Source: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=2740
Timestamp: 2019-04-18 16:37:57+00:00

Document:
On April 30, 2003, the Department of Treasury (Treasury) and the Securities and Exchange Commission (SEC or Commission) jointly issued a final rule to implement Section 326 of the USA PATRIOT Act (PATRIOT Act).1 Section 326 provides that Treasury and SEC issue a rule that, at a minimum, requires broker/dealers to implement reasonable procedures to: (1) verify the identity of any person seeking to open an account, to the extent reasonable and practicable; (2) maintain records of the information used to verify the person's identity; and (3) determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to brokers or dealers by any government agency. The final rule requires each broker/dealer to establish a written Customer Identification Program (CIP) to verify the identity of each customer who opens an account. The written CIP must also include recordkeeping procedures and procedures for providing customers with notice that the broker/dealer is requesting information to verify their identity. Broker/dealers must fully implement their CIPs by October 1, 2003.
Questions regarding this Notice to Members may be directed to Kyra Armstrong, at (202) 728-6962, or Vicky Berberi-Doumar, at (202) 728-8905, both of the Department of Member Regulation; or Nancy Libin, at (202) 728-8835, or Grace Yeh, at (202) 728-6939, both of the Office of General Counsel, NASD Regulatory Policy and Oversight.
On October 26, 2001, President Bush signed into law the PATRIOT Act. Title III of the PATRIOT Act imposed obligations on broker/dealers under new anti-money laundering (AML) provisions and amendments to the Bank Secrecy Act (BSA) in an effort to make it easier to prevent, detect, and prosecute money laundering and the financing of terrorism. Among these obligations, broker/dealers were required to have an AML compliance program in place as of April 24, 2002. Consistent with this requirement under the PATRIOT Act, NASD Rule 3011 requires each member, to develop and implement a written AML program reasonably designed to achieve and monitor the member's compliance with the requirements of the BSA and the implementing regulations.
On July 23, 2002, Treasury and the SEC jointly proposed a rule to implement Section 326 of the PATRIOT Act with respect to broker/dealers. The SEC received 20 comment letters in response to the proposal. Members of the industry questioned, among other things, the proposed rule's definition of "customer," which included persons with trading authority over an account. Others expressed concern about the verification and recordkeeping requirements. The final rule addresses many of the comments.
The final rule provides several definitions, which, among other things, assist members in determining who are the relevant persons whose identities need to be verified.
As initially proposed, the definition of "account" contained several examples of types of accounts that would be covered including cash accounts, margin accounts, prime brokerage accounts, and accounts established to engage in securities repurchase transactions. The Adopting Release notes that these types of accounts remain "accounts" for purposes of the final rule, but the final rule does not specifically include them as examples to clarify that the list is not exhaustive.
Under this definition, "customer" does not refer to persons who fill out account opening paperwork or who provide information necessary to set up an account, if such persons are not the accountholder as well.
Any entity, other than a bank, whose common stock or analogous equity interests are listed on the New York Stock Exchange or the American Stock Exchange or whose common stock or analogous equity interests have been designated as a NASDAQ National Market Security listed on The NASDAQ Stock Market (except stock or interests listed under the separate "NASDAQ Small-Cap Issues" heading), provided that, for purposes of this provision, a person that is a financial institution, other than a bank, is an exempt person only to the extent of its domestic operations.
These documents are merely examples of reliable documents. A firm may use other documents for verification provided that the documents allow a firm to establish a reasonable belief that it knows the true identity of the customer.
Treasury and the SEC recommend that firms analyze whether there is a 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 (e.g., zip code and city/state are consistent).
A CIP must include procedures for making and maintaining a record of all information obtained to verify a customer's identity.41 At a minimum, the record must include all identifying information about a customer obtained to verify a customer's identity.
With regard to verification, a firm's records must contain a description of any document that was relied on to verify the customer's identity, 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. This differs from the proposed rule, which required that firms keep copies of verification documents.
With respect to non-documentary verification, the final rule requires that records contain a description of the methods and the results of any measures undertaken to verify the identity of a customer.
The Adopting Release notes that Treasury and the Federal functional regulators have not yet designated any government lists. The Adopting Release also notes that firms do not have an affirmative duty to seek out all lists of known or suspected terrorists or terrorist organizations compiled by the federal government. Instead, firms will receive notification from the federal government regarding the lists that they must consult for purposes of this provision.
A CIP must include procedures "for providing customers with adequate notice that the broker/dealer is requesting information to verify their identities."48 Notice must occur before the account is opened. Notice is adequate if the broker/dealer generally describes the identification requirements of the final rule and provides such notice in a manner reasonably designed to ensure that a customer is able to view the notice, or otherwise given notice, before opening an account.49 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 Web site, include the notice on its account applications, or use any other form of oral or written notice.
The final rule acknowledges that there may be circumstances in which a firm may be able to rely on the performance by another financial institution of some or all of the elements of a firm's CIP.51 Therefore, the final rule provides that a 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.
The other financial institution must enter into a contract requiring it to certify annually to the broker/dealer that it has implemented its antimoney laundering program, and that it will perform (or its agent will perform) specified requirements of the broker/dealer's CIP.
1 68 Fed. Reg. 25,113 (May 9, 2003) ("Adopting Release").
2 31 C.F.R. § 103.122(a)(1).
3 Broker/dealers are advised to consider situations when it may be appropriate to verify the identity of customers associated with transferred accounts in developing and implementing the required anti-money laundering compliance program. 68 Fed. Reg. 25,113, 25,115.
4 The Adopting Release discusses why these accounts are excluded from the definition of "account." Such accounts are less susceptible to be used for the financing of terrorism and money laundering because, among other things, they are funded through payroll deductions in connection with employment plans that must comply with federal regulations. These regulations impose, among other requirements, low contribution limits and strict distribution requirements. 68 Fed. Reg. 25,113, 25,115.
5 68 Fed. Reg. 25,113, 25,115.
6 However, the introducing firm and the clearing firm would need to meet the requirements for reliance on another financial institution (as discussed supra on page 355) such as entering into a contract and providing certifications to the extent that they intend to rely on each other to undertake CIP requirements with respect to customers that open accounts after the transfer. 68 Fed. Reg. 25,113, 25,115, fn. 20.
7 31 C.F.R. § 103.122(a)(2).
8 31 C.F.R. § 103.122(a)(4).
9 68 Fed. Reg. 25,113, 25,116. However, a broker/dealer, based on its risk-assessment of anew account, may need to take additional steps to verify the identity of a customer that is not an individual, such as obtaining information about persons with control over the account. In addition, the due diligence procedures required under other provisions of the BSA or securities laws may require broker/dealers to look through to owners of certain types of accounts. Id. at 25,115, fn. 30.
10 The final rule does not affect any requirements under SEC Rule 17a-3(a)(9) to make records with respect to the beneficial owners of certain accounts. 68 Fed. Reg. 25,113, 25,116, fn. 31.
11 68 Fed. Reg. 25,113, 25,116. See discussion supra at page 353.
12 31 C.F.R. § 103.122(a)(5).
13 31 C.F.R. § 103.122(a)(6).
14 31 C.F.R. § 103.122(a)(7).
15 31 C.F.R. § 103.122(a)(8).
16 31 C.F.R. § 103.122(a)(9).
17 31 C.F.R. § 103.122(b)(1). The Adopting Release notes that the provision permitting broker/dealers to rely on the performance of another financial institution for some or all of the elements of a firm's CIP (as discussed supra on page 355) is not specified as a minimum CIP requirement because any such reliance is optional. 68 Fed. Reg. 25,113, 25,117, fn. 48.
18 31 C.F.R. § 103.122(b)(2)(i)(A). The Treasury and the SEC recognize that a foreign business or enterprise may not have an identification number. The Adopting Release states that when a firm is 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. 68 Fed. Reg. 25,113, 25,118, fn. 65.
19 68 Fed. Reg. 25,113, 25,118, fn. 65. The Adopting Release emphasizes that the rule neither endorses nor prohibits a broker/dealer from accepting information from particular types of identification documents issued by foreign governments. The broker/dealer must determine, based upon appropriate risk factors, including those discussed on page 351 (under "Identity Verification Procedures"), whether the information presented by a customer is reliable.
20 31 C.F.R. § 103.122(b)(2)(i)(B).
21 31 C.F.R. § 103.122(b)(2).
22 31 C.F.R. § 103.122(b)(2)(ii). The Adopting Release notes that it is possible, however, that a firm would violate other laws by permitting a customer to transact business prior to verifying the customer identity. See, e.g., 31 C.F.R. Part 500 (regulations of Treasury's Office of Foreign Asset Control (OFAC)). Firms are prohibited from doing business with those persons and organizations listed on the OFAC Web Site as well as with the listed embargoed countries and regions. 68 Fed. Reg, 25,113, 25,119, (fn. 79).
23 68 Fed. Reg. 25,113, 25,119.
24 68 Fed. Reg. 25,113, 25,119.
25 31 C.F.R. § 103.122(b)(2)(ii)(A).
27 68 Fed. Reg. 25,113, 25,119.
30 31 C.F.R. § 103.122(b)(2)(ii)(B).
31 The Adopting Release does not list the specific types of databases that would be suitable for verification. It will depend on the circumstances and the firm's assessment of relevant risk factors. 68 Fed. Reg. 25,113, 25,120, fn. 95.
32 31 C.F.R. § 103.122(b)(2)(ii)(B)(1).
33 31 C.F.R. § 103.122(b)(2)(ii)(B)(2). The Adopting Release notes that there may be circumstances other than those described when a firm should use non-documentary verification procedures. 68 Fed. Reg. 25,113, 25,120, fn. 98.
34 68 Fed. Reg. 25,113, 25,120.
35 31 C.F.R. § 103.122(b)(2)(ii)(C).
36 See, e.g., the list of non-cooperative countries and territories published by the Financial Action Task Force on Money Laundering (FATF) at www1.oecd.org/fatf/NCCT_en.htm. The FATF is an intergovernmental body whose purpose is the development and promotion of policies to combat money laundering.
37 68 Fed. Reg. 25,113, 25,121.
39 31 C.F.R. § 103.122(b)(2)(iii).
40 68 Fed. Reg. 25,113, 25,121. For more information regarding the filing of Form SAR-SFs, see NASD Notice to Members 02-47, Treasury Issues Final Suspicious Activity Reporting Rule for Broker/Dealers; Effective Date: Transactions After December 30, 2002, www.nasdr.com/pdf-text/0247ntm.pdf.
41 31 C.F.R. § 103.122(b)(3).
42 The Adopting Release notes that the requirement was limited to substantive discrepancies to make clear that records would not have to be made in the case of minor discrepancies, such as those caused by typographical error. 68 Fed. Reg. 25,113, 25,121, fn. 111.
43 31 C.F.R. § 103.122(b)(3)(ii).
45 31 C.F.R. § 103.122(b)(4).
47 See, infra endnote 22; 68 Fed. Reg. 25,113, 25,122, fn. 120.
48 31 C.F.R. § 103.122(b)(5)(i).
49 31 C.F.R. § 103.122(b)(5)(ii).
50 31 C.F.R. § 103.122(b)(5)(iii).
51 31 C.F.R. § 103.122(b)(6).
52 68 Fed. Reg. 25,113, 25,123.

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