Nov. 19, 2008

Clearing broker-dealers face stricter Customer Identification Program rules
Clearing broker-dealers face increased responsibilities related to the Customer Identification Program (CIP). A section of the USA Patriot Act, the CIP aims to help prevent and detect international money laundering and the financing of terrorism. Previously, the Financial Crimes Enforcement Network (FinCEN) allowed clearing broker-dealers to share in CIP responsibilities with introducing broker-dealers. However, a recent Office of Foreign Assets Control (OFAC) guideline has prohibited the reallocation of this legal responsibility to a third party.

The OFAC is encouraging every broker-dealer to develop its own risk-based policies and procedures to ensure compliance. If a broker-dealer delegates its OFAC compliance functions to a third party, it could be held liable for violations that occur due to that third party’s negligence. Clearing brokers who delegate certain CIP functions to introducing brokers should ensure those functions are being properly performed.

Broker-dealers should use risk-based procedures to verify the identity of every new customer who opens an account. When establishing procedures, broker-dealers need to design a plan according to their total assets under management, location, customer base, types of accounts offered and methods accounts can be opened (i.e., in person or remotely).

OFAC vs. FinCEN compliance
Although there are similarities between CIP compliance for OFAC and FinCEN, there are notable differences. FinCEN has stated that a broker-dealer is not required to look through the intermediary to the underlying beneficial owners of an omnibus account to comply with CIP. However, OFAC regulations apply to all property and interests in property of a sanctions target within the possession or control of a U.S. person, including shares held in an omnibus account on behalf of a sanctioned party. Accounts opened by non U.S. persons may present a higher risk and may require greater due diligence.

Broker-dealers need to be mindful of these nuances. Read the full update or contact
Richard Flowers, Financial Services Audit partner, at 212.624.5340 for more information.

Visit www.GrantThornton.com.

 

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