant
or introducing broker may choose to place limits on the account, such
as restricting the number of transactions or the dollar value of
transactions, until a customer's identity is verified. Therefore, the
proposed rule provides futures commission merchants and introducing
brokers with the flexibility to use a risk-based approach to determine
when the identity of a customer must be verified relative to the
opening of an account or granting of trading authority.\13\
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    \13\ Treasury and the Commission note that it is possible that
futures commission merchants and introducing brokers could violate
other laws by permitting a customer to transact business prior to
verifying the customer's identity. See, e.g., 31 CFR part 500,
prohibiting transactions involving designated foreign countries or
their nationals.
---------------------------------------------------------------------------

    As mentioned above, a person becomes a customer each time they open
a new account or are granted trading authority. Therefore, upon the
opening of each account, the verification requirements of this rule
would apply. However, if a customer whose identification has been
verified previously opens a new account, a futures commission merchant
or introducing broker would not need to verify the customer's identity
a second time, provided it (1) previously verified the customer's
identity in accordance with procedures consistent with this rule, and
(2) continues to have a reasonable belief that it knows the true
identity of the customer.
    The rule provides for two methods of verifying identifying
information: use of documents and use of non-documentary means. For
example, using documents would include obtaining a driver's license or
passport from a natural person or articles of incorporation from a
company. Non-documentary methods would include cross-checking the
information provided by a customer against that supplied by a credit
bureau or consumer reporting agency.
    The proposed rule requires each futures commission merchant's and
introducing broker's CIP to address both methods of verification.
Depending on the type of customer and the method of opening an account,
it may be more appropriate to use either documents or non-documentary
methods. However, in some cases, it may be appropriate to use both
methods. The CIP should set forth guidelines describing when documents,
non-documentary methods, or a combination of both will be used.
    The risk that a futures commission merchant or introducing broker
will not know a customer's identity will be heightened for certain
types of accounts, such as accounts opened in the name of a
corporation, partnership, or trust that is created or conducts
substantial business in jurisdictions designated as primary money
laundering concerns or that have been designated as non-cooperative by
an international body, such as the Financial Action Task Force.
    Obtaining sufficient information to verify a given customer's
identity can reduce the risk that a futures commission merchant or
introducing broker will be used as a conduit for money laundering and
terrorist financing. Each futures commission merchant's and introducing
broker's identity verification procedures must be based on its
assessment of the factors described in paragraph (b) of the proposed
rule. Accordingly, when those assessments suggest a heightened risk,
the futures commission merchant and introducing broker should prescribe
additional verification measures.
1. Verification Through Documents
    Paragraph (d)(1) provides that the CIP must describe when a futures
commission merchant or introducing broker will verify identity through
documents and set forth the documents that will be used for this
purpose. The rule also lists certain documents that are suitable for
verification. For natural persons, these documents may include:
unexpired government-issued identification evidencing nationality or
residence and bearing a photograph or similar safeguard. For other
persons, suitable documents would be ones showing the existence of the
entity, such as registered articles of incorporation, a government-
issued business license, a partnership agreement, or a trust
instrument.
2. Verification Through Non-Documentary Methods
    Paragraph (d)(2) provides that the CIP must describe non-
documentary verification methods and when such methods will be employed
in addition to, or instead of, using documents. The rule allows for the
exclusive use of non-documentary methods because some accounts are
opened by telephone, mail, or over the Internet. However, even if the
customer presents documents, it may be appropriate to use non-
documentary methods as well. In the end, each futures commission
merchant and introducing broker is responsible for employing sufficient
verification methods to be able to form a reasonable belief that it
knows the true identity of the customer.
    The proposed rule sets forth certain non-documentary methods that
would be suitable for verifying identity. These methods include
contacting a customer after the account is opened; obtaining a
financial statement; comparing the identifying information provided by
the customer against fraud and bad check databases to determine whether
any of the information is associated with known incidents of fraudulent
behavior (negative verification); comparing the identifying information
with

[[Page 48334]]

information available from a trusted third party source, such as a
credit report from a credit bureau or consumer reporting agency
(positive verification); and checking references with other financial
institutions. Futures commission merchants and introducing brokers also
may wish to analyze whether there is logical consistency between the
identifying information provided, such as the customer's name, street
address, ZIP code, telephone number (if provided), date of birth, and
social security number (logical verification).
    Paragraph (d)(2) also provides that the CIP must require the use of
non-documentary methods in certain cases; specifically, when a natural
person is unable to present an unexpired government issued
identification document that bears a photograph or similar safeguard or
when a futures commission merchant or introducing broker is presented
with unfamiliar documents to verify the identity of a customer, does
not obtain documents to verify the identity of a customer, does not
meet a customer face-to-face, or is otherwise presented with
circumstances that increase the risk the futures commission merchant or
introducing broker will be unable to verify the true identity of a
customer through documents.
    Thus, non-documentary methods should be used when the futures
commission merchant or introducing broker cannot examine original
documents. In addition, Treasury and the Commission recognize that
identification documents, including those issued by a government
entity, may be obtained illegally and may be fraudulent. In light of
the recent increase in identity fraud, futures commission merchants and
introducing brokers are encouraged to use non-documentary methods, even
when a customer has provided identification documents.

E. Section 103.123(e) Government Lists

    Section 326 of the Act also requires reasonable procedures for
determining whether a customer's name appears on any list of known or
suspected terrorists or terrorist organizations provided by any
government agency. The proposed rule implements this requirement and
clarifies that the requirement applies only with respect to lists
circulated by the Federal government.
    In addition, the proposed rule states that futures commission
merchants and introducing brokers must follow all Federal directives
issued in connection with such lists. This provision makes clear that
futures commission merchants and introducing brokers must have
procedures for responding to circumstances when a customer is named on
a list.

F. Section 103.123(f) Customer Notice

    Section 326 of the Act contemplates that financial institutions
will provide their customers with "adequate notice" of the customer
identification procedures. Therefore, each futures commission
merchant's and introducing broker's CIP must include procedures for
providing customers with adequate notice that the futures commission
merchant or introducing broker is requesting information to verify
their identity. A futures commission merchant or introducing broker may
satisfy the notice requirement by generally notifying its customers
about the procedures it must comply with to verify their identities.
For example, a futures commission merchant or introducing broker may
post a sign in its lobby or provide customers with any other form of
written or oral notice. If an account is opened electronically, such as
through an Internet website, the futures commission merchant or
introducing broker may provide notice electronically.

G. Section 103.123(g) Lack of Verification

    Paragraph (g) of the proposed rule states that each futures
commission merchant's and introducing broker's CIP must include
procedures for responding to circumstances in which it cannot form a
reasonable belief that it knows the true identity of a customer.
    Generally, each futures commission merchant and introducing broker
should only maintain an account for a customer when it has a reasonable
belief that it knows the customer's true identity.\14\ Thus, each
futures commission merchant's and introducing broker's CIP should
specify the actions to be taken when it cannot form a reasonable
belief. There also should be guidelines for when an account will not be
opened. In addition, the CIP should address the terms under which a
customer may conduct transactions while a customer's identity is being
verified. The CIP should specify at what point, after attempts to
verify a customer's identity have failed, an account that has been
opened should be closed. Finally, the procedures should include a
process for determining whether, in connection with conducting customer
identification or verification, a Suspicious Activity Report should be
filed.
---------------------------------------------------------------------------

    \14\ There are some exceptions to this basic rule. For example,
a futures commission merchant or introducing broker may introduce or
maintain an account, at the direction of law enforcement,
notwithstanding that it does not know the true identity of a
customer.
---------------------------------------------------------------------------

H. Section 103.123(h) Recordkeeping

    Section 326 of the Act requires procedures for maintaining records
of the information used to verify a person's identity, including name,
address, and other identifying information. Paragraph (h) of the
proposed rule sets forth recordkeeping procedures that must be included
in each futures commission merchant's and introducing broker's CIP.
These procedures must provide for the maintenance of all information
and documents obtained pursuant to the CIP. Information that must be
maintained includes all identifying information provided by a customer
pursuant to paragraph (c). Thus, the futures commission merchant and
introducing broker must make a record of each customer's name, date of
birth (if applicable), addresses, and tax identification number or
other number. Futures commission merchants and introducing brokers also
must maintain copies of any documents that were relied upon to verify
identity pursuant to paragraph (d)(1), evidencing the type of document
and any identification number it may contain. For example, if a
customer produces a driver's license, the futures commission merchant
or introducing broker must make a copy of the driver's license that
clearly indicates it is a driver's license and legibly depicts any
identification number on the license.
    Futures commission merchants and introducing brokers also must make
and maintain records evidencing the methods and results of measures
undertaken to verify the identity of a customer pursuant to paragraph
(d)(2). For example, if a futures commission merchant or introducing
broker obtains a report from a credit bureau concerning a customer, the
report must be maintained. Futures commission merchants and introducing
brokers also must make and maintain records of the resolution of any
discrepancy in the identifying information obtained. To continue with
the previous example, if the customer provides a residence address that
is different from the address shown on the credit report, the futures
commission merchant or introducing broker must document how it resolved
this discrepancy or, if the discrepancy was not resolved, how it formed
a reasonable belief notwithstanding the discrepancy.
    Futures commission merchants and introducing brokers must retain
all of these records for five years after the date an account is closed
or the grant of

[[Page 48335]]

authority to effect transactions with respect to an account is revoked.
In all other respects, the records must be maintained in accordance
with the requirements of Commission Rule 1.31.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 1.31.
---------------------------------------------------------------------------

    Nothing in this proposed rule modifies, limits or supersedes
section 101 of the Electronic Records in Global and National Commerce
Act, Public Law 106-229, 114 Stat. 464 (15 U.S.C. 7001) (E-Sign Act).
Thus, futures commission merchants and introducing brokers may use
electronic records to satisfy the requirements of this rule, as long as
the records are maintained in accordance with Commission Rules 1.4 and
1.31.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 1.4, 1.31.
---------------------------------------------------------------------------

    Treasury and the Commission emphasize that the collection and
retention of information about a customer as an ancillary part of
collecting identifying information, do not relieve futures commission
merchants and introducing brokers from their obligations to comply with
anti-discrimination laws or regulations.

I. Section 103.123(i) Approval of Program

    Paragraph (i) of the proposed rule requires that each futures
commission merchant's and introducing broker's CIP be approved by its
most senior level (e.g., board of directors, managing partners, board
of managers or other governing body performing similar functions) or by
persons specifically authorized by that body to approve such a program.

J. Section 103.123(j) Exemptions

    Section 326 states that the Secretary and the Federal functional
regulator jointly issuing the rule may by order or regulation exempt
any financial institution or type of account from this rule in
accordance with such standards and procedures as the Secretary may
prescribe. The proposed rule provides that the Commission, with the
concurrence of the Secretary, may exempt any futures commission
merchant or introducing broker that registers with the Commission.
However, it excludes from this exemptive authority futures commission
merchants and introducing brokers that register pursuant to section
4f(a)(2) of the CEA. These are firms that register as futures
commission merchants or introducing brokers solely because they deal in
security futures products. The exemptive authority with respect to
these firms is addressed in the rule issued jointly by Treasury and the
SEC.
    In issuing exemptions under the proposed rule, the Secretary and
the Commission shall consider whether the exemption is consistent with
the purposes of the BSA, and in the public interest, and may consider
other necessary and appropriate factors.

III. Request for Comments

    Treasury and the Commission invite comment on all aspects of the
proposed rule, and specifically seek comment on the following issues:
    1. Whether the proposed definition of "account" is appropriate.
    2. How the proposed rule should apply to various types of accounts
that are designed to allow a customer to transact business immediately.
    3. Ways that futures commission merchants and introducing brokers
can comply with the requirement to obtain both the address of a
person's residence, and, if different, the person's mailing address in
situations involving natural persons who lack a permanent address.
    4. Whether non-U.S. persons that are not natural persons will be
able to provide futures commission merchants and introducing brokers
with the identifying information required in Sec. 103.123(c)(4), or
whether other categories of identifying information should be added to
this section. Commenters on this issue should suggest other means of
identification that futures commission merchants and introducing
brokers currently use or should use in this circumstance.
    5. Whether the proposed rule will subject futures commission
merchants and introducing brokers to conflicting State laws. Treasury
and the Commission request that commenters cite and describe any
potentially conflicting State laws.
    6. The extent to which the verification procedures required by the
proposed rule make use of information that futures commission merchants
and introducing brokers currently obtain in the account opening
process. We note that the legislative history of section 326 indicates
that Congress intended "the verification procedures prescribed by
Treasury [to] make use of information currently obtained by most
financial institutions in the account opening process." See H.R. Rep.
No. 107-250, pt. 1, at 63 (2001).

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies in connection with
their conducting or sponsoring any collection of information as defined
by the PRA. Because this proposed rulemaking contains information
collection requirements within the meaning of the PRA, FinCEN has
submitted the information collection requirements in this proposed rule
to the Office of Management and Budget (OMB) for its review in
accordance with 44 U.S.C. 3507(d).
    An agency may not conduct or sponsor, and a person is not required
to respond to, an information collection unless it displays a currently
valid OMB control number.
    The proposed rule requires futures commission merchants and
introducing brokers to implement reasonable procedures to (1) maintain
records of the information used to verify the person's identity and (2)
provide notice of these procedures to customers. These recordkeeping
and disclosure requirements are required under section 326 of the Act.
    The Commission estimates that approximately 188 futures commission
merchants and 1593 introducing brokers will need to implement a CIP.
Further, the Commission estimates that each futures commission merchant
and introducing broker will need to spend approximately 10 hours per
year to meet the recordkeeping requirements of the proposed rule.\17\
Further, Treasury and the Commission estimate that each futures
commission merchant and introducing broker will need to spend
approximately one hour per year to meet the disclosure requirements of
the new rule. Therefore, the estimated paperwork burden of this
proposed rule is calculated as follows:
---------------------------------------------------------------------------

    \17\ The Commission believes that futures commission merchants
and introducing brokers already obtain from their customers most, if
not all, of the information required under the proposed rule. See
Commission Rule 1.37, 17 CFR 1.37 (requiring futures commission
merchants and introducing brokers to obtain the customer's true
name, address, principal occupation or business, name of guarantor,
and name of person controlling the account), and NFA Compliance Rule
2-30 (futures commission merchants and introducing brokers are
required to obtain, with respect to customers that are individuals,
the customer's true name, address, principal occupation or business,
estimated annual income and net worth, and approximate age). Futures
commission merchants and introducing brokers are required to
maintain these records pursuant to Commission Rule 1.31, 17 CFR
1.31, and NFA Compliance Rule 2-10.
---------------------------------------------------------------------------

    Estimated number of respondents: 1781.
    Estimated average annual burden for the recordkeeping requirements
of the proposed rule for each respondent: 10 hours.
    Estimated average annual burden for the disclosure requirements of
the proposed rule per each respondent: 1 hour.
    Estimated total annual burden: 19,591 hours.

[[Page 48336]]

    Treasury and the Commission invite comment on:
    (1) Whether the collections of information contained in the notice
of proposed rulemaking are necessary for the proper performance of each
agency's functions, including whether the information has practical
utility;
    (2) The accuracy of the Commission's estimate of the burden of the
proposed information collections;
    (3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
    (4) Ways to minimize the burden of the information collections on
respondents, including the use of automated collection techniques or
other forms of information technology; and
    (5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information.
    Organizations and individuals desiring to submit comments on the
information collection requirements should direct them (preferably by
fax (202-395-6974)) to Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Office of Management and
Budget, Paperwork Reduction Project (1506), Washington, DC 20503 (or by
the Internet to [email protected]), with a copy to FinCEN by mail or
the Internet at the addresses previously specified.

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires federal agencies, in promulgating rules, to consider the
impact of those rules on small entities. The rule proposed today would
affect futures commission merchants and introducing brokers. The CFTC
previously established certain definitions of "small entities" to be
used in evaluating the impact of its rules in accordance with the
RFA.\18\ The Commission has previously determined that futures
commission merchants are not small entities for the purpose of the
RFA.\19\ With respect to introducing brokers, the Commission has stated
that it would evaluate within the context of a particular rule proposal
whether all or some affected introducing brokers would be considered to
be small entities and, if so, the economic impact on them of any
rule.\20\ The Commission believes that all introducing brokers will be
affected by this rule, including small introducing brokers. However,
the Commission does not believe that the economic impact of the rule
will be significant. First, the information being collected by
introducing brokers is, for the most part, already required to be
collected by CFTC rules and by self-regulatory organization rules.\21\
Second, each introducing broker will be able to tailor its CIP to fit
its own size and needs; the rule provides for flexibility in how they
will meet their requirements. Lastly, the CFTC believes that any
expenditure associated with establishing and implementing a CIP will be
commensurate with the size of an introducing broker. If an introducing
broker is small, its economic burden should be de minimis. For these
reasons, the Commission does not expect the rule, as proposed herein,
to have a significant economic impact on a substantial number of small
entities. Accordingly, it is hereby certified pursuant to 5 U.S.C.
605(b), that the proposed rule will not have a significant economic
impact on a substantial number of small entities. Treasury and the
Commission invite the public to comment on this finding.
---------------------------------------------------------------------------

    \18\ See 47 FR 18618 (April 30, 1982).
    \19\ See 47 FR at 18619.
    \20\ See id.
    \21\ See, supra, page 34 n.17.
---------------------------------------------------------------------------

VI. Commission's Analysis of the Costs and Benefits Associated With the
Proposed Rule

    Section 15(a) of the CEA requires the CFTC to consider the costs
and benefits of its action before issuing a new regulation. The CFTC
understands that, by its terms, section 15(a) does not require the CFTC
to quantify the costs and benefits of a new regulation or to determine
whether the benefits of the proposed regulation outweigh its costs. Nor
does it require that each proposed rule be analyzed in isolation when
that rule is a component of a larger package of rules or rule
revisions. Rather, section 15(a) simply requires the CFTC to "consider
the costs and benefits" of its action.
    Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the CFTC could in its discretion give
greater weight to any one of the five enumerated areas of concern and
could in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the CEA.
    Section 326 of the Act requires Treasury and the Commission to
prescribe regulations setting forth minimum standards for futures
commission merchants and introducing brokers regarding the identities
of customers that shall apply in connection with the opening of an
account. The statute also provides that the regulations issued by
Treasury and the Commission must, at a minimum, require financial
institutions to implement reasonable procedures for: (1) Verification
of customers' identities; (2) determination of whether a customer
appears on a government list; and (3) maintenance of records related to
customer verification. The proposed rule implements this statutory
mandate by requiring futures commission merchants and introducing
brokers to (1) establish a CIP; (2) obtain certain identifying
information from customers; (3) verify identifying information of
customers; (4) check customers against lists provided by federal
agencies; (5) provide notice to customers that information may be
requested in the process of verifying their identities; and (6) make
and maintain records. The Commission believes that these requirements
are reasonable and practicable, as required by section 326 and,
therefore, that the costs associated with them are attributable to the
statute. Moreover, while the proposed rule specifies certain minimum
requirements, futures commission merchants and introducing brokers will
be able to design their CIPs in a manner most appropriate to their
business models and customer bases. This flexibility should help them
to tailor their CIPs appropriately, while still meeting the statutory
requirements of section 326.
    The proposed rule is not related to the marketplace and thus should
not affect the protection of market participants; the efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; or sound risk management practices. This proposed rule does,
however, address other public interest considerations, namely, the
prevention and detection of money laundering and financing of
terrorism. As noted elsewhere in this preamble, the CFTC believes the
costs associated with implementing CIPs, which are mandated by section
326 of the Act, will be small. On the other hand, the benefits include
a reduced risk of futures commission merchants and introducing brokers
unwittingly aiding criminals, including terrorists, in laundering money
or moving funds for illicit purposes. Additionally, the

[[Page 48337]]

implementation of such programs should make it more difficult for
persons to successfully engage in fraudulent activities involving
identity theft.

VII. Executive Order 12866

    Treasury has determined that this proposed rule is not a
"significant regulatory action" for purposes of Executive Order
12866. The rule follows closely the requirements of section 326 of the
Act. Moreover, as indicated above, Treasury and the Commission believe
that futures commission merchants and introducing brokers already have
procedures in place that fulfill most of the requirements of the
proposed rule. First, the procedures are a matter of good business
practice. Second, futures commission merchants and introducing brokers
already are required to have BSA compliance programs that address many
of the requirements detailed in this notice of proposed rulemaking.
Third, futures commission merchants and introducing brokers should
already 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.
Accordingly, a regulatory impact analysis is not required.

Lists of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations
(Government agencies), Banks, Banking, Brokers, Commodity futures,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Law enforcement, Penalties, Reporting and recordkeeping
requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, part 103 of title 31 of
the Code of Federal Regulations is proposed to be amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS

    1. The authority citation for part 103 is revised to read as
follows:

    Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31
U.S.C. 5311-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub
L. 107-56, 115 Stat. 307.

    2. Subpart I of part 103 is amended by adding new section 103.123
to read as follows:


Sec. 103.123  Customer Identification Programs for futures commission
merchants and introducing brokers.

    (a) Definitions. For the purposes of this section:
    (1) Account means any formal business relationship with a futures
commission merchant, including, but not limited to, those established
to effect transactions in contracts of sale for future delivery,
options on contracts of sale for future delivery, or options on
physicals in any commodity.
    (2) Commission means the United States Commodity Futures Trading
Commission.
    (3) Commodity means any good, article, service, right, or interest
described in Section 1a(4) of the Commodity Exchange Act, 7 U.S.C.
1a(4).
    (4) Customer. (i) The term customer means:
    (A) Any person who opens a new account with a futures commission
merchant; and
    (B) Any person who is granted authority to effect transactions with
respect to an account with a futures commission merchant.
    (ii) Where an account is introduced to a futures commission
merchant by an introducing broker, a person opening the account or
granted authority to effect transactions with respect to the account is
a customer of both the futures commission merchant and the introducing
broker.
    (5) Futures commission merchant means any person registered or
required to be registered as a futures commission merchant with the
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.),
except persons who register pursuant to section 4f(a)(2) of the
Commodity Exchange Act, 7 U.S.C. 6f(a)(2).
    (6) Introducing broker means any person registered or required to
be registered as an introducing broker with the Commission under the
Commodity Exchange Act, except persons who register pursuant to section
4f(a)(2) of the Commodity Exchange Act.
    (7) Option means an agreement, contract or transaction described in
Section 1a(26) of the Commodity Exchange Act, 7 U.S.C. 1a(26).
    (8) Person has the same meaning as that term is defined in
Sec. 103.11(z).
    (9) U.S. person means:
    (i) A U.S. citizen; or
    (ii) A corporation, partnership, trust or person (other than an
individual) that is established or organized under the laws of a State
or the United States.
    (10) Non-U.S. person means a person that is not a U.S. person.
    (11) Taxpayer identification number. The provisions of section 6109
of the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the
regulations of the Internal Revenue Service promulgated thereunder
shall determine what constitutes a taxpayer identification number.
    (b) Customer Identification Program. Each futures commission
merchant and introducing broker shall implement a written Customer
Identification Program (Program) that shall be based on the type of
identifying information available and on an assessment of the varying
risks associated with the futures commission merchant's or the
introducing broker's size, location, methods of opening accounts, types
of accounts and transactions, customer base, and reliance, if any, on
another futures commission merchant or introducing broker with which it
shares an account relationship. Each futures commission merchant's and
introducing broker's procedures must enable it to form a reasonable
belief that it knows the true identity of its customers. The Program
should be a part of each futures commission merchant's and introducing
broker's anti-money laundering program required under 31 U.S.C.
5318(h).
    (c) Required information--(1) General. Except as permitted by
paragraph (c)(2) of this section, each Program shall require the
futures commission merchant or the introducing broker to obtain
specified identifying information about each of their customers. The
Program shall require that this minimum information be obtained prior
to opening a customer's account or granting a customer authority to
effect transactions with respect to an account. At a minimum, the
specified identifying information shall include:
    (i) Name;
    (ii) Date of birth, for natural persons;
    (iii) Addresses:
    (A) Residence and mailing (if different) for natural persons; or
    (B) Principal place of business and mailing (if different) for
persons other than natural persons; and
    (iv) Identification number:
    (A) For U.S. persons, a U.S. taxpayer identification number (e.g.,
social security number, or employer identification number); or
    (B) For non-U.S. persons, a U.S. taxpayer identification number, a
passport number and country of issuance, an alien identification card
number, or the number and country of issuance of any other government-
issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.
    (2) Limited exception. The Program may permit the futures
commission

[[Page 48338]]

merchant or introducing broker to open or add a signatory to an account
for a person other than an individual (such as a corporation,
partnership, or trust) that has applied for, but has not received, an
employer identification number. However, in such a case, the futures
commission merchant or introducing broker must obtain a copy of the
application before it opens or adds a signatory to the account and
obtain the employer identification number within a reasonable period of
time after it opens or adds a signatory to the account.
    (d) Required verification procedures. Each Program shall contain
risk-based procedures for verifying the identity of customers, to the
extent reasonable and practicable. Such verification must occur within
a reasonable time before or after the customer's account is opened or
the customer is granted authority to effect transactions with respect
to an account. A futures commission merchant or introducing broker need
not verify the information about an existing customer who opens a new
account or who is granted authority to effect transactions with respect
to a new account, if it previously verified the customer's identity in
accordance with procedures consistent with this paragraph (d), and
continues to have a reasonable belief that it knows the true identity
of the customer.
    (1) Verification through documents. Each Program must describe when
the futures commission merchant or introducing broker will verify
identity through documents and set forth the documents that it will use
for this purpose. Suitable documents for verification may include:
    (i) For natural persons, an unexpired government-issued
identification evidencing nationality or residence and bearing a
photograph or similar safeguard; and
    (ii) For persons other than natural persons, documents showing the
existence of the entity, such as registered articles of incorporation,
a government-issued business license, a partnership agreement, or a
trust instrument.
    (2) Verification through non-documentary methods. Each Program must
describe non-documentary methods the futures commission merchant or
introducing broker will use to verify their customer's identity and
when these methods will be used in addition to, or instead of, relying
on documents. These non-documentary methods may include, but are not
limited to, contacting a customer; obtaining a financial statement;
independently verifying information through credit bureaus, public
databases, or other sources; and checking references with other
financial institutions. Non-documentary methods shall be used when: a
natural person is unable to present an unexpired government-issued
identification document that bears a photograph or similar safeguard;
the futures commission merchant or introducing broker is presented with
unfamiliar documents to verify the identity of a customer; the futures
commission merchant or introducing broker does not obtain documents to
verify the identity of a customer; does not meet a customer face-to-
face; or is otherwise presented with circumstances that increase the
risk the futures commission merchant or introducing broker will be
unable to verify the true identity of a customer through documents.
    (e) Government lists. Each Program shall include procedures for
determining whether a customer's name appears on any list of known or
suspected terrorists or terrorist organizations provided to the futures
commission merchant or introducing broker by any federal government
agency. Futures commission merchants and introducing brokers shall
follow all federal directives issued in connection with such lists.
    (f) Customer notice. Each Program shall include procedures for
providing customers with adequate notice that the futures commission
merchant or introducing broker is requesting information to verify
their identity.
    (g) Lack of verification. Each Program shall include procedures for
responding to circumstances in which the futures commission merchant or
introducing broker cannot form a reasonable belief that it knows the
true identity of a customer.
    (h) Recordkeeping. (1) The Program shall include procedures for
maintaining a record of all information obtained pursuant to the
Program, including:
    (i) All identifying information provided by a customer pursuant to
paragraph (c) of this section, and copies of any documents that were
relied on pursuant to paragraph (d)(1) of this section evidencing the
type of document and any identification number it may contain;
    (ii) The methods and results of any measures undertaken to verify
the identity of a customer through non-documentary methods pursuant to
paragraph (d)(2) of this section; and
    (iii) The resolution of any discrepancy in the identifying
information obtained.
    (2) Futures commission merchants and introducing brokers must
retain all records made or obtained when verifying the identity of a
customer pursuant to a Program until five years after the date the
account of the customer is closed or the grant of authority to effect
transactions with respect to an account is revoked. In all other
respects, the records shall be maintained pursuant to the provisions of
17 CFR 1.31.
    (i) Approval of program. Each Program shall be approved by the
futures commission merchant's or introducing broker's board of
directors, managing partners, board of managers or other governing body
performing similar functions or by a person or persons specifically
authorized by such bodies to approve the Program.
    (j) Exemptions. The Commission, with the concurrence of the
Secretary, may by order or regulation exempt any futures commission
merchant or introducing broker that registers with the Commission
(except futures commission merchants or introducing brokers that
register pursuant to section 4f(a)(2) of the Commodity Exchange Act) or
any type of account from the requirements of this section. 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.

    Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.

    Dated: July 10, 2002.
Jean A. Webb,
Secretary of the Commodity Futures Trading Commission.
[FR Doc. 02-18195 Filed 7-22-02; 8:45 am]
BILLING CODE 4810-02-P
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