Anti-Money Laundering Requirements for FCMs and IBs

NFA Web SeminarSeptember 28, 2006

Today’s Presenters

Larry DyekmanDirector, Communications and Education

Sharon Pendleton Compliance Director

Carol Wooding Assistant General Counsel

History of AML Requirements

• October 2001 – USA PATRIOT Act signed into law

• April 2002 – First federal regulations adopted

• April 2002 – NFA adopts Compliance Rule 2-9(c) and Interpretive Notice

Who constitutes a customer?• For Customer Identification Program purposes, a

customer is an individual or entity that opens a new account on or after October 1, 2003.

• In instances where the firm holds an account in the name of an intermediary, the customer of the FCM/IB is the intermediary, not the underlying beneficiary of the account.

• If an intermediary opens an account in a pool’s name, the customer is the pool and not the underlying beneficiaries.

Required Components of a Firm’s CIP• Procedures that require the firm to collect certain

identifying information and perform certain verification procedures;

• Procedures on what records must be kept and for how long;

• Procedures on comparing new customers with certain government lists; and

• Procedures on providing notice to customers.

What identification information must be collected for individuals?• Customer’s name, date of birth and residential or business

address.• If the individual is a U.S. person, the firm must obtain the

individual’s social security number.• If the individual is a non-U.S. person, the firm must obtain

either a taxpayer identification number, a passport number and the 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 that has a photograph on it or something similar to identify the individual.

What identification information must be collected for non-natural persons?

• The entity’s name, its principal place of business, local office or other physical location.

• If it is a U.S. entity, the firm must obtain its taxpayer identification number.

• If it is a non-U.S. entity, the firm must obtain a government-issued identification number, or if none, an alternative government-issued document that certifies the existence of the business or enterprise.

Verifying customer identification information

• A firm is required to have risk-based procedures to verify the identity of each customer to the extent reasonable and practicable.

• Information may be verified using documentary methods, non-documentary methods or a combination of both.

• The program must identify under what circumstances the firm will use each method.

Keeping customer identification documents• All the identity information the firm obtains from the

customer;• Either a copy or a description of a document that was

relied on. This description must indicate the type of document, the identification number of the document, the place of issuance and expiration date;

• A description of any non-documentary methods used and the results; and

• If there were any substantive discrepancies noted during the process, how they were resolved.

Records retention requirements• Firms are required to maintain the record of the identifying

information for 5 years after the account is close.• All other records must be maintained for 5 years after the

record is made.• If a customer opens multiple accounts at separate times,

the identifying information must be kept for 5 years after the last account is closed.

• If a customer updates information, the firm must maintain the original information as well as the updated information.

Comparing new customers with certain government lists

• Office of Foreign Assets Control’s Specially Designated Nationals List

• If a customer is located in one of the sanctioned countries, the FCM or IB needs to review the sanctioning document or contact OFAC to determine the breadth of any restrictions.

A firm’s CIP must include procedures to provide customers with adequate notice that the firm is requesting information to verify their identity.

When an FCM relies on an IB to conduct the CIP

• The reliance must be reasonable under the circumstances.

• The IB is required to have an AML compliance program and is regulated by a federal functional regulator.

• The IB enters into a contract requiring that it certify annually to the FCM or IB that it has implemented an AML program and that it will perform the CIP (or a portion of it).

Auditing for AML compliance

• Obtain a copy of an FCM’s or IB’s CIP and review it to make sure it contains all the required components.

• Test the program to make sure it is being followed.

Suspicious Activity Monitoring Requirements

• The FCM’s or IB’s compliance program must outline its procedures for monitoring for suspicious activity.

• However, NFA does not require that each firm monitor for suspicious activity in the same way.

Suspicious Activity Reporting Requirements

• For transactions that occurred after May 18, 2004, FCMs and IBs are required to file an SAR-SF form (the SF stands for securities futures) with FinCEN to report certain transactions.

• FCMs and IBs must file an SAR-SF form for a transaction or transactions that are done through the firm that involve in the aggregate at least $5,000 in funds or other assets and the FCM/IB knows, suspects or has reason to suspect one of the following:

Suspicious Activity Reporting Requirements

• The transaction involves funds that come from illegal activity or a part of a transaction designed to conceal that the funds are from illegal activity.

• The transaction is designed to avoid BSA reporting requirements.

• The transaction doesn’t appear to serve any business or apparent lawful purpose.

• It uses the FCM or IB to facilitate a criminal transaction.

Be aware there are some restrictions on disclosing that a SAR has been filed or providing a copy of the SAR to others.

Auditing for SAR Compliance

• Review the firm’s procedures for monitoring for suspicious activity and make sure that the procedures are reasonable for the firm’s operations.

• Review a sample of accounts for suspicious activities.• Ask the firm if they found any suspicious activity and

if so, what type of investigation was conducted and if the activity resulted in the filing of an SAR.

Information Sharing Requirements

• FCMs are required to search their records for any current accounts and accounts maintained by a subject named on FinCEN’s Web site.

• If the FCM finds a match, the FCM must report the match to FinCEN through the Web site usually within 14 days of the list being published.

Recordkeeping Requirements Related to Information Sharing Requests

• The date of the request;• The tracing numbers within the request;• The date the firm conducted the search; and• If a match is found, the date it was reported to

FinCEN.

Common AML Audit Problem Areas

• Annual review of the firm’s AML program.• Annual AML training requirement.

Questions?

Contact Information for Today’s Presenters

Larry DyekmanLdyekman@nfa.futures.org

Sharon Pendleton Spendleton@nfa.futures.org

Carol Wooding Cwooding@nfa.futures.org