preliminary guidance for deterring money laundering … · 2008 guidance for deterring money...

| �

2008 guidance for deterring money laundering and terrorist financing activity

anti-money launderingand financial crimes committee

February 2008

| �

TABLE OF CONTENTS

Introduction.......................................................................................................1

1.. Anti‑Money.Laundering.Program......................................................4

2.. Written.Anti‑Money.Laundering.Procedures...................................5

2.1.. Overview.of.Procedures.......................................................................5

2.2.. Designation.of.Anti‑Money.Laundering.Department,..Unit,.Group,.Committee.or.Compliance.Officer.............................7

2.3.. Procedures.Relating.to.Limitations.and.Restrictions..on.Types.of.Deposits............................................................................8

2.4.. Procedures.Relating.to.the.Concept.of.“Know.Your.Customer”....8

2.5.. Procedures.Relating.to.Monitoring.Certain.Transactions...............9

2.6.. Procedures.for..Identifying.and.Reporting..Suspicious.or.Unusual.Transactions..................................................9

3.. Reviewing.OFAC.Lists.Prior.to.Establishing.a.Customer..Account,.Effecting.a.Transaction,.and.Delivering.or..Receiving.Securities.............................................................................9

4.. Know.Your.Customer.(“KYC”).policy,.including.Customer.Identification.Program.(“CIP”)........................................................11

4.1.. Customer.Identification.and.Verification........................................11

4.2.. CIP.Generally......................................................................................12

4.3.. Timing.of.Verification........................................................................12

4.4.. Reliance.on.Financial.Institutions.....................................................13

4.5.. KYC.Generally.....................................................................................13

4.6.. KYC.Considerations.for.Particular.Kinds.of.Accounts..................15

4.6.1.. Individual.Accounts............................................................................15

4.6.2.. Accounts.of.Non‑U.S..Persons...........................................................15

� |

4.6.3.. Domestic.Operating.or.Commercial.Entities....................................15

4.6.4.. Domestic.Trusts.....................................................................................15

4.6.5.. Foreign.Operating.Commercial.Entities............................................15

4.6.6.. Personal.Investment.Corporations.or.Personal..Holding.Companies.............................................................................16

4.6.7.. Offshore.Trusts......................................................................................17

4.6.8.. U.S..and.Non‑U.S..Charitable.and.Other...Non‑Profit.Organizations....................................................................18

4.6.9.. Institutional.Accounts,.Hedge.Funds,.Investment..Funds.and.Other.Intermediary.Relationships..................................18

4.6.10..Omnibus.Accounts............................................................................... 20

4.6.11..Accounts.Opened.via.the.Internet..................................................... 20

4.6.12..Additional.KYC.efforts........................................................................ 21

4.6.13..High.Risk.and.Non‑Cooperative.Jurisdictions................................21

5.. Special.Due.Diligence.for.Foreign.Accounts....................................21

5.1.. Private.Banking.Accounts...................................................................22

5.1.1.. Nominal.and.Beneficial.Owners........................................................22

5.1.2.. Senior.Foreign.Political.Figures.(“SFPFs”).......................................23

5.1.3.. Source.of.Funds....................................................................................24

5.2.. Correspondent.Accounts.for.Foreign.Financial.Institutions.........24

5.2.1.. Shell.Bank.Prohibitions.and.Required.Information..for.Foreign.Banks.................................................................................25

5.2.2.. Due.Diligence.for.Foreign.Financial.Institutions............................26

5.2.3.. Enhanced.Due.Diligence....................................................................27

5.3.. Special.Procedures...............................................................................29

6.. Special.Measures..................................................................................29

7.. Suspicious.Activity.Reporting............................................................30

| �

7.1.. Reporting.Threshold............................................................................30

7.2.. Reportable.Transactions......................................................................30

7.3.. Potential.Indicators.of.Suspicious.Activity.......................................31

7.3.1.. Indicators.at.Account.Opening.Stage................................................31

7.3.2.. Indicators.Related.to.Account.Activity.............................................32

7.4.. Reporting.Exceptions..........................................................................33

7.4.1.. Robbery.or.Burglary............................................................................33

7.4.2.. Violations.of.Federal.Securities.Laws.or.SRO.Rules.......................34

7.5.. Firm.Practice.Regarding.the.Reporting.of.Suspicious.Activity.....34

7.5.1.. Reporting.Suspicious.Activity............................................................34

7.5.2.. Timing.of.SARs....................................................................................34

7.5.3.. Requests.by.Law.Enforcement.to.Maintain.Accounts....................35

7.5.4.. Supporting.Documentation...............................................................35

7.5.5.. Confidentiality.of.SARs......................................................................36

7.5.6.. Sharing.SARs.with.Controlling.Companies.....................................36

7.6.. State.Reporting.Requirements...........................................................36

7.7.. Review.of.Suspicious.Activity............................................................37

8.. Monitoring.of.Account.Activity........................................................37

8.1.. Monitoring.Generally.........................................................................37

9.. Information.Sharing.with.Law.Enforcement.and.other..Financial.Institutions..........................................................................38

9.1.. Information.Requests.by.FinCEN.....................................................38

9.2.. Voluntary.Information.Sharing.........................................................39

10.. AML.Training......................................................................................40

10.1.. Training.Generally...............................................................................40

� |

10.2.. Relevant.Topics.to.be.Addressed.......................................................40

11.. Other.BSA.Reporting.and.Recordkeeping.Requirements..............41

11.1.. Currency.Transactions.Reports.........................................................41

11.2.. Reports.of.International.Transportation.of.Currency..or.Monetary.Instruments..................................................................42

11.3.. Foreign.Bank.Account.Reports..........................................................42

11.4.. Funds.Transfer.Rules.and.Recordkeeping........................................42

11.5.. Prohibition.Against.Structured.Transactions..................................42

12.. Independent.Testing.of.AML.Program............................................43

13.. General.Recordkeeping.Requirements.............................................43

14.. AML.Contacts......................................................................................44

15.. Relationship.Between.Introducing.Brokers.and..Clearing.Brokers..................................................................................44

15.1.. Apportionment.of.Responsibilities.Between.the.Parties................44

15.2.. Delegation.of.CIP.Responsibilities.Pursuant.to.the..Reliance.Agreements...........................................................................45

15.3.. Special.Due.Diligence.and.Enhanced.Due.Diligence.....................45

15.4.. Monitoring.of.Suspicious.Activity.....................................................46

15.5.. Communications.With.Respect.to.Suspicious.Transactions.........47

APPENDIX.A...................................................................................................48

| �

* The2008GuideForDeterringMoneyLaunderingAndTerroristFinancingActivity(“2008AMLGuidance”)hasbeenupdatedwiththeassistanceofBettySantangeloofSchulteRoth&ZabelLLP.

** TheregulatoryanalysisandrecommendationscontainedinthisdocumentreflecttheviewsofSIFMA’sAnti-MoneyLaunderingandFinancialCrimesCommitteeandhavenotbeenendorsedbyFinCEN,theSECorFINRA.

1 SIFMA,formedin2006withthemergerbetweenTheSecuritiesIndustryAssociationandtheBondMarketAssociation.SIFMAbringstogetherthesharedinterestofmorethan650securitiesfirms,banksandassetmanagers.SIFMA’smissionistopromotepoliciesandpracticesthatworktoexpandandperfectmarkets,fosterthedevelopmentofnewproductsandservicesandcreateefficienciesformemberfirms,whilepreservingandenhancingthepublic’strustandconfidenceinthemarketsandtheindustry.SIFMAworkstorepresentitsmembers’interestslocallyandglobally.

2 ThePreliminaryGuidancewasissuedbySIFMA’sAnti-MoneyLaunderingCommittee,whichbecameSIFMA’sAnti-MoneyLaunderingandFinancialCrimesCommitteein2007.The2008AMLGuidancereplacesthePreliminaryGuidanceissuedinFebruary2002.

3 UnitingandStrengtheningAmericaByProvidingAppropriateToolsRequiredtoInterceptandObstructTerrorism(USAPATRIOT)Actof2001(the“PATRIOTAct”orthe“Act”),Pub.L.No.107-56.TherelevantprovisionsrelatedtomoneylaunderingpreventionarecontainedinTitleIIIoftheAct,theInternationalMoneyLaunderingAbatementandAntiTerroristFinancingActof2001.

4 TreasuryhasdesignatedFinCEN,abureauofTreasury,toestablish,overseeandimplementpoliciesandprocedurestoassistinthepreventionanddetectionofmoneylaunderingactivity.Itactsasacentralrepositoryforreportsbyfinancialinstitutions,includingthoserequiredundertheBSA,providesintelligenceinformationtolawenforcementgroups,andassistsinthedevelopmentofnewstrategiestocombatmoneylaundering.

2008 Guidance for deterrinG Money LaunderinG and terrorist financinG activity*

Introduction**SIFMA’sAnti‑MoneyLaunderingandFinancialCrimesCommittee(“the

Committee”),whichwasestablishedin2001,voicesthesecuritiesindustry’sconcernsandcommentsregardinganti‑moneylaunderingandcounter‑terrorismregulatoryandlegislativeproposals,focusesoncompliancewithU.S.sanctionsprograms,andworkstoimprovethecoordinationbetweentheindustry,regulators,andlawenforcementtodeteranddetectfinancialcrimes.1Aspartofitsfocus,theCommitteehasundertakenanumberofinitiativestoassistitsmembersinaddressingtheiranti‑moneylaundering(“AML”)responsibilities.OnesucheffortwastheissuanceinFebruaryof2002ofPreliminary Guidance For Deterring Money Laundering Activity(“PreliminaryGuidance”)toitsmemberswithrespecttotheprocedurestheyshouldconsiderfollowingwithrespecttocompliancewithexistingAMLregulations.2ThePreliminaryGuidancewasissuedsubsequenttopassageoftheUSAPATRIOTActof2001(“thePATRIOTAct”),3butpriortothefinalizationofitsimplementingrules.ManyrulesimplementingthePATRIOTActarenowcomplete.This2008 Guidance For Deterring Money Laundering And Terrorist Financing Activity(“2008AMLGuidance”)hasbeenupdatedtoreflecttherulesthathavebeenimplementedandinterpretiveguidanceissuedsincethepassageofthePATRIOTAct,bytheFinancialCrimesEnforcementNetwork(“FinCEN”),4theU.S.Securitiesand

� |

ExchangeCommission(“SEC”),andtheself‑regulatoryorganizations(“SROs”),includingtheFinancialIndustryRegulatoryAuthority(“FINRA”),5aswellas,totheextentapplicable,relatedguidanceissuedinconjunctionwiththebankingregulators6andtheU.S.CommodityFuturesTradingCommission(“CFTC”).Inaddition,this2008AMLGuidanceaddressesadditionalguidanceissuedbytheU.S.TreasuryDepartment’sOfficeofForeignAssetsControl(“OFAC”).

This.2008.AML.Guidance.is.intended.to.highlight.what.the.Committee.believes.to.be.key.elements.for.a.broker‑dealer.to.consider.in.developing.an.effective.AML.program...In.articulating.these.AML.goals.for.the.securities.industry,.it.is.the.hope.of.the.Committee.that.these.suggested.practices.may.prove.helpful.to.firms.as.they.continue.to.evaluate.and.revise.their.AML.programs,.policies.and.procedures.7

As. all. broker‑dealers. are. now. well. aware,. the. PATRIOT. Act. amended.the. Bank. Secrecy. Act. (“BSA”). by. imposing. significant. new. requirements. on.broker‑dealers,. banks. and. other. financial. institutions. well. beyond. traditional.notions.of.AML.compliance.. .The.PATRIOT.Act. requires,. among.other. things,.the. establishment. and. implementation. of. AML. programs,. identification. and.verification. of. persons. seeking. to. open. new. accounts,. reporting. of. suspicious.transactions,. certain. recordkeeping. for. “correspondent. accounts”. with. foreign.banks,.and.the.performance.of.special.due.diligence.for.correspondent.and.private.banking.accounts.. .The.Act.also.prohibits. correspondent.accounts.with. foreign.shell.banks.and.provides.for.certain.procedures.for.information.sharing.with.the.Government.. . The. long. lasting. implication. for. broker‑dealers,. banks. and. other.financial. institutions. is. that. they.have.been.and.will. continue. to.be.required. to.devote.more.resources.than.ever.before.to.AML.efforts...

SIFMA. and. its. member. firms. have. long. been. strong. supporters. of. AML.efforts...Even.prior.to.the.passage.of.the.PATRIOT.Act.in.October.2001,.SIFMA.worked.with. its.members. to. increase. their. level.of.AML.compliance.and.many.firms.endeavored.to.develop.and.implement.policies.and.procedures.to.detect.and.

5 FINRA,formerlyknownastheNationalAssociationofSecuritiesDealers(“theNASD”)andtheNYSERegulation(“theNYSE”),wascreatedinJuly2007whentheNASDconsolidatedwiththememberregulation,enforcement,andarbitrationfunctionsoftheNYSE.Forpurposesofthe2008AMLGuidance,referencestotherulesofFINRAwillcontinuetobereferredtoasNYSEorNASD,aspreviouslydesignated.AtsuchtimeasFINRArenumberstherules,theappropriatelydesignatedcorrespondingrulenumberswillapply.

6 ThebankingregulatorsincludetheBoardofGovernorsoftheFederalReserveSystem(“FRB”),theOfficeoftheComptrolleroftheCurrency(“OCC”),theBoardofDirectorsoftheFederalDepositInsuranceCorporation(“FDIC”),theOfficeofThriftSupervision(“OTS”),andtheNationalCreditUnionAdministration(“NCUA”).

7 The2008AMLGuidanceisintendedprimarilyforU.S.broker-dealerslocatedintheUnitedStates.Thosefirmswithinternationalofficesmustalsoconsidertheeffectsofapplicablenon-U.S.lawontheirbusiness.

| �

deter.money.laundering.and.other.illicit.activities.8.Since.the.PATRIOT.Act.was.enacted,.the.Committee.issued.Preliminary.Guidance.in.February.2002,.as.well.as.many.other.brochures.and.publications.targeted.to.the.securities. industry,.such.as. the.SuggestedPractices forCustomer IdentificationPrograms. (“CIP.Suggested.Practices”).. . In. addition,. SIFMA. offers. training. tools,. such. as. an. anti‑money.laundering. interactive. online. course,. and. has. submitted. comment. letters. to.regulators.on.various.issues.pertaining.to.the.securities.and.financial.industries...The.Committee.will.continue.to.update.this.2008.AML.Guidance,.as.necessary,.to.reflect.significant.changes.brought.about.by.subsequent.regulations.issued.under.the.PATRIOT.Act,.changes.in.any.of.the.other.AML.laws.or.regulations,.as.well.as,.formal.interpretations.of.the.regulations.issued.by.the.regulatory.agencies.9

Given. the. complexity. of. the. securities. industry. today. and. the. considerable.differences.among,.and.even.within,.securities.firms,.as.well.as.the.wide.variety.of.business.lines,.products.and.services.offered,.the.Committee.continues.to.believe,.and.the.regulators.have.come.to.recognize,.that.no.one.standard.or.model.program.can. be. appropriate. for. all. firms. industry‑wide.10. Moreover,. many. of. the. rules.implementing. the. PATRIOT. Act. recognize. the. need. for. a. risk‑based. approach.depending. on. the. type. and. nature. of. the. firm’s. business.. . Among. the. different.types.of.firms.are:..full‑service.retail.firms.(historically.larger.firms),.introducing.brokers.(historically.smaller.firms),.discount.brokers,.clearing.brokers.(generally,.larger,. well‑capitalized. firms),. firms. that. offer. prime. brokerage. services,. firms.with.an.international.presence.and.firms.that.provide.clients.the.ability.to.transact.business.via.the.Internet...

Brokerage. firms. can. also. be. distinguished. by. their. client. base.. . Some. firms.service. retail. customers;. others. deal. primarily. with. an. institutional. client. base;.some.interact.with.the.customer.only.over.the.Internet;.and.some.have.non‑U.S..clients.. .Still.others.handle.all. types.of.customer.accounts.. .Further,.while. large.firms.are.able. to. facilitate.customer.trades.and.transactions. involving.hundreds.of. millions. of. dollars,. other. organizations. may. operate. in. a. local. community.and.offer.limited.services.with.limited.capital...This.2008.AML.Guidance.should.therefore.be.adapted.to.reflect.the.type.of.firm.involved,.the.breadth.and.scope.of.its.customer.base,.the.type.of.accounts.and.transactions,.the.extent.of.international.

8 Forexample,manybrokeragefirmshavelongfollowedthepracticeofnotacceptingcashoroflimitingthedepositofcashandcash-likemonetaryinstruments.Further,evenpriortotheobligationtofilesuspiciousactivityreports,manyfirmsreportedsuspiciousorpotentiallysuspicioustransactionsrelevanttopossibleviolationsofapplicablelaws,regulationsorrules,onavoluntarybasis.

9 AnoverviewofmanyofthePATRIOTActprovisionsthathavetakeneffectincalendaryears2001through2007,insofarastheyapplytobroker-dealers,isincludedasAppendix Atothis2008AMLGuidance.

10 SeeFINRA,SmallFirmTemplate,Anti-MoneyLaunderingProgram:ComplianceandSupervisoryProcedures(“FINRASmallFirmTemplate”),at1,notingthattheobligationtodevelopanAMLPlanisnota“one-size-fits-all”requirementandthateachfirmmusttailoritsAMLprogramtofiteachfirm’ssituation.FINRAisintheprocessofupdatingthistemplate,whichwaslastissuedinJanuary2004.

� |

activities,.the.differing.nature.and.risk.of.its.individual.lines.of.business.and.other.relevant.factors...Focused.primarily.on.full.service.retail.brokerage.firm.accounts.as.a.starting.point,.the.2008.AML.Guidance.should.be.modified.as.necessary.to.reflect.the.nature.of.the.firm’s.business..

1. Anti‑MoneyLaunderingProgramEffective. April. 24,. 2002,. the. PATRIOT. Act. required. that. all. financial.

institutions,.including.broker‑dealers,.establish.written.AML.programs...Section.352.of.the.PATRIOT.Act.sets.forth.the.minimum.standards.for.such.programs,.which. must. 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.

Brokerage.firms.are.considered.to.be.in.compliance.with.the.PATRIOT.Act’s.AML.program.requirement.if.they.maintain.AML.programs.as.required.by.their.respective.federal.functional.regulator.or.their.designated.SRO...In.this.regard,..the.New.York.Stock.Exchange.(“NYSE”).and.the.National.Association.of.Securities.Dealers. (“NASD”). and. other. SROs. have. issued. rules. which. require. members.to. implement. written. AML. programs. that. are. reasonably. designed. to. achieve.and.monitor.compliance.with.the.requirements.of.the.BSA.and.incorporate.the.requirements.identified.in.the.PATRIOT.Act.11.These.rules.provide,.among.other.things,.that.each.firm’s.AML.program.must.be.approved.by.senior.management.and.the.firm.must.identify.the.designated.compliance.officer.in.charge.of.implementing.the.firm’s.AML.program.to.its.SRO..12.

In.addition. to. incorporating. the. required.elements.of.an.AML.program,.a.firm.should.adopt.a.broad.statement.that.clearly.sets.forth.the.firm’s.policy.against.money. laundering. and. any. activity. that. facilitates. money. laundering. or. the.funding.of.terrorist.or.criminal.activities.13.This.policy.statement.should.evidence.the.strong.commitment.of. the.firm.and. its. senior.management. to.comply.with.

11 NYSERule445andNASDRule3011.Inaddition,othernationalstockexchangesalsorequiretheadoptionofAMLprograms.SeeAmericanStockExchangeRule432,ChicagoBoardOptionsExchangeRule4.20,andPhiladelphiaStockExchangeRule757.

12 BothNYSERule445andNASDRule3011requirefirmstoimplementawrittenAMLprogram,approvedbyseniormanagement,thatisdesignedto:(1)establishandimplementpoliciesandproceduresthatcanbereasonablyexpectedtodetectandcausethereportingofsuspicioustransactions;(2)establishandimplementpolicies,procedures,andinternalcontrolsreasonablydesignedtoachievecompliancewiththeBSAanditsimplementingregulations;(3)provideindependenttestingforcompliancetobeconductedbymemberpersonnelorbyaqualifiedoutsideparty;(4)designate,andidentifytoitsSRO(byname,title,mailingaddress,e-mailaddress,telephonenumber,andfacsimilenumber)anindividualorindividualsresponsibleforimplementingandmonitoringtheday-to-dayoperationsandinternalcontrolsoftheAMLandprovidepromptnotificationtoitsSROregardinganychangestosuchdesignation(s);and(5)provideongoingtrainingforappropriatepersonnel.

13 SeeFINRASmallFirmTemplate,at2.See alsoNASD,NoticetoMembers02-21,NASD Provides Guidance to Member Firms Concerning Anti-Money Laundering Compliance Programs Required by Federal Law (Apr.10,2002)(“NASDNTM02-21”).

| �

all.laws.and.regulations.designed.to.combat.money.laundering.activity,.including.those. rules. and. regulations. requiring. the. reporting. of. transactions. involving.currency,. certain. monetary. instruments,. and. suspicious. activity.. . The. policy.also. should. emphasize. the. responsibility. of. every. employee. to. protect. the. firm.from.exploitation.by.money.launderers,.and.should.set.forth.the.consequences.of.non‑compliance.with.the.applicable.laws.and.firm.policy,.including.the.significant.criminal,.civil.and.disciplinary.penalties,.and.reputational.harm.that.could.ensue.from.any.association.with.money.laundering.activity...As.set.forth.more.fully.below,.firm.policy.should.also.include.references.to.the.specific.procedures.adopted.by.the.firm.to.prevent.and.detect.money.laundering.and.to.the.firm’s.commitment.to.educating.and.training.its.employees.in.money.laundering.prevention...

The.firm’s.AML.policy.should.be.disseminated.to.all.appropriate.personnel.(e.g.,.those.who.deal.directly.with.customers).in.the.most.effective.way.possible.given. the. structure.of. the.firm.. .As. set. forth.more. fully.below,. the.firm.should.determine.whether.certain.employees.may.need.additional.or.specialized.training.due.to.their.specific.responsibilities.

2. WrittenAnti‑MoneyLaunderingProcedures

2.1. OverviewofProceduresAs.described.above,.each.securities.firm.must.adopt.written.procedures. to.

implement. an. AML. program. that. is. reasonably. designed. to. assure. compliance.with. the. regulatory. requirements.of. the.BSA.and. its. implementing. regulations,.SRO.rules,.and.where.applicable,. interpretive.guidance.issued.by.the.regulatory.agencies..

A.firm’s.AML.program.should.include.written.procedures.setting.forth.the.supervisory.system.and.internal.controls.on.which.the.firm.relies.both.to.prevent.and.detect.money.laundering...These.procedures.should.discuss.the.firm’s.“know.your. customer”. policy. and. customer. identification. program. (“CIP”),. as. well. as.the.procedures.intended.to.protect.the.firm.and.its.employees.from.inadvertently.assisting.in.money.laundering.and.terrorist.financing,.such.as.those.procedures.related. to. receipt. and. reporting. of. deposits. of. currency. and. cash. equivalents,.and.the.identification.of.structured.transactions. The.written.procedures.should.include.a.discussion.of.the.firm’s.efforts.to.monitor.account.activity.for.unusual.or. suspicious. transactions,. and. set. forth. the. requirements. with. respect. to. the.reporting. of. suspicious. transactions.. . In. addition,. a. firm’s. written. procedures.should. include. any. supplemental. procedures. implemented. for. those. types. of.transactions.or.accounts.deemed.by.the.firm.to.pose.a.heightened.risk.for.money.laundering,.terrorist.financing.or.otherwise.illicit.activity...

When. establishing. AML. programs,. firms. should. consider. guidance.applicable.to.the.securities.industry.published.by.various.regulators,.including.the.

� |

SEC.and.the.SROs,.as.well.as.FinCEN,.OFAC,14.the.Financial.Action.Task.Force.(“FATF”)15.and.the.federal.banking.regulators.16.In.addition,.firms.should.consider.AML. guidance. issued. by. various. industry. associations,. including. SIFMA.17. In.establishing.AML.programs,.firms.may.wish.to.utilize.the.SEC’s.recently.developed.AML.source.tool.18.Developed.by.the.SEC’s.Office.of.Compliance.Inspections.and.Examinations,.this.compliance.tool.compiles.and.organizes.key.AML.laws,.rules.and.guidance.applicable.to.broker‑dealers,.and.provides.links.to.access.such.AML.materials...

A.firm’s.overall.money.laundering.prevention.program.should.be.assimilated.into. the. existing. policies. and. procedures. for. its. various. business. functions. to.assure.that.AML.compliance.reaches.all.aspects.of.the.firm’s.business.

A.firm’s.AML.program.should.be.reviewed.regularly.and.updated.as.necessary.based.on.changes.to.applicable.laws.and.regulations,.and.modified.to.adequately.address. changes. to. a. firm’s. business. lines. and. operations.. . In. addition,. a. firm’s.AML.program.should.be.updated,.as.necessary,. in.response.to.the.independent.testing.reviews.or.regulatory.examinations.of.its.AML.program...

14 OFACadministersandenforceseconomicandtradesanctionsbasedonU.S.foreignpolicyandnationalsecuritygoalsagainsttargetedforeigncountries,terrorists,internationalnarcoticstraffickers,andthoseengagedinactivitiesrelatedtotheproliferationofweaponsofmassdestruction.OFACactsunderPresidentialwartimeandnationalemergencypowers,aswellasauthoritygrantedbyspecificlegislation,toimposecontrolsontransactionsandfreezeforeignassetsunderU.S.jurisdiction.

15 FATFisaninter-governmentalbodyestablishedbytheG7summitinParis,FranceinJuly1989toexaminemeasurestocombatmoneylaunderingworldwide.Itiscomprisedofrepresentativesofthefinancial,regulatory,andlawenforcementcommunitiescurrentlyfrom32countriesandterritoriesand2regionalorganizationsandservesasaworldleaderinthedevelopmentofeffectiveAMLprograms.FATFsetsminimuminternationalstandardsthatgovernmentsshouldhaveinplacewithrespecttofinancialinstitutionsandotherprofessions,andpublishesitsrecommendations,typologiesandreportsaddressingissuesandconcernsrelatingtomoneylaunderingandterroristfinancing.

16 See, e.g.,theBank Secrecy Act / Anti-Money Laundering Examination Manual(“FFIECBSA/AMLExaminationManual”),lastpublishedinAugust2007bytheFederalFinancialInstitutionsExaminationCouncil(“FFIEC”),available athttp://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2007.pdf,whosemembersincludetheFRB,FDIC,NCUA,OCCandOTS.TheFFIECBSA/AMLExaminationManualprovidesguidanceonidentifyingandcontrollingrisksassociatedwithmoneylaunderingandterroristfinancing.AlthoughtheManualfocusesonAMLobligationsoffinancialinstitutionssubjecttoregulatoryoversightbyfederalbankingregulators,itprovidesanoverviewofBSA/AMLcomplianceprogramrequirements,BSA/AMLrisksandriskmanagementexpectations,industrysoundpracticesandexaminationprocedures,aswellasspecificsectionsaddressingparticularproducts,someofwhicharecurrentlyofferedandsoldbySIFMAmembers.ItalsoprovidesguidancewithrespecttoacomprehensiveOFACprogram.

17 See, e.g.,guidancefromtheWolfsbergGroup,BaselCommitteeonBankingSupervision,theNewYorkClearingHouse,andManagedFundsAssociation’sSound Practices for Hedge Fund Managers(“MFASoundPractices”),available athttp://www.managedfunds.org/downloads/Sound%20Practices%202007.pdf(2007).

18 SeeSECAnti-MoneyLaundering(AML)SourceTool,availableathttp://www.sec.gov/about/offices/ocie/amlsourcetool.htm(Jan.1,2008).

| �

2.2. DesignationofAnti‑MoneyLaunderingDepartment, Unit,Group,CommitteeorComplianceOfficer

A. firm. must. designate. a. qualified. AML. compliance. officer. responsible.for. administering. its. AML. program.19. The. AML. compliance. officer. should. be.given.full.responsibility.and.authority.to.enforce.the.firm’s.AML.program.. .The.AML.compliance.officer.may.effect.his.or.her.responsibilities.through.a.specific.department,.unit,.group,.or.committee...Depending.on.the.size,.structure,.business.and. resources. of. a. firm,. the. designated. department,. unit,. group,. committee. or.officer.may.be.dedicated.solely. to. the.firm’s.AML.efforts,.or. the.firm.may.elect.to.incorporate.the.AML.responsibilities.into.the.existing.duties.of.a.compliance.officer.or.risk.manager...The.AML.compliance.officer’s.duties.should.include,.in.part:.(1).monitoring.the.firm’s.compliance.with.its.AML.program;.(2).developing.communication.and.training.tools.for.employees;.(3).assisting.to.resolve.any.due.diligence.or.red.flag.issues;.and.(4).ensuring.that.AML.records.are.maintained.and.reports,.such.as.Suspicious.Activity.Reports.(“SARs”),.are.filed.in.accordance.with.applicable.regulations.20.The.AML.compliance.officer,.either.directly.or.through.the.designated.department,.unit,.group.or.committee,.should.be.a.central.point.of.contact.for.communicating.with.regulatory.agencies.regarding.issues.related.to.the.firm’s.AML.program.

The. AML. compliance. officer. should,. to. the. extent. applicable,. report. AML.compliance.issues.either.to.a.member.of.the.Board.of.Directors.or.another.high.level.executive.officer.of. the.firm.. .The.firm’s.senior.management.and.the.AML.compliance. officer. should. work. together. to. help. assure. that. the. firm’s. AML.program.is.compliant.with.all.applicable.laws.and.that.it.is.effective.in.detecting.and.deterring.AML.misconduct..

As.noted.above,.pursuant. to. the.relevant.applicable.SRO.rule,.a.firm.must.notify.its.SROs.of.the.identity.and.contact.information.of.the.compliance.officer.supervising. its. AML. program.. . A. firm. is. required. to. update. the. AML. contact.information.with.any.relevant.SROs.promptly,.which.generally.means.within.30.days.under.the.rules.21

19 FirmsshouldalsobecognizantofthefactthattheSROrulesaddresstherelationshipbetweentheAMLcomplianceofficerandthememberfirm.SeeNYSERule445(4),requiringsuchpersonstobeemployedbyeachmemberormemberorganization,oremployedbyanentitythatdirectlyorindirectlycontrols,oriscontrolledby,orisundercommoncontrolwiththememberormemberorganization(i.e.,parent,affiliateorsubsidiaryofthememberormemberorganization).See alsoNASDRule3011(d),requiringsuchindividualstobeassociatedpersonsofthemember.

20 SeegenerallyNASDNTM02-21,at14.

21 SeeNYSERules445(4)and416A(a);NASDRule3011(d)and1160(b);andNASDIM3011-2.Inaddition,theNASDrequiresmemberstoverifythecontactinformationandupdateitasnecessarywithin17daysaftertheendofeachcalendaryear.NASDRule1160(b).MemberfirmsmayusetheFINRAContactSystem,availableontheFINRAwebsite,tofacilitatereportingkeycontactstoFINRA.

� |

2.3. ProceduresRelatingtoLimitationsandRestrictions onTypesofDeposits

Each.firm.should.assess.its.business.and.implement.procedures.with.regard.to. those. types. of. deposits. that. pose. the. greatest. risk. to. the. institution.. . These.could.include..procedures.for.the.acceptance.of.cash.and.cash.equivalents,.such.as.traveler’s.checks,.money.orders,.cashier’s.checks.and.bearer.bonds,.which,.although.legitimate,.have.been.utilized.in.connection.with.fraudulent.activity...

The.current.practice.of.many.securities.firms.is.not.to.accept.cash.and.cash.equivalents.at.all.–.or.to.place.limitations.on.the.acceptance.of.cash,.money.orders.and. traveler’s. checks.. . Whether. or. not. a. firm. accepts. cash. or. cash. equivalents,.regulators.expect.firms.to.alert.employees.to.the.BSA.reporting.and.recordkeeping.requirement.relating.to.both,.and.to.develop.and.implement.written.procedures.regarding.the.reporting.requirements...These.procedures.should.also.address.the.legal.prohibition.against.“structuring,”.which.may.be.evidenced.by.an.attempt.by.a.customer.to.spread.deposits.of.currency.or.cash.equivalents.on.a.single.day,.over.a.number.of.days.or.in.a.number.of.accounts..(See.section.11.for.a.discussion.of.the.relevant.reporting.requirements.)

2.4. ProceduresRelatingtotheConceptof“KnowYourCustomer”A.firm’s.anti‑money.laundering.procedures.should.incorporate,.to.the.extent.

appropriate,.its.existing.KYC.obligations.as.described.in.the.rules.of.the.NYSE.and.the.NASD...Presently,.both.the.NYSE.Rules22.and.NASD’s.Conduct.Rules23.require.that.for.each.account.opened,.a.firm.undertake.reasonable.efforts.to.obtain.and.maintain.certain.customer.information.24 Similarly,.a.firm’s.anti‑money.laundering.procedures.should.emphasize. the.obligation.of. the.firm.to.request. the.essential.

22 NYSERule405provides,inpertinentpart,that“everymemberorganizationisrequired…to…(1)[u]seduediligencetolearntheessentialfactsrelativetoeverycustomer,everyorder,everycashormarginaccountacceptedorcarriedbysuchorganizationandeverypersonholdingpowerofattorneyoveranyaccountacceptedorcarriedbysuchorganization.”

23 NASDRule3110requiresthatforeachaccountopened,thefirmmustmaintaincertaininformation,including(i)thecustomer’snameandresidence;(ii)whetherthecustomerisoflegalage;(iii)thesignatureoftheregisteredrepresentative(broker)introducingtheaccountandthesignatureofthememberorpartner,officer,ormanagerwhoacceptstheaccount;and(iv)ifthecustomerisacorporation,partnershiporotherlegalentity,thenamesofanypersonsauthorizedtotransactbusinessonbehalfoftheentity.Additionally,foreachaccountotherthaninstitutionalaccountsandaccountsinwhichinvestmentsarelimitedtotransactionsinmoneymarketfunds,NASDRulesmandatethateachmembermakereasonableeffortstoobtain(priortosettlementoftheinitialtransactionintheaccount)thecustomer’staxidentificationorSocialSecuritynumber,thecustomer’soccupation(includingtheemployer’snameandaddress),andwhetherthecustomerisanassociatedpersonofanothermember.

24 Althoughallfirmsmustrequestcertainbasicinformationabouttheircustomers,thenatureandextentoftheinformationeachrequestsmayvarydependingonthefirm’sbusinessmodel,thetypesofservicesitoffers,andthetypesofcustomersoraccountsinvolved.Forexample,firmsthatofferadvicemayrequestmoreinformationaboutcustomersinordertomeettheirrelevantsuitabilityobligations.Giventhedifferenttypesofcustomerrelationships,informationdesignedtomeetsuitabilityobligationsmaybeincorporatedaspartofafirm’sant-moneylaunderingprocedures.

| �

facts.relating.to.each.customer.and.each.account..(See.section.4.for.a.discussion.of.KYC.procedures,.including.CIP).

2.5. ProceduresRelatingtoMonitoringCertainTransactionsFirms. should.have. in.a.place.a.monitoring.program. to. review. for.unusual.

or. potentially. suspicious. account. activity.. . Depending. upon. the. size. and. the.nature.of.the.firm’s.business.activities,.a.monitoring.program.could.take.various.forms,.ranging.from.the.manual.monitoring.of.significant.transactions.or.activity.to. the. use. of. automated. monitoring. systems.. . Once. a. firm. has. determined. the.appropriate.method.or.manner.effectively.to.monitor.account.activity,. it.should.adopt.suitable.related.procedures...Exception.reporting.may.be.based.on.different.factors,.including.the.size.of.transactions.and.volume.of.activity...(See.section.8.for.a.discussion.of.monitoring.of.accounts.)

2.6. ProceduresforIdentifyingandReportingSuspicious orUnusualTransactions

Certain.activity.may.warrant. the.firm. to.make.or.file. reports.with.various.governmental. agencies. or. law. enforcement. authorities.. . Firms. should. have.procedures.in.place.that.are.designed.to.assist.personnel.in.detecting.unusual.or.suspicious.activities...Firm.procedures.should.make.clear.that.employees.should.report.such.activity,.once.detected,.to.managers.or.other.supervisory.personnel...Specific.internal.channels.for.reporting.unusual.or.suspicious.activity.should.be.established...(See.section.7.for.a.discussion.of.procedures.and.examples.regarding.suspicious.activity.

3. ReviewingOFACListsPriortoEstablishingaCustomerAccount, EffectingaTransaction,andDeliveringorReceivingSecurities

Securities.firms,.like.other.U.S..financial.institutions,.must.comply.with.the.economic.and.trade.sanctions.programs.administered.by.OFAC...Prior.to.opening.an.account.or.entering.into.a.transaction,.securities.firms.should.determine.whether.a. potential. customer. is. listed. on. OFAC’s. Specifically. Designated. Nationals. and.Blocked.Persons.List.(“SDN.List”),.or.are.residents.of,.or.organized.in,.embargoed.countries.or.regions.listed.on.OFAC’s.website,.i.e.,.whether.a.potential.customer.is.a.“Prohibited.Person”.under.OFAC’s.sanctions.programs.25.Additionally,.firms.should.screen..physical.securities.to.determine.whether.there.are.any.prohibited.securities.involved.in.the.transactions.26

25 See generallyU.S.Dept.oftheTreasury,Foreign Assets Control Regulations for the Securities Industry,at2-3(Apr.29,2004),available athttp://www.treasury.gov/offices/enforcement/ofac/regulations/facsc.pdf.,andFINRASmallFirmTemplate,at5;see also,NASDNTM02-21,at6.

26 Broker-dealersshouldbeawarethattheDepositoryTrustCompanyhasspecificprocedureswithrespecttothescreeningofsecuritiespriortoanysecuritiestransactions.

�0 |

Periodically,.firms.should.screen.the.existing.customer.accounts.and.securities.in.custody.against.the.SDN.List.and.OFAC.sanctions.programs,.as.the.OFAC.lists.are.updated.. . . If.a.firm.discovers.any.accounts. that.are.held. in. the.name.of,.or.on. behalf. of,. a. Prohibited. Person. or. any. prohibited. securities,. the. firm. should.promptly.take.the.necessary.action..

If. a. potential. or. existing. customer. is. identified. as. a. Prohibited. Person,. or.a. prohibited. security. is. discovered,. depending. upon. the. applicable. sanctions.program,.the.securities.firm.may.be.obligated.to.(a).reject.the.transaction.or.(b).freeze.the.funds.or.securities.and.establish.a.blocked.account.to.hold.the.frozen.assets.. . In. either. event,. securities. firms. must. notify. OFAC. within. 10. business.days.of.the.blocking.or.rejection.by.submitting.the.appropriate.form.to.OFAC.27.Securities.firms.must.also.file.an.annual.report.with.OFAC.by.September.30.of.each.year.for.blocked.property.held.as.of.June.30.of.that.year.28

Although.not.required.by.OFAC.regulations,.to.avoid.engaging.in.any.OFAC‑prohibited.transactions,.and.as.a.matter.of.sound.business.practice,.a.firm.should.establish. an. OFAC. compliance. program. that. is. commensurate. with. its. OFAC.risk. profile.29. Generally,. a. firm. can. determine. its. risk. profile. by. conducting. a.risk.assessment.of.its.specific.products,.services,.customer.base,.and.geographic.locations.30. Based. on. this. assessment,. a. firm. should. implement. policies. and.procedures.for.OFAC.screening.and.reporting.that.address.the.associated.level.of.risk,.particularly.if.any.high‑risk.areas.have.been.identified...In.addition,.a.firm’s.OFAC.compliance.program.should.include:.(1).a.designated.person.responsible.for.overseeing.OFAC.compliance;.(2).methods.for.independent.testing.of.the.firm’s.OFAC.compliance.program;.and.(3).OFAC.training.for.appropriate.personnel.31.To.ensure.that.all.aspects.of.a.firm’s.business.are.OFAC.compliant,.a.firm.should.integrate. its. OFAC. and. AML. policies. and. procedures. into. the. firm’s. overall.compliance.program.

27 FinCENallowsafirmtosatisfyitsobligationtofileaSARwithrespecttoanOFACprohibitedtransactionbyfilingablockingreportwithOFAC.TotheextentthatafirmisinpossessionofinformationnotincludedontheblockingreportfiledwithOFAC,aseparateSARshouldbefiledwithFinCENincludingthatinformation.SeeBSAAdvisoryGroup,“Section5-IssuesandGuidance,”The SAR Activity Review - Trends, Tips & Issues,at38-40(April2005),available athttp://www.fincen.gov/sarreviewissue8.pdf#page=44.

28 SeeOFACformsforfilingreportsonblockedandrejectedtransactionsandannualreports,available athttp://www.treasury.gov/offices/enforcement/ofac/forms/index.shtml.

29 SeeFFIECBSA/AMLExaminationManual,at140;see generally,NASDNoticetoMembers01-67,Executive Order Targeting Terrorists,at578(Oct.2001).

30 Althoughitwascreatedwiththefinancialinstitutionsthataresubjecttofederalbankingregulatorsinmind,OFAC’sRiskMatrixprovidesguidelinesthatcanbeconsideredbyotherfinancialinstitutionstodeterminewhetheraparticularbusinessareaislow,mediumorhighrisk.See OFAC,RiskMatrix,availableathttp://www.treasury.gov/offices/enforcement/ofac/faq/matrix.pdf.

31 SeeFFIECBSA/AMLExaminationManual,at140.

| ��

4. KnowYourCustomer(“KYC”)policy,including CustomerIdentificationProgram(“CIP”)

A.firm’s.KYC.policy,.including.its.CIP,.should.be.focused.on.the.customers.with.whom.a.firm.transacts.business.and.should.be.intended.to.enable.firm.personnel.to.obtain.information.about.the.firm’s.clients.in.order.to.verify.their.identities.and.to.better.assess.their.legitimacy.and.the.legitimacy.of.the.transactions.conducted.with. the. firm.. . A. firm’s. KYC. policy,. including. the. CIP,. should. be. designed. to.enhance. a. firm’s. ability. to. maintain. compliance. with. all. applicable. statutes. and.regulations,.including.the.reporting.of.suspicious.activity.

The. process. of. knowing. one’s. customer. is. not. concluded. once. the. initial.account.opening.information.has.been.obtained...Given.the.nature.of.the.securities.business,.the.process.of.“knowing.one’s.customer”.continues.to.develop.over.time...Even. after. the. account. is. established,. in. the. normal. course. of. the. relationship,.firms. should. continue. to. build. upon. the. information. initially. provided. by. the.customer.and.update.their.records.accordingly.

4.1. CustomerIdentificationandVerificationThe.U.S..Department.of.the.Treasury.(“Treasury”).and.the.SEC.have.jointly.

implemented. the. customer. identification. program. rule. (the. “CIP. Rule”). for.broker‑dealers,. which. became. effective. on. October. 1,. 2003.. . In. January,. 2006,.SIFMA’s.AML.Committee.published.guidance.concerning.the.identification.and.verification. procedures. required. by. the. CIP. Rule. titled,. Suggested Practices forCustomerIdentificationPrograms. (“CIP.Suggested.Practices”).32.Since. that. time,.FinCEN,.in.conjunction.with.the.SEC,.the.CFTC,.and.the.banking.regulators,.has.issued.additional.guidance....

The.CIP.Rule.requires.that.broker‑dealers.establish,.document.and.maintain.a. written. CIP. that. is. part. of. its. overall. AML. program.. . A. firm’s. CIP. must. be.designed.to.allow.it.to.form.a.reasonable.belief.that.it.knows.the.true.identity.of.each.customer...Therefore,.the.CIP.must.include,.among.other.things,.risk‑based.procedures. for. verifying,. to. the. extent. reasonable. and. practicable,. the. identity.of.each.“customer”.who.opens.a.new.“account”.with.the.firm...The.firm’s.senior.management.must.approve.this.CIP.in.writing.33

32 This2008AMLGuidanceisintendedtosupplement,notreplace,theCIPSuggestedPractices,whichhasafarmorefulsomeapproachtotheissuesrelatingtoCIP.However,giventhattherehasbeenadditionalguidancesincetheissuanceofthoseCIPSuggestedPractices,the2008AMLGuidanceaddressesthoseissuestoalimitedextent.

33 AfirmmusthaveitsAMLprogramapprovedinwritingbyamemberofthefirm’sseniormanagementpursuanttoNYSERule445andNASDRule3011.BecausetheCIPRulerequiresafirmtoincorporateCIPintoitsoverallAMLprogram,andtheCIPwouldbeamaterialchangetotheAMLprogram,afirmmustalsoobtainapprovalinwritingfortheCIPpursuanttotheseSROrules.

�� |

4.2. CIPGenerallyAt.a.minimum,.a.firm’s.CIP.must.include:

• Adescriptionofthetypesofminimumidentifyinginformationthefirmwillobtainfromcustomersopeningnewaccounts;34

• Proceduresforverifyingtheidentityofsuchcustomers,totheextentreasonableandpracticable,withinareasonableperiodoftimebeforeorafteraccountopening;

• ProceduresformakingandmaintainingrecordsrelatedtotheCIP;

• ProceduresfordeterminingwhethercustomersopeningnewaccountsappearonanygovernmentlistofknownorsuspectedterroristsorterroristorganizationsspecificallydesignatedbyFinCENandtheSECasaSection326listunderthePATRIOTAct;35

• Proceduresforprovidingnoticetocustomerspriortoaccountopeningthatinformationisbeingrequestedtoverifytheiridentity;

• Proceduresspecifyingtheactionthefirmwilltakewhenitcannotadequatelyverifytheidentityofacustomeropeninganewaccount;and

• ProceduresspecifyingwhenaSARshouldbefiled.

For. identification. and. verification. procedures. that. should. be. considered. for.various.types.of.customers,.firms.may.refer.to.the.SIFMA’s.CIP.Suggested.Practices.

4.3. TimingofVerificationFirms. should. reasonably. exercise. the. flexibility. provided. by. the. CIP. Rule.

to.undertake.verification.before.or.after.an.account.is.opened.. .The.appropriate.time.frame.may.depend.on.various.factors,.such.as.the.type.of.account.opened,.the.method.by.which.the.account.is.opened,.the.type.of.identifying.information.available,. the. verification. method. used,. and. the. location. of. the. customer.. . As.described.in.section.3.above,.a.firm.should.also.consider.whether.it.has.met.its.obligations.under. the.OFAC.sanctions.programs.before.allowing.a.customer. to.transact.business.36

34 AssetforthintheCIPSuggestedPractices,existingaccountsareexemptfromafirm’sCIP.SeeCIPSuggestedPractices,at4-6.ForpurposesofCIP,theregulatorshaveclarifiedthatacustomerofaduallyregisteredsecuritiesbroker-dealer/futurescommissionmerchantwouldbeconsideredanexistingcustomerofthedualregistrant,regardlessofwhetherornottheaccountwasoriginallyopenedattheotherfinancialinstitution,providedthatthedualregistrantmaintainsareasonablebeliefthatitknowsthetrueidentityofthecustomer.GuidancefromtheStaffsoftheCFTC,FinCENandTreasury,“Questions and Answers Regarding the Customer Identification Program Rule for Futures Commission Merchants and Introducing Brokers”,at3(undated).

35 FinCENandtheSEChavenotyetdesignatedalistforpurposesoftheCIPRule.However,firmsshouldnotconfusethelistrequirementintheCIPRulewiththeobligationsandprohibitionsthatariseunderOFAC.OFACimposesseparaterequirementsthatallfirmsmustcomplywithonacontinuousbasis.

36 Thebroker-dealerCIPrulediscussestheobligationoffirmstocomplywithexistingobligationsunderOFAC.See68Fed.Reg.25113,25122n.120(May9,2003).

| ��

A. firm. should. use. a. risk‑based. approach. in. determining. what. constitutes.a. reasonable. period. of. time. to. verify. its. customers.. . The. AML. Committee.recommends. that,. in.general,.firms.verify. the. identification.of.customers.either.before. account. opening. or. within. a. reasonable. period. after. account. opening...More.time.may.be.necessary.to.verify.non‑U.S..individuals.and.entities.because.documents.from.other.countries.may.not.be.readily.available.or.may.require.more.time.to.review.for.reliability...Similarly,.where.an.account.involves.certain.non‑U.S..persons.(e.g.,.persons.who.may.be.senior.foreign.political.figures.or.persons.from.high.risk.jurisdictions),.a.firm.may.need.additional.time.to.undertake.verification.or.may.determine.to.require.that.such.information.be.obtained.prior.to.the.opening.of.the.account...If.a.firm.needs.additional.time.to.undertake.verification,.it.should.consider.setting.restrictions.on.transactions.in.the.account.until.such.verification.can. be. completed. or. requiring. some. higher. level. of. management. pre‑approval,.either.of.the.entire.account.or.of.specific.transactions.such.as.withdrawals.or.funds.transfers...

4.4. RelianceonFinancialInstitutionsRegulators.recognize.the.ability.of.firms.to.rely.on.the.performance.by.another.

financial. institution. with. which. it. shares. an. account. relationship. to. undertake.the.procedures.necessary.to.comply.with.the.requirements.of.a.firm’s.CIP,.where.certain.conditions.are.met...Reliance.is.permitted.provided.that:.(1).such.reliance.is.reasonable.under.the.circumstances;.(2).the.other.financial.institution.is.subject.to.a.rule.implementing.the.AML.compliance.program.requirements.and.is.regulated.by. a. federal. functional. regulator;. and. (3). the. other. financial. institution. enters.into.a.contract.with.the.firm.requiring.it.to.certify.annually.to.the.firm.that.it.has.implemented.an.AML.Program.and.will.perform.(or.its.agent.will.perform).the.specified.CIP.requirements.37.In.certain.instances,.the.regulations.permit.reliance.on.financial.institutions.that.are.not.yet.subject.to.the.AML.rules...For.example,.the.SEC,.in.consultation.with.FinCEN,.issued.a.No‑Action.Letter.providing.that.in.certain.situations,.broker‑dealers.may.treat.a.registered.investment.adviser.(“IA”).as.if.it.were.subject.to.AML.rules.for.purposes.of.relying.on.the.IA’s.performance.of.CIP,.provided.all.other.requirements.and.conditions.of.the.rule.are.met.38

4.5. KYCGenerallyThe. establishment. of. the. customer‑firm. relationship. presents. the. best.

opportunity. for. the.firm.to.begin. to.develop. its.knowledge.about. the.customer.

37 31C.F.R.§103.122(b)(6).

38 SeetheSECNo-ActionLetter(Jan.10,2008),extendingthereliefprovidedinpreviousletters,withrespecttoinvestmentadvisers,available athttp://www.sec.gov/divisions/marketreg/mr-noaction/2008/sifma011008-aml.pdf;see alsoCFTCLetterNo.05-05(Mar.14,2005),providingno-actionrelieftofuturescommissionmerchants(“FCMs”)whorelyoncommoditytradingadvisorsregisteredwiththeCFTCorregisteredasinvestmentadviserswiththeSECforpurposesofCIP,available athttp://www.cftc.gov/files/tm/letters/05letters/tm05-05.pdf.

�� |

and.the.types.of.transactions.in.which.the.customer.is.likely.to.engage...Securities.firms.start.with.the.basic.KYC.requirements.mandated.by.SROs.rules,.including.NYSE.and.NASD.

Consistent. with. SRO. requirements,. a. firm’s. AML. program. should. be.designed.to.permit.the.firm.to.make.a.reasonable.risk‑based.determination.as.to.its.customers,.its.customers’.source.of.income.and.the.customers’.expected.activity...In.assessing.the.risks.associated.with.particular.customers.or.transactions,.the.firm.should.first.evaluate.its.business.to.ascertain.those.areas.in.which.the.likelihood.of.suspicious.or.potentially.illegal.activity.may.be.greater...Such.an.evaluation.should.serve. as. the. basis. for. determining. the. amount. of. customer. due. diligence. and.documentation.that.is.necessary.for.a.particular.customer.or.for.customers.in.the.same.or.similar.categories.and.the.extent.of.the.monitoring.that.such.customers.or.accounts.may.require...A.firm.may.consider.the.following.factors,.among.others,.in.assessing.the.risk.posed.by.particular.customers.or.transactions:

• Whetherthecustomerisanindividual,anintermediary,public,private,domesticorforeigncorporation,afinancialornon‑financialinstitution,orregulatedpersonorentity;

• Whetherthecustomerhasbeenanexistingcustomerforasignificantperiodoftime;

• Howtheclientbecameacustomerofthefirm;

• Whetherthebusinessofthecustomer,ortheparticulartypeofaccount,isthetypemorelikelytobeinvolvedinillicitactivity(e.g.,cash‑intensivebusinesses);

• Whetherthecustomer'shomecountryisamemberofFATForthecustomerisotherwisesubjecttoadequateAMLcontrolsinitshomejurisdiction;and

• Whetherthecustomerresidesin,isincorporatedinoroperatesfromajurisdictionwithbanksecrecylaws,orthathasbeendesignatedbyFATFasnon‑cooperativeinthefightagainstmoneylaundering(an"NCCTJurisdiction"),39oridentifiedbytheSecretaryoftheTreasuryassubjecttospecialmeasures,orsubjecttoaFinCENAdvisory.(Seesections4.6.13and6foradiscussionofaccountsfromthesejurisdictions).

In.addition,.firms.should.make.their.own.assessment.of.any.additional.due.diligence.that.may.be.necessary.to.assess.risk...

39 An“NCCTJurisdiction”isacountryorterritoryofferingfinancialserviceswithoutappropriatecontrolorregulationtoeffectivelypreventmoneylaundering,andwithstrictbankingsecrecyprotectionsthatmakecustomeridentificationdifficultorimpossible.Suchjurisdictionsdonot,oronlymarginally,participateininternationalcooperationagainstfinancialcrime.SeeFATF,Report on Non-Cooperative Countries and Territories,at2(Feb.14,2000),available athttp://www.fatf-gafi.org/dataoecd/57/22/33921735.pdf.Asofthedateoftheissuanceofthis2008AMLGuidance,therearenocountriesdesignatedasNCCTJurisdictions.

| ��

Although.firms.can.contract.to.outside.vendors.certain.AML.functions.such.as.the.provision.of.databases.to.conduct.due.diligence.as.part.of.KYC,.the.ultimate.responsibility.for.AML.compliance.remains.always.with.the.firm.40

4.6. KYCConsiderationsforParticularKindsofAccounts

4.6.1. IndividualAccountsFor.accounts.opened.by.an.individual,.in.addition.to.the.information.required.

by. the. CIP. Rule,. each. firm. should. undertake. reasonable. efforts. to. obtain. the.following.information.at.the.commencement.of.the.business.relationship:

• Thecustomer'sinvestmentexperienceandobjectives,ifapplicable;

• Thecustomer'snetworthandannualincome;

• Thecustomer'soccupationandemploymentdata,suchastheemployer'saddress(generallyunderstoodtobethecustomer'ssourceofincome);and

• Thenamesofallauthorizedpersons.

4.1.2. AccountsofNon-U.S.PersonsAdditional.due.diligence.may.be.warranted.depending.on.a.number.of.factors,.

including. the. country. of. origin. of. a. non‑U.S.. person,. such. as. a. non‑resident.alien.

4.6.3. DomesticOperatingorCommercialEntitiesEach. securities. firm. should. obtain. information. sufficient. to. ascertain. the.

identity.of.the.corporate.or.business.entity.establishing.the.business.relationship.and. the. authority. of. the. business. representative. to. act. on. the. corporation’s. or.entity’s.behalf...The.type.of.documentation.obtained.by.a.firm.may.vary.depending.upon.the.nature.of.the.corporate.or.business.entity...

4.6.4. DomesticTrustsThe.firm.should.obtain.information.regarding.the.authorized.activity.of.the.

trust.and.the.persons.authorized.to.act.on.behalf.of.the.trust...

4.6.5. ForeignOperatingCommercialEntitiesTaking. into. account. various. factors,. including. the. entity’s. country. of.

incorporation. and. the. foreign. or. offshore. jurisdiction. in. which. the. business. is.located,.firms.should.undertake.appropriate. internal.processes. for.corporations.or.entities.established.or.located.in.jurisdictions.outside.the.United.States...Based.

40 See68Fed.Reg.at25123n.132.

�� |

upon. its. own. risk‑assessment,. a. firm. may. consider. whether. additional. due.diligence,. including. identifying. information. about. the. parties. controlling. the.account,.is.necessary.

Consistent. with. the. provisions. of. the. PATRIOT. Act. relating. to. prohibited.foreign.shell.banks,.firms.should.not.establish,.maintain,.administer.or.manage.an. account. in. the. United. States. for,. or. on. behalf. of,. a. prohibited. foreign. shell.bank.41.(See.section.5.2.1,.below,.for.a.discussion.of.shell.banks)...The.PATRIOT.Act. also. requires. financial. institutions. to. take. reasonable. steps. to. ensure. that.correspondent. accounts. are. not. used. indirectly. to. provide. banking. services. to.foreign.shell.banks.

4.6.6. PersonalInvestmentCorporationsor PersonalHoldingCompanies

Personal. Investment. Corporations. or. Personal. Holding. Companies,. as.discussed. in. this. 2008. AML. Guidance,. are. “shell. companies,”. i.e.,. non‑publicly.traded.corporations.and. limited. liability.companies. that.often.have.no.physical.presence.and.generate.little.or.no.independent.economic.value.42.Shell.companies.are.not.illegal,.and.most.are.created.by.individuals.and.businesses.for.legitimate.business. purposes.. . However,. because. the. structure. of. a. shell. company. allows.ownership.and.transactional.information.about.the.entity.to.be.easily.and.legally.concealed,.shell.companies.present.a.higher.risk.for.money.laundering.and.other.illicit.purposes,.particularly.if.located.in.a.tax.haven.jurisdiction.43.Therefore,.the.AML.Committee.recommends.that.firms.ensure.that.their.anti‑money.laundering.policies. and. procedures. effectively. assess. and. manage. the. risks. associated. with.a. shell. company.44. To. assess. the. level. of. risk. associated. with. a. shell. company,.

41 PursuanttoSection313ofthePATRIOTAct,thisprohibitionappliesto“aforeignbankwithoutaphysicalpresenceinanycountry.”31C.F.R.§103.175(i).Theprohibitiondoesnotapplyiftheforeignbankisa“regulatedaffiliate”,i.e.,anaffiliateofadepositoryinstitution,creditunion,orforeignbankthatmaintainsaphysicalpresenceintheUnitedStatesoraforeigncountry,asapplicable,andissubjecttosupervisionbyabankingauthorityintheforeigncountryregulatingsuchaffiliateddepositoryinstitution,creditunionorforeignbank.31C.F.R.§103.175(p)(1).

42 Companiesthatholdsignificantassets,suchassubsidiarycompanyshares,butarenotengagedinactivebusinessoperationsarenotconsideredshellcompanies.SeeFinCENGuidance,Potential Money Laundering Risks Related to Shell Companies(“FinCENShellCompanyGuidance”),FIN-2006-G014(Nov.9,2006),at2n.3,available athttp://www.fincen.gov/AdvisoryOnShells_FINAL.pdf.

43 See generallyFinCENReport,The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies(Nov.2006),availableathttp://www.fincen.gov/LLCAssessment_FINAL.pdf.;see alsoUnitedStatesGovernmentAccountabilityOfficeReporttothePermanentSubcommitteeonInvestigations,CommitteeonHomelandSecurityandGovernmentalAffairs,U.S.Senate,Company Formations - Minimal Ownership Information is Collected and Available(Apr.2006),available athttp://www.senate.gov/~levin/newsroom/supporting/2006/GAO%20report%20on%20company%20formation%20GAO-06-376.pdf.

44 SeeFinCENShellCompanyGuidance,at4.FinCEN‘sguidanceindicatesthataneffectivecomplianceprogramshouldincludescreeningshellcompaniesforpossibleOFAC-relatedsanctionsreferencesandobtainingassurancesfromshellcompanyrepresentativesthatprincipalsofthecompanyhavebeenscreened.Id.atn.6.

| ��

factors. to. consider. include,. among. others,. the. ownership. structure,. nature. of.the.customer,.the.purpose.of.the.account,.and.the.type.and.location.of.services.provided.to.the.customer.45.Firms.should.be.aware.that.shell.companies.may.be.domestic.or.foreign.entities..

A.firm.should.identify.the.principal.beneficial.owner(s).of.offshore.corporate.accounts.where.such.accounts.are.personal.investment.corporations.or.personal.holding.companies...Although.the.documentation.may.vary,.a.firm.should.strive.to. obtain. sufficient. documentation. regarding. the. principal. beneficial. owner(s).of.the.account...Additional.due.diligence.may.also.be.warranted.depending.on.a.number.of.factors,.including.the.location.of.the.offshore.entity.and.the.location.of. the. principal. beneficial. owner(s).. . The. firm. should. make. a. risk. assessment.as. to. whether. it. is. appropriate. to. obtain. similar. information. for. domestic. shell.companies.. . Moreover,. when. the. beneficial. owner. is. a. senior. political. foreign.figure.(“SFPF”).or.politically.exposed.person.(“PEP”),46.special.due.diligence.may.be.required,.either.under.Section.312.of.the.PATRIOT.Act,.or.relevant.Treasury.guidance.47

4.6.7. OffshoreTrustsWith.an.offshore. trust,. there. is.a.higher.risk. that.a.firm.will.not.know.the.

customer’s. true. identity,. particularly. if. the. trust. is. established. in. a. jurisdiction.which. lacks. regulatory. oversight. over. trust. formation,. because. the. structure. of.a.trust.may.be.used.to.conceal.the.sources.of.funds.and.the.identity.of.the.true.owners.or.those.with.beneficial.interest.in.the.trust.48.Therefore,.when.a.firm.opens.an. account. for. an. offshore. trust,. even. though. the. “customer”. is. the. trust,49. the.firm.should.consider.conducting.additional.due.diligence.for.such.trust.accounts...Specifically,.the.firm.should.identify.the.principal.ownership.of.the.trust.and.gather.information.on.the.individuals.with.authority.or.control.over.the.trust’s.account,.such.as.the.settlor,.grantor,.trustee,.or.other.persons.that.direct.the.trustee.50

45 SeeFFIECBSA/AMLExaminationManual,at290-297,forguidanceonmanagingtherisksassociatedwithshellcompanies.

46 SFPFsandPEPsareaddressedinmoredetailinsection5.1.2,below.

47 SeeTreasury,Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of Foreign Official Corruption(“TreasuryGuidanceRegardingForeignOfficialCorruption”)(Jan.2001).See alsoNASDNTM02-21,at8.

48 Foradiscussionontrusts,includingoffshoretrusts,seeFATF,The Misuse of Corporate Vehicles, Including Trust and Company Service Providers(Oct.13,2006),available athttp://www.fatf-gafi.org/dataoecd/30/46/37627377.pdf.

49 SeeCIPSuggestedPracticesat20;see also Interagency Interpretive Guidance on Customer Identification Program Requirements under Section 326 of the USA PATRIOT Act,FAQs:FinalCIPRule(“FinalCIPRuleFAQs”),issuedbytheFederalReserveBoard,FDIC,NCUA,OCC,OTS,andFinCEN,at7,#9(April28,2005),available athttp://www.fincen.gov/faqsfinalciprule.pdf.

50 SeeFFIECBSA/AMLExaminationManualat254-255.

�� |

Additional.due.diligence.may.also.be.warranted.depending.on.a.number.of.factors,.such.as.the.location.of.the.offshore.entity.and.the.principal.owner(s)...For.example,. a. firm. should. consider. conducting. additional. due. diligence. for. trusts.established. in. any. jurisdiction. that. has. been. designated. as. a. primary. money.laundering.concern.or.non‑cooperative.by.an.international.body...Although.the.types.of.available.documentation.may.vary,.a.firm.should.strive.to.obtain.sufficient.documentation.regarding.the.principal.ownership.of.the.account.

4.6.8. U.S.andNon-U.S.CharitableandOther Non-ProfitOrganizations

For.an.account.opened.in.the.name.of.a.charitable.or.non‑profit.organization.(e.g.,.educational.institution,.religious.group,.or.foundation),.firms.must.conduct.CIP.prior.to.account.opening.and.verify.its.identity.within.a.reasonable.period.of.time.before.or.after.account.opening.

While.the.CIP.Rule.requires.firms.to.verify.only.the.identity.of.the.named.customer. (i.e.,. the. charitable. or. non‑profit. organization). and. does. not. require.firms. to. look. through. to. its. beneficiaries,. a. firm. should. consider,. based. on. its.risk.assessment,.whether.it. is.appropriate.to.obtain.additional. information.with.respect.to.the.customer...Although.many.charitable.and.non‑profit.organizations.are.well‑known.and.reputable,.others.have.been.implicated.in.a.number.of.terrorist.investigations,51. and. firms. may. therefore. face. higher. risks. when. dealing. with.smaller.or.less.well‑known.organizations...Based.on.their.risk.analysis,.firms.may.determine.to.look.through.the.charitable.or.non‑profit.organization.to.ascertain.the.nature.of.the.charitable.giving,.by.performing.additional.due.diligence,.such.as.reviewing.the.website.of.the.non‑profit.organization..

4.6.9. InstitutionalAccounts,HedgeFunds,InvestmentFunds andOtherIntermediaryRelationships

A.firm’s.AML.procedures.should.cover.its.institutional.business.and.clients...In.establishing.these.procedures,.firms.should.look.in.the.first.instance.to.the.SRO.procedures.for.institutional.accounts.52.It.should.be.understood.that.institutional.

51 FinCENhasnotedthatterroristgroupscreatecharitablefrontsandusenon-profitstoraiseandmovemoneyandtosupportfamilymembersofoperativesordeceasedsuicidebombers,amongotherthings.SeeFinCENAnnualReportFY2005,at55,available athttp://www.fincen.gov/fincenannualreport2005.pdf.Firmsshouldconsiderwhethercharitableorothernon-profitorganizationsthatarecustomershaveadoptedtheTreasury’sguidelines,whicharedesignedtoenhanceawarenessofthekindsofpracticesthatcharitiesmayconsidertoreducetheriskofterroristfinancingorabuse.See alsoTreasury,Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities(Dec.2005),available athttp://www.ustreas.gov/press/releases/reports/0929%20finalrevised.pdf.See alsoFATF,Combating the Abuse of Non-Profit Organisations: International Best Practices(Oct.11,2002)foradiscussionofinternationalbestpracticestoguidegovernmentswhendealingwithterroristfinancingthroughcharities,available athttp://www.fatf-gafi.org/dataoecd/39/19/34033761.pdf.

52 See, e.g.,NASDRule3110(c)(4);see alsoNASD3011,IM-2310-3.

| ��

business.differs.from.traditional.retail.business.on.a.number.of.levels...Therefore,.institutional. accounts. have. historically. been. the. subject. of. an. analysis. different.from.retail.accounts.because.the.former.are.generally.viewed.as.accounts.opened.for.financially.sophisticated.customers,.who.typically.buy.and.sell.in.the.market.frequently.and.often.in.significant.volume...Institutional.clients.often.are.widely.known,. regulated. and/or. publicly. held.. . In. addition,. consistent. with. normal,.legitimate. business. and. competitive. practices,. firms. may. have. limited. or. no.contact.with.the.underlying.beneficiaries.of. institutional.clients,.and.deal.solely.through.intermediaries.

Investment.advisers.that.generally.introduce.investment.funds,.such.as.mutual.funds,.and.private.investment.funds,.including.hedge.funds,.are.examples.of.such.intermediaries.. . In. addition. to. these. types. of. relationships,. other. institutional.accounts.frequently.are.established.solely.for.trade.execution.and.therefore.these.clients.maintain.a.limited.relationship.with.the.firm...Nevertheless,.firms.should.remind. appropriate. personnel. that,. with. respect. to. institutional. accounts,. due.diligence.may.need.to.be.performed,.notwithstanding.the.fact.that.these.accounts.do. not. represent. a. credit. risk. to. the. firm. due. to. the. delivery. versus. payment.(“DVP”).nature.of.the.accounts.

Firms.should.conduct.due.diligence.on.the.institutional/intermediary.client.as. required. by. the. applicable. SRO. rules. and,. depending. on. the. nature. of. the.entity,. as. provided. in. sections. 4.6.3. through. 4.6.8. above,. keeping. in. mind. that.institutional/intermediary.accounts.may.require.more.or. less.scrutiny.based.on.various.factors..

Firms. should. ascertain. via. representation. or. otherwise. the. institution’s/intermediary’s. authority. to. act. on. behalf. of. the. underlying. client. and,. where.appropriate,. whether. the. institutional. client/intermediary. has. policies. and.procedures.to.know.its.own.clients.53

Factors. to. evaluate. in. determining. whether. additional. due. diligence. is.appropriate.when.doing.business.with.a.particular.institution/intermediary.may.include.whether:

• theinstitution/intermediaryhasestablishedAMLpoliciesandprocedures;

• thefirmhashistoricalexperiencewiththeinstitution/intermediary;

• theinstitution/intermediaryisaregisteredfinancialinstitutionbasedinamajorregulatedfinancialcenterorisaregisteredfinancialinstitution

53 Insuchinstances,firmsshouldconsiderobtaining,whereappropriate,AMLattestationsfromtheintermediary.See e.g.,ModelAMLattestationsincludedinMFASoundPractices,atAppendixIV,AnnexB.

�0 |

locatedinaFATFjurisdiction;

• theinstitution/intermediaryhasareputablehistoryintheinvestmentbusiness;and

• theinstitution/intermediaryisfromajurisdictioncharacterizedasahighriskjurisdiction,suchasanoffshorebankingorsecrecyhaven,anNCCTjurisdictionoronethatissubjecttoaFinCENAdvisory.

4.6.10.OmnibusAccountsAn. omnibus. account. is. generally. an. account. for. an. entity. (such. as. a.

mutual. fund,. investment. advisor. or. another. broker‑dealer). that. is. acting. as. an.intermediary. on. behalf. of. multiple. individuals. or. entities.. . In. this. situation,.the.firm.may.have. little.or.no. information.about. the. identity.of. the.underlying.participants.or.beneficiaries.. .This. relationship.has.a.variety.of. implications. for.the.broker‑dealer’s.AML.obligations...For.example,.for.purposes.of.the.CIP.Rule,.the.firm’s.customer.is.the.intermediary.firm,.and.not.the.individual.participants,.even.in.certain.situations.where.the.broker‑dealer.has.some.limited.information.about.the.accounts.54.Such.an.omnibus.relationship.also.exists. in.the.context.of.agency.lending,.for.which.FinCEN.has.issued.specific.guidance.55.See.SIFMA’s.CIP.Suggested.Practices.for.a.fuller.discussion.of.the.omnibus.account.issue...

For.other.broader.AML.purposes,.firms.may.consider.obtaining.an.attestation.from.the.intermediary..

4.6.11.AccountsOpenedviatheInternetA.firm.should.extend.its.anti‑money.laundering.procedures.to.accounts.opened.

via.the.Internet.or.similar.technology...The.firm’s.policies.for.customer.identification.and.related.documentation.relating.to.accounts.opened.on‑line.or.through.similar.technology. should. be,. to. the. extent. relevant,. consistent. with. the. requirements.discussed.above.under.section.4.6.1.. .Where.appropriate,.a.firm’s.policies.should.reflect.a.reasonable.risk‑based.assessment.that.would.serve.as.the.basis.for.the.firm’s.determination.as.to.whether.any.additional.identifying.information.is.necessary.for.a.particular.customer.or.for.customers.in.the.same.or.similar.categories.

Firms. may. employ. a. variety. of. procedures. to. establish. the. identity. of. the.customer,.based.on.the.identifying.information.provided.by.the.customer,.including.the.use.of.outside.vendors.or.other.public.information.resources.. .In.addition,.a.firm.should.consider.implementing.procedures.to.contact.the.customer.to.obtain.certain.data.or.request.additional.information.in.cases.where.applications.do.not.

54 SeeGuidancefromtheStaffofTreasuryandtheSEC,Question and Answer Regarding the Broker-Dealer Customer Identification Program Rule(Oct.1,2003).

55 SeeFinCENGuidance,Frequently Asked Question, Customer Identification Program Responsibilities under the Agency Lending Disclosure Initiative,FIN-2006-G007(Apr.25,2006),available at http://www.fincen.gov/cip_faq.pdf.

| ��

satisfy. initial. qualification. requirements. or. have. a. deficiency. in. the. information.provided.

4.6.12.AdditionalKYCeffortsIn.appropriate.cases,.after.account.opening.procedures.have.been.followed.and.

where.an.account.presents.suspicious.indicators,.a.firm.may.undertake.a.variety.of.efforts.to.obtain.additional.information.about.the.customer.or.authenticate.the.customer’s.identity.

Consistent.with.privacy.requirements,.the.availability.of.public.information,.and.the.firm’s.own.assessment.of.the.risk.for.a.particular.customer.or.type.of.account,.a.firm.may.consider.utilizing.outside.vendors.or.software.programs. to.assist. in.verifying. information. provided. by. the. customer.. . For. example,. for. individual.customers,. firms. may. elect. to. screen. customer. name. and. address. information.through.various.vendor.databases.for.possible.anomalies.in.the.customer’s.social.security.number,.date.of.birth,.and.residential.address...Similarly,.for.commercial.accounts,. a. firm. may. elect. to. utilize. a. service. provide. or. software. program. to.screen. for. inconsistencies. between. business. or. corporate. documentation. and.the. taxpayer. identification. number. or. the. location. and. legitimacy. of. the. stated.business.address...A.firm.may.also.elect.to.make.use.of.its.fraud.detection.policies.and.procedures.to.assist.in.its.anti‑money.laundering.program.

4.6.13.HighRiskandNon-CooperativeJurisdictionsAs.part.of.their.risk.assessment,.firms.should.pay.particular.attention.to.those.

accounts.for.customers. located,.or.incorporated.in,.certain.countries.or.regions.identified. by. recognized. international. organizations,. multilateral. expert. groups.or. in. governmental. or. industry. publications. as. NCCT. jurisdictions,. or. having.inadequate. AML. measures.. . Sources. that. a. firm. should. consider. in. making. a.reasonable.determination.about.such.accounts.include.the.guidance,.reports.and.advisories.which.identify.high‑risk.countries,.such.as.those.circulated.by.FinCEN,.the. U.S.. Department. of. State’s. Annual. International. Narcotics. Control. Strategy.Report,. FATF,. the. Organization. for. Economic. Cooperation. and. Development,.and. the. Offshore. Financial. Centers. Assessment. Reports. by. the. International.Monetary.Fund...Firms.may.also.wish.to.review.the.annual.U.S..National.Money.Laundering. Strategy. Report. for. other. jurisdictions,. states. or. territories. that.have.been.designated.by.law.enforcement.as.posing.a.heightened.risk.of.money.laundering.

5. SpecialDueDiligenceforForeignAccountsTreasury. and. FinCEN. have. issued. rules. implementing. Section.312. of. the.

56 See31C.F.R.§§103.176and103.178(2007).

�� |

PATRIOT. Act,. setting. forth. the. general. due. diligence. requirements. for. private.banking.accounts.and.correspondent.accounts.for.non‑U.S..entities.and.persons.56.In.addition.to.certain.requirements.for.all.foreign.banks.under.Sections.313.and.319(b),.Section.312.also.sets.forth.certain.enhanced.due.diligence.measures.that.financial. institutions.must. include. in. their.compliance.program.with.respect. to.certain.high‑risk.foreign.banks.57.The.due.diligence.requirements.for.correspondent.and.private.banking.accounts.are.presently.effective. for.broker‑dealers. for.both.new.and.existing.accounts...With.respect.to.enhanced.due.diligence.requirements.for. correspondent. accounts. for. high. risk. foreign. banks,. the. effective. dates. are.February.5,.2008.for.new.accounts.opened.on.or.after.February.5,.2008,.and.May.5,.2008.for.existing.accounts.

5.1. PrivateBankingAccountsPrivate.banking.accounts.are.those.that.require.a.minimum.aggregate.deposit.

of.funds.or.other.assets.not.less.than.$1,000,000;.are.established.on.behalf.of.or.for.the.benefit.of.one.or.more.non‑U.S..persons.who.are.direct.or.beneficial.owners.of. the. account;. and. are. assigned. to,. administered,. or. managed. by,. an. officer,.employee,.or.agent.of.the.financial.institution.who.acts.as.a.liaison.with.the.direct.or.beneficial.owner.of.the.account.58.For.such.accounts.held.by.non‑U.S..persons,59.a.firm.must.take.reasonable.steps.to.identify.all.nominal.and.beneficial.owners.of,.and.the.source.of.funds.deposited.into.private.banking.accounts...In.addition,.the.firm.must.ascertain.the.purpose.and.expected.use.of.the.account,.and.review.the.account. activity. to. ensure. it. is. consistent. with. information. obtained.60. Further,.firms.should.have.procedures.for.reporting.any.known.or.suspected.violation.of.law.conducted.through.or.involving.the.account,.including.transactions.that.may.involve.the.proceeds.of.foreign.corruption.61

5.1.1.NominalandBeneficialOwnersFirms. are. required. to. ascertain. the. identity. of. all. nominal. and. beneficial.

owners.. . When. doing. so,. the. owner’s. line. of. business. or. source. of. wealth. may.be.a.component.of.the.institution’s.due.diligence.review.. .A.firm’s.due.diligence.program.should.include.procedures.to.enable.the.firm.to.look.through.the.nominal.owner.to.find.the.owner.with.real.control.over.the.account...In.addition,.a.firm.should.include.measures.in.which.it.will.gather.information.on.legal.entities.that.are.not.publicly.traded,.regarding.the.structure.of.the.entity,.including.directors,.

57 See generally,72Fed.Reg.44768(Aug.9,2007).

58 31.C.F.R.§103.175(o).

59 Forpurposesofthespecialduediligencerequiredforforeignaccounts,anon-U.S.personisdefinedtoincludenon-U.S.citizensandnon-residentaliens.ThisisnotthesamedefinitionusedintheCIPRule.

60 31C.F.R.§103.178(b)(4).

61 SeeFINRASmallFirmTemplate,at15.

| ��

shareholders.and.those.with.control.over.the.account,.as.well.as.which.individuals.constitute. the.beneficial.owner(s),.and,. in. the.case.of.a. trust,.which. individuals.control.the.funds.of.the.trust,.and.the.source.of.the.funds..

If.a.firm.determines. that.a.nominal.or.beneficial.owner. is.a.senior. foreign.political.figure,.regardless.whether.the.account.has.been.requested.by.or.on.behalf.of. the. senior. foreign. political. figure,. it. must. conduct. enhanced. scrutiny. of. the.private.banking.account.62

5.1.2.SeniorForeignPoliticalFigures(“SFPFs”)

The.term.senior.foreign.political.figure.includes:.(1).a.current.or.former.senior.official.in.the.executive,.legislative,.administrative,.military,.or.judicial.branches.of.a.foreign.government.(whether.elected.or.not);.a.senior.official.of.a.major.foreign.political. party;. a. senior. executive. of. a. foreign. government‑owned. commercial.enterprise;.(2).a.corporation,.business.or.other.entity.that.has.been.formed.by,.or.for.the.benefit.of,.any.such.individual;.and.(3).immediate.family.members.or.close.associates.of.any.such.individuals...Outside.the.United.States,.SFPFs.are.referred.to.as.Politically.Exposed.Persons.or.PEPs.63

Firms.that.maintain.private.banking.accounts.should.include.due.diligence.procedures. to. ascertain. information. directly. from. the. client. regarding. possible.SFPF.or.PEP.(collectively.“SFPFs”).status,.to.check.references,.as.appropriate,.as.to.whether.the.individual.is.currently.or.was.an.SFPF.or.close.associate.of.one,.and.to.make.reasonable.efforts.to.review.public.sources.of.information...This.includes.checking. the. name. of. the. individual. against. U.S.. government. databases,. major.news.publications.and.commercial.databases.on.the.Internet,.as.well.as.fee‑based.services,.as.appropriate.

Enhanced.due.diligence.is.required.for.accounts.held.by.SFPFs.and.should.be. designed. to. reasonably. detect. and. report. transactions. that. may. involve. the.proceeds.of.foreign.corruption.64.If.a.firm.discovers. information.indicating.that.the.client.may.be.an.SFPF.or.associated.with.one,.it.should.exercise.additional.due.diligence.to.confirm.whether.or.not.the.information.is.correct,.including.seeking.

62 SeeFFIECBSA/AMLExaminationManual,at122-124,foradditionalguidanceregardingenhancedscrutinyforprivatebankingaccountsofSFPFs.

63 A“politicallyexposedperson”isatermusedforindividualswhoareorhavebeenentrustedwithprominentpublicfunctionsinaforeigncountry,forexampleHeadsofStateorofgovernment,seniorpoliticians,seniorgovernment,judicialormilitaryofficials,seniorexecutivesofstateownedcorporations,andimportantpoliticalpartyofficials.BusinessrelationshipswithfamilymembersorcloseassociatesofPEPsinvolvereputationalriskssimilartothosewithPEPsthemselves.Thedefinitionisnotintendedtocovermiddlerankingormorejuniorindividualsinthesecategories.FATF,Key Topics, 40 Recommendations Glossary(2004),available athttp://www.fatf-gafi.org/glossary/0,2586,en_32250379_32236889_35433764_1_1_1_1,00.html#34285860.

64 31C.F.R.§103.178(c)(1).

�� |

confirmation.from.the.individual,.speaking.with.additional.references,.obtaining.information.from.other.branches.of.the.firm,.where.applicable,.operating.in.the.country.of.residence.of.the.client,.and.research.of.publicly.available.information,.including.the.political.climate,.and.further.investigation.of.the.client’s.employment.history.and.sources.of.income...Where.the.client.is.a.former.SFPF,.factors.to.be.taken.into.account.include.the.length.of.time.the.client.has.been.out.of.office.and.the.size.of.the.account,.in.addition.to.the.information.ordinarily.derived.through.the.due.diligence.process...

A. firm’s. AML. compliance. officer. should. be. contacted. immediately. if. a. firm.detects.suspicious.activity.relating.to.such.accounts...AML.compliance.officers.should.review. the. circumstances,. and. consistent. with. the. firm’s. procedures,. determine.whether.to..suspend.trading.in.the.account,.file.a.SAR,.or.close.the.account.

Firms. that.do.not.maintain.private.banking.accounts. for.non‑U.S..persons.should. still. be. sensitive. to. concerns. related. to. SFPFs.. . A. firm. should. employ.reasonable. measures. to. identify. accounts. maintained. for. SFPFs. and. conduct.enhanced. due. diligence. to. determine,. among. other. things,. the. source. of. such.persons’. funds.. . Firms. should. also. conduct. enhanced. scrutiny. of. the. accounts.maintained.by.or.on.behalf.of.SFPFs,.utilizing.procedures.and.controls.reasonably.designed. to. detect. and. report. transactions. that. may. involve. the. proceeds. of.foreign.corruption...In.opening.an.account.for.a.Personal.Investment.Corporation.or.Personal.Holding.Company,.firms.should.be.careful.to.ascertain.if.the.account.is.being.established.by,.or.for.the.benefit.of,.a.SFPFs/PEPs.

5.1.3.SourceofFundsA.firm’s.due.diligence.program.must.include.reasonable.steps.to.ascertain.the.

source.of.funds.deposited.into.private.banking.accounts,.the.purpose.for.which.the.account.was.established.and.its.anticipated.activity.. .Although.firms.are.not.expected.to.verify.the.source.of.every.deposit,.firms.should.have.controls.in.place.to.notice.any.unusual.deposits.that.might.bare.further.scrutiny,.such.as.unusually.large. deposits. or. deposits. from. unusual. sources,. such. as. a. charitable. fund. or.foreign.government.agency.trust.fund.or.aid.grant.65

5.2. CorrespondentAccountsforForeignFinancialInstitutionsThe. PATRIOT. Act. contains. several. measures. that. impose. additional.

requirements.for.U.S..financial.institutions.that.maintain.correspondent.accounts.

65 71Fed.Reg.at510.

66 31C.F.R.§103.175(d)(1).Thedefinitionof“correspondentaccount”forpurposesofSections311,312,313and319ofthePATRIOTActisfoundinSection311.Inthebroker-dealercontext,thedefinitionof“account”is“anyformalrelationshipestablishedwithabroker-dealerinsecuritiestoprovideregularservicestoeffecttransactionsinsecurities,including,butnotlimitedto,thepurchaseorsaleofsecuritiesandsecuritiesloanedandborrowedactivity,andtoholdsecuritiesorotherassetsforsafekeepingorascollateral.”31C.F.R.§103.175(d)(2).

| ��

for. foreign. financial. institutions,. including. banks.. . A. correspondent. account. is.defined. as. an. account. established. to. receive. deposits. from,. make. payments. on.behalf. of. a. foreign. financial. institution,. including. a. foreign. bank,. or. to. handle.other.financial.transactions.related.to.such.institution.66

5.2.1. ShellBankProhibitionsandRequiredInformation forForeignBanks

Firms.must.not.establish,.maintain,.administer.or.manage.an.account.in.the.United.States.for,.or.on.behalf.of,.a.prohibited.foreign.shell.bank.67.Section.313.of.the.PATRIOT.Act.also.requires.financial. institutions.to.take.reasonable.steps.to.ensure. that. correspondent. accounts. are. not. used. indirectly. to. provide. banking.services. to. foreign. shell. banks.. . Section. 319(b). of. the. PATRIOT. Act. requires.financial.institutions.that.provide.correspondent.accounts.to.foreign.banks.to.keep.records.of.the.owners.of.each.non‑U.S..bank.whose.shares.are.not.publicly.traded.and.of.the.non‑U.S..bank’s.agent.authorized.to.accept.service.of.legal.process.in.the.United.States...

Firms.are.permitted.to.use.a.certification.form,.provided.in.the.rule,.to.comply.with.the.shell.bank.prohibition.and.the.requirement.to.identify.a.foreign.bank’s.owners.and.agent.for.service.of.process...Firms.have.30.days.from.when.an.account.is.opened.to.obtain.the.certification...A.new.certification.or.recertification.must.be.obtained.at.least.once.every.three.years.on.or.before.the.three‑year.anniversary.of. the. execution. of. the. initial. or. previous. certification.68. If. a. certification. or.recertification. is. not. obtained. within. the. required. time,. a. broker‑dealer. must.close. all. correspondent. accounts. with. the. foreign. bank. within. a. commercially.reasonable.time.

In.addition,.if.a.firm.is.aware.or.suspects.that.any.information.contained.in.a.certification.or.re‑certification.provided.by.a.foreign.bank,.or.otherwise.relied.upon.by.the.firm,.is.no.longer.correct,.a.firm.should.require.the.foreign.bank.to.either.verify.or.correct.such.information,.or.the.firm.should.take.other.measures.to.ascertain.the.accuracy.of.the.information.or.to.obtain.the.correct.information,.as.appropriate.69.Firms.are.required.to.obtain.verification.of.this.information.or.must.receive.corrected.information.from.a.foreign.bank.within.90.calendar.days.after.the.date.of.undertaking.the.verification...If.the.information.is.not.received.from.the.foreign.bank,.firms.should.close.all.“correspondent.accounts”.with.such.foreign.bank.within.a.commercially.reasonable.time,.and.should.not.permit.the.foreign.bank.to.establish.any.new.positions.or.execute.any.transactions.through.such.account,.unless.necessary.to.close.the.account...

67 Seesection4.6.5,aboveforadefinitionofshellbanks.

68 SeeFinCENGuidance,Frequently Asked Questions Foreign Bank Recertifications Under 31 C.F.R. § 103.177(Feb.3,2006),FIN-2006-G003at2,availableathttp://www.fincen.gov/faqsguidance.pdf.

69 31C.F.R.§103.177(c)(2007).

�� |

Firms. should. not. re‑establish. any. account. closed. or. establish. any. other.“correspondent.account”.with.the.concerned.foreign.bank.until.the.certification.or.re‑certification.is.received...Firms.that.follow.these.procedures.for.terminating.such.accounts.may.not.be.liable.to.any.person.in.any.court.or.arbitration.proceeding..

Under.Section.319(b).of.the.PATRIOT.Act,.financial.institutions.must.respond.within. seven. days. to. a. written. request. from. law. enforcement. for. information.concerning.the.owners.or.agent.of.the.non‑U.S..bank.

5.2.2. DueDiligenceforForeignFinancialInstitutionsFirms. should. establish. due. diligence. procedures,. and. where. appropriate,.

enhanced. due. diligence,. for. correspondent. accounts. maintained. for. non‑U.S..financial. institutions,. including. policies,. procedures,. and. controls. reasonably.designed.to.detect.and.report.money.laundering.activity...As.part.of.a.risk.based.approach,. a. reasonable. program. is. one. that. includes. policies,. procedures. and.controls,.that.assess.the.money.laundering.risks.posed.by.correspondent.accounts...Foreign.Financial.Institutions.subject.to.the.correspondent.account.rule.include:.(a).foreign.banks,.(b).foreign.branches.or.offices.of.covered.financial.institutions,.(c).non‑U.S..entities.that.if.located.in.the.U.S.,.would.be.a.securities.broker‑dealer,.futures.commission.merchant.(“FCM”).or.mutual.fund,.and.(d).non‑U.S..entities.that. are. engaged. in. the. business. of,. and. are. readily. identifiable. as,. a. currency.dealer. or. exchanger. or. a. money. transmitter.70. Firms. should. premise. their. due.diligence. program. for. correspondent. accounts. on. a. risk‑based. approach.. . Due.diligence.programs,.at.a.minimum,.should.include.procedures.for.assessing.the.money.laundering.risk.posed,.based.on.a.consideration.of.relevant.risk.factors;.and.applying.risk‑based.policies,.procedures,.and.controls.to.each.such.correspondent.account,. that.are. reasonably.designed. to.detect.and.report.known.or. suspected.money.laundering.activity...Firms.should.also.determine.whether.the.account.is.subject. to.enhanced.due.diligence.under.Section.312.of. the.PATRIOT.Act.and.apply.the.procedures.set.forth.in.section.5.2.3.below..

A.firm’s.risk‑based.approach.should.result.in.a.risk.stratification.based.on.a.consideration.of.relevant.money.laundering.risk.factors.to.determine.the.necessity.of.additional.measures,.including.identifying.the.risk.factors.that.would.warrant.additional. scrutiny.of.particular. types.of.accounts. that.may.not. fall. into.any.of.the.statutory.categories.requiring.enhanced.due.diligence...A.firm’s.due.diligence.

70 FinCENrecognizesthedifficultyindeterminingwhetheraforeignfinancialinstitutionwouldbeforexample,asecuritiesbroker-dealer,anFCMoramutualfundiflocatedintheUnitedStatesandhasrecommendedthat,aspartofafirm’soverallriskassessment,itconductaninquirybyaskingtheforeignfinancialinstitutionaseriesofquestionssoastogenerallyconcludewhetherthatinstitutionwouldqualifyassuchintheUnitedStates.See alsoFinCENGuidance,Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Futures Industries(“SecuritiesandFutures312Guidance”),FIN-2006-G009,(May10,2006),at5-7,forexamplesofpossiblequestions,availableathttp://www.fincen.gov/312securities_futures_guidance.pdf.

| ��

program.should.also.maintain.account.profiles.for.their.correspondents.to.enable.it.to.monitor.atypical.account.activity.

Firms.should.focus.their.compliance.efforts.in.this.area.on.accounts.that.pose.a.high.risk.of.money.laundering,.and.based.on.the.firm’s.risk.assessment,.consider.some.or.all.of.the.following.risk.factors,.among.others:.(1)the.nature.of.the.foreign.financial. institution’s. business. and. the. markets. it. serves;. (2). the. type,. purpose,.and.anticipated.activity.of.the.correspondent.account;.(3).the.nature.and.duration.of.the.firm’s.relationship.with.the.foreign.financial.institution;.(4).the.AML.and.supervisory.regime.of.the.jurisdiction.in.which.any.company.that.is.an.owner.of.the.foreign.financial.institution.is.incorporated.or.chartered;.and.(5).information.known.or.reasonably.available.to.the.firm.about.the.foreign.financial.institution’s.AML.record,.including.public.information.in.standard.industry.guides,.periodicals.and.major.publications.71

Such. procedures. should. include. a. periodic. review. of. the. correspondent.account. activity. sufficient. to. determine. consistency. with. information. obtained.about. the. type,. purpose,. and. anticipated. activity. of. the. account.72 A. firm’s. due.diligence.program.should.also.enable.it.to.monitor.atypical.account.activity...

5.2.3. EnhancedDueDiligenceSection.312.of.the.PATRIOT.Act.requires.enhanced.scrutiny.for.correspondent.

accounts. maintained. for. certain. non‑U.S.. banks,. including. those. operating.under:.

(1)AlicenseissuedbyajurisdictiondesignatedbyTreasuryaswarrantingspecialmeasures(seediscussionofspecialmeasuresinsection6below);

(2).An.offshore.banking.license;73.or.

(3).A.license.issued.by.a.jurisdiction.designated.as.an.NCCT.jurisdiction..

Firms. must. establish. enhanced. due. diligence. procedures. with. respect. to.such. accounts. that. include. measures. to:. (1). guard. against. money. laundering.and. to. report. suspicious. activity;. (2). ascertain. whether. the. non‑U.S.. bank.

71 31C.F.R.§103.176(a)(2).SeegenerallyFinCEN,SecuritiesandFutures312Guidance,at1-2.

72 Withrespecttoexecutingbrokers,FinCENhasclarifiedthattheinteractionbetweenanexecutingdealerandaprimebrokerageclientinover-the-counterforeignexchangeandderivativesmarketspursuanttoaprimebrokeragearrangementdoesnotestablisha“correspondentaccount”requiringanexecutingdealertocomplywiththeduediligenceprovisionsofthecorrespondentaccountrule.SeeFinCENGuidance,Application of the Correspondent Account Rule to Executing Dealers Operating in Over-The-Counter Foreign Exchange and Derivatives Markets Pursuant to Prime Brokerage Arrangements,FIN-2007-G004(Sept.5,2007),available athttp://www.fincen.gov/312ForexOTCPrimeBrokerage.pdf.

73 Anoffshorebankinglicenseis“alicensetoconductbankingactivitiesthatprohibitsthelicensedentityfromconductingbankingactivitieswiththecitizensof,orinthelocalcurrencyof,thejurisdictionthatissuedthelicense.”31C.F.R.§103.175(k).

�� |

provides. correspondent. accounts. to. other. non‑U.S.. banks. that. use. in. any. way.the.correspondent.account,.and,.if.so,.conduct.appropriate.due.diligence;.and.(3).identify.the.owners.of.share.in.excess.of.10%.of.the.non‑U.S..bank.if.the.bank.is.not.publicly.traded,.and.the.nature.and.extent.of.such.ownership.interest.74

To.assess.the.risks.posed.by.such.correspondent.accounts,.a.firm.should.adopt.risk‑based.enhanced.due.diligence.procedures.to.determine.the.nature.and.extent.of. the. risks. posed. by. such. correspondent. accounts. and. the. extent. of. enhanced.due. diligence. that. would. be. necessary. and. appropriate. to. mitigate. such. risks...Firms.should.consider. the. same.five. risk. factors.described. in. the.due.diligence.requirements.for.correspondent.accounts,.among.others,.in.order.to.determine.the.appropriate.level.of.enhanced.due.diligence...In.particular,.firms.should.consider.the.AML.regime.of.the.jurisdiction.that.issued.a.charter.or.license.to.the.foreign.bank.and.of.the.home.jurisdiction.of.the.foreign.bank.or.its.parent..

For.correspondent.accounts.held.by.any.such.entities,.a.firm.should.review.information.about.the.non‑U.S..bank’s.AML.program.to.generally.assess.the.extent.to.which.the.firm.may.be.exposed.to.money.laundering.risk.by.the.non‑U.S..bank’s.correspondent. account.. . In. certain. circumstances,. firms. may. wish. to. consider.using.a.questionnaire.to.gather.information.regarding.the.AML.program.of.such.correspondent. account. if. the. questionnaire. enables. the. financial. institution. to.assess.the.risk.of.money.laundering.associated.with.the.correspondent.account.75.However,.firms.are.not.generally.expected.to.obtain.a.copy.of.the.AML.program.for.such.correspondent.account.. .In.addition,.firms.are.required.to.monitor.the.non‑U.S.. bank’s. transactions. to,. from. or. through. the. correspondent. account. to.detect.money.laundering.and.suspicious.activity.76.In.certain.situations,.firms.may.conduct.a.review.of.transaction.history.with.such.correspondent.account.to.assess.any.money.laundering.risks.associated.with.such.account...Under.this.risk‑based.approach,.firms.are.not.required.to.conduct.an.audit.of.the.AML.programs.of.such.correspondent.accounts.

As.a.general.rule,.firms.are.required.to.determine.whether.such.correspondent.accounts. have. foreign. bank. customers.. . If. such. a. correspondent. account. has.foreign.bank.customers,.firms.are.not.expected.to.obtain.customer.lists.from.such.correspondent. accounts.. . However,. depending. on. the. firm’s. risk. assessment,. it.should.make.inquiries.about.such.factors.as.the.type.of.foreign.bank.customers.the. respondent. bank. serves,. and. the. extent. to. which. transactions. for. any. such.

74 Firmsshouldbeawarethatthereisnorisk-basedapproachwithrespecttothedefinitionof“owner”forpurposesoftheEDDFinalRule.

75 See e.g.,theWolfsbergGroup,Bankers’Almanac AML Questionnaire,Appendix3(undated),available athttp://wolfsberg-principles.com/pdf/faq-correspondet-banking-app3.pdf.

76 31C.F.R.§103.176(b)(1)(ii).

| ��

customers. may. be. conducted.. . Firms. may. also. consult. bank. reference. guides,.and.monitor.transaction.activity.to.the.extent.it.may.contain.information.on.the.foreign.bank.customers.of.such.correspondent.accounts.

5.3. SpecialProceduresFirms. should. also. bear. in. mind. that. the. special. procedures. requirement.

described.above.for.private.banking.accounts.under.Section.312.of.the.PATRIOT.Act,.such.as.refusing.to.open.the.account,.suspending.transaction.activity,.filing.a.suspicious.activity.report.or.closing.the.account,.also.applies.to.correspondent.accounts,. not. only. when. due. diligence. cannot. be. performed. but. also. when.enhanced.due.diligence.cannot.be.performed.77

6. SpecialMeasuresUnder. Section. 311. of. the. PATRIOT. Act,. the. Secretary. of. the. Treasury,.

in. consultation. with. appropriate. Federal. agencies. and. parties,. including,. for.example,.the.Secretary.of.State.and.the.SEC,.can.issue.orders.designating.certain.jurisdictions,.foreign.financial.institutions,.groups.of.transactions.or.accounts.as.being.of.primary.money.laundering.concern.and.can.require.financial.institutions.to. institute. special. measures. with. respect. to. those. jurisdictions,. financial.institutions,.transactions.or.accounts...Those.special.measures.can.include:

• recordkeepingandreportingofcertainfinancialtransactions;

• collectionofinformationrelatingtobeneficialownershipofanyaccountopenedormaintainedintheUnitedStatesbyanon‑U.S.person;

• collectionofinformationrelatingtocertaincorrespondentaccountsandpayable‑throughaccounts;and

• prohibitionsorconditionsonopeningormaintainingcertaincorrespondentorpayable‑throughaccounts.

Treasury.has.designated.a.limited.number.of.countries.and.entities.as.being.of. primary. money. laundering. concern.. . These. designations. are. identified. on.FinCEN’s.website.. .Treasury.prohibits.financial. institutions.from.establishing.or.maintaining.correspondent.accounts.on.behalf.of.these.financial.institutions.and.jurisdictions.. . Firms. are. also. required,. in. certain. circumstances,. under. Section.311.to.provide.notice.to.certain.customers.of.such.designations...It.is.important.for.financial.institutions.to.remain.aware.of.these.designations.and.to.follow.the.relevant.procedures.for.each.special.measure...

77 31C.F.R.§103.176(d).

78 31C.F.R.§§103.19.TheSAR-SFformwasspecificallydesignedforthesecuritiesandfuturesindustries.

�0 |

7. SuspiciousActivityReportingEffective. for. transactions. taking.place.after.December.30,.2002,.all.broker‑

dealers.located.within.the.U.S..are.required.to.file.Suspicious.Activity.Reports.by.the.Securities.and.Futures.Industry.(“SAR‑SFs”).pursuant.to.the.rule.adopted.by.Treasury.78.

Although. broker‑dealer. subsidiaries. of. bank. holding. companies. had. been.required.by.regulation.since.1996.to.file.a.Suspicious.Activity.Report.(“SAR”).on.suspicious.transactions.relating.to.a.variety.of.violations,.including.possible.money.laundering.activity,79.many.other.securities.firms.had.filed.SARs.with.FinCEN.on.a.voluntary.basis.or.contacted.law.enforcement.directly.when.suspicious.activity.related.to.money.laundering.had.been.identified..

7.1. ReportingThresholdThe.rule.requires.the.reporting.of.suspicious.transactions.of.at. least.$5,000.

in.funds.or.other.assets...Treasury.expects.firms.to.follow.a.risk‑based.approach.in. monitoring. for. suspicious. transactions. and. to. report. suspicious. transactions.detected. that. are. $5,000. or. over.. . Firms. should. evaluate. customer. activity. and.relationships.for.money.laundering.risks.and.design.a.monitoring.program.that.is.appropriate.in.light.of.those.risks...Transactions.require.reporting.whether.or.not.they.involve.currency...Firms.should.also.consider.reporting.transactions.that.appear.suspicious,.even.if.they.are.less.than.$5,000.

Suspicious.activity.can.occur.either.at.the.outset.of.the.customer.relationship.or.long.after.the.relationship.has.been.initiated...Transactions.should.be.viewed.in. the. context. of. other. account. activity. and. a. determination. of. whether. the.transaction.is.actually.suspicious.will.necessarily.depend.on.the.customer.and.the.particular.transaction,.compared.with.the.customer’s.normal.business.activity..

7.2. ReportableTransactionsSuspicious. transactions. that. are. relevant. to. a. possible. violation. of. law. or.

regulation.must.be.reported...If.a.broker‑dealer.knows,.suspects,.or.has.reason.to.suspect.that.the.transaction.(or.a.pattern.of.transactions).falls.within.one.of.the.following.four.categories,.the.transaction.must.be.reported:..

• involvesfundsderivedfromillegalactivityorisintendedorconductedinordertohideordisguisefundsorassetsderivedfromillegalactivity;

• isdesigned,whetherthroughstructuringorothermeans,toevadetherequirementsoftheBSA;

79 See12C.F.R.§§225.4(f)and208.62.

| ��

• hasnobusinessorapparentlawfulpurpose,orisnotthesortinwhichtheparticularcustomerwouldbeexpectedtoengage,andthebroker‑dealerknowsofnoreasonableexplanationafterexaminingtheavailablefacts;or

• involvesuseofthebroker‑dealertofacilitatecriminalactivity.

A.firm.must.report.suspicious.transactions.even.if.the.funds.are.legally.derived,.if. the. firm. suspects. that. the. transaction. is. being. conducted. to. support. illegal.activities...For.example,.a.firm.must.report.a.transaction.involving.legally‑derived.funds,.if.the.firm.suspects.that.the.funds.are.being.used.to.fund.terrorist.activity...Firms.may.voluntarily.file.a.SAR‑SF.in.situations.where.mandatory.reporting.is.not.required.

7.3. PotentialIndicatorsofSuspiciousActivityExamples.of.activity.that.may.be.indicative.of.unusual.or.potentially.suspicious.

activity. should. be. provided. to. all. appropriate. firm. personnel. through. standard.distribution. channels. and. should. be. incorporated. into. the. firm’s. AML. policies.and.procedures,.as.well.as.its.AML.training.materials...Firms.also.should.review.the.SAR.Activity.Reviews.issued.periodically.by.FinCEN,.which.identify.trends.in.suspicious.activity.reporting.by.financial.institutions..

Although.by.no.means.exhaustive,.the.following.sections.describe.potential.indicators. of. suspicious. activity. which,. if. unexplained,. may. evidence. money.laundering.activity..

7.3.1. IndicatorsatAccountOpeningStage • Acustomerexhibitsanunusualconcernregardingthefirm'scompliance

withgovernmentreportingrequirements,particularlywithrespecttohisorheridentity,typeofbusinessandassets,orisreluctantorrefusestorevealanyinformationconcerningbusinessactivities,orfurnishesunusualorsuspectidentificationorbusinessdocuments;

• Acustomerwishestoengageintransactionsthatlackbusinesssense,apparentinvestmentstrategy,orareinconsistentwiththecustomer'sstatedbusiness/strategy;

• Acustomerprovidesinformationidentifyingalegitimatesourceoffundsthatisfalse,misleading,orsubstantiallyincorrect;

• Acustomer(orapersonpubliclyassociatedwiththecustomer)hasaquestionablebackgroundoristhesubjectofnewsreportsindicatingpossiblecriminal,civilorregulatoryviolations;

• Acustomerappearstobeactingastheagentforanotherentitybutdeclines,evadesorisreluctant,withoutlegitimatecommercialreasons,toprovideanyinformationinresponsetoquestionsaboutthatentity;

�� |

• Acustomerhasdifficultydescribingthenatureofhisorherbusinessorlacksgeneralknowledgeofhisorherindustry;

• AcustomerappearstobecontrolledbyanundisclosedSFPF/PEP;

• Acustomerisanon‑U.S.bankthatdeclinestoprovideinformationregardingownership;

7.3.2. IndicatorsRelatedtoAccountActivity • Acustomerattemptstomakefrequentorlargedepositsofcurrency,

insistsondealingonlyincashequivalentsorasksforexemptionstothefirm'spoliciesrelatingtothedepositofcashandcashequivalents;

• Acustomerengagesintransactionsinvolvingcurrency,cashequivalentsorothermonetaryinstruments,aggregatinginexcessof$10,000,orthatappeartobestructuredtoavoidgovernmentreportingrequirements,especiallyifthemonetaryinstrumentsareinanamountjustbelowreportingorrecordingthresholdsand/oraresequentiallynumbered;

• Acustomerengagesinmultipletransfersoffundsorwiretransferstoandfromcountriesthatareconsideredbanksecrecyor”taxhavenjurisdictions”thathavenoapparentbusinesspurpose,arenottypicallyassociatedwiththecustomer'sbusinessoraretoorfromcountrieslistedasNCCTjurisdictionsbyFATF,orareotherwiseconsideredbythefirmtobehigh‑risk;

• Acustomer'saccounthasunexplainedorsuddenextensivewireactivity,wherepreviouslytherehadbeenlittleornowireactivitywithoutanyapparentbusinesspurpose;

• Acustomer'saccountshowsalargenumberofwiretransferstounrelatedthird‑partiesthatareinconsistentwiththecustomer'sbusinesspurpose;

• Acustomer'saccountreceivesinorshowslargeorfrequentwiretransfers,immediatelywithdrawnbycheckordebitcardwithnoapparentbusinesspurposeorwithoutthecustomerengaginginanytradingorinvestmentactivity;

• Acustomermakesafundsdepositfollowedbyanimmediaterequestthatthemoneybewiredoutortransferredtoathirdparty,ortoanotherfirmwithoutanyapparentbusinesspurpose;

• Acustomerhasdifficultydescribingthereasonforfrequenttransferstobankaccountsorjurisdictionsoutsidethecustomer'shomecountry;

• Acustomermakesafundsdeposit,forthepurposeofpurchasingalong‑terminvestment,followedshortlythereafterbyarequesttoliquidatethepositionandatransferoftheproceedsoutoftheaccount;

• Fornoapparentreason,acustomerhasmultipleaccountsunderasinglenameormultiplenames,withalargenumberofinter‑accountor

| ��

third‑partytransfers;

• Acustomerengagesinexcessivejournalentriesbetweenrelatedorunrelatedaccountswithoutanyapparentlegitimatepurpose;

• Acustomerrequeststhatatransactionbeprocessedinsuchamannersoastoavoidthefirm'snormaldocumentationrequirements;

• Acustomerengagesintransactionsinvolvingcertaintypesofsecurities,suchaspennystocks,RegulationSstocksandbearerbonds,which,althoughlegitimate,havebeenutilizedinconnectionwithfraudulentschemesandmoneylaunderingactivity;

• Acustomerdepositsbearerbondsfollowedbyimmediaterequestforthedisbursementoffunds;

• Acustomer'saccountshowsahighlevelofaccountactivitywithverylowlevelsofsecuritiestransactions,fornoapparentreason;

• Acustomerexhibitsatotallackofconcernregardingrisks,commissions,orothertransactioncosts,orofferstopaychargeshigherthanthenormalcostinordertosecuresecrecy;

• Acustomer'saccounthasinflowsoffundsbeyondcustomer'sresources;

• Acustomer'stransactionisinconsistentwithaccountopeningdocumentsorthenormalpatternofinvestmentsforthattypeofcustomer;

• Acustomerseekstodeposit,investortransferthesecurities,fundsorinvestmentsofortoathirdpartywithwhichthereisnocommercial,familialorfiduciaryrelationship;

• Acustomerconductsbusinessunderunusualcircumstances,atirregularhours,orfromunusuallocationsorrefusestomeetthebroker;

• Acustomerattemptstoengageinorappearstobeengaginginactivitythatviolatesthelaw.

7.4. ReportingExceptionsThere.are.two.categories.of.transactions.for.which.SAR‑SFs.do.not.have.to.be.

filed...Each.is.discussed.below.

7.4.1. RobberyorBurglaryA.broker‑dealer. is.not. required. to.file. a.SAR‑SF. for.a. robbery.or.burglary.

committed.or.attempted.of.the.broker‑dealer.that.is.reported.to.appropriate.law.enforcement.authorities,.or.for.lost,.stolen,.missing.or.counterfeit.securities.that.are.reported.in.accordance.with.existing.SEC.rules.

�� |

7.4.2. ViolationsofFederalSecuritiesLawsorSRORulesViolations.of.federal.securities.laws.or.SRO.rules.by.a.broker‑dealer.or.any.

of.its.associated.persons.do.not.have.to.be.reported.on.a.SAR‑SF,.so.long.as.such.violation. is.appropriately.reported. to. the.SEC.or.an.SRO.(e.g.,.on.Forms.RE‑3,...U‑4,. or. U‑5).. . This. exception. does. not. apply. if. the. securities. law. or. SRO. rule.violation.is.also.a.violation.of.BSA.regulations...In.such.situations,.the.Firm.must.also.report.the.violation.on.a.SAR‑SF..80

7.5. FirmPracticeRegardingtheReportingofSuspiciousActivity.

7.5.1. ReportingSuspiciousActivity.Although.the.firm’s.internal.structure.for.reporting.suspicious.activity.will.be.

dependent.on.a.number.of.factors,.including.the.firm’s.size,.structure,.resources.and.nature.of.its.business,.a.firm.should.endeavor.to.centralize.its.reporting.practices.to.ensure.consistency.and.uniformity...In.developing.its.procedures,.a.firm.should.designate.a.particular.person.or.persons.to.be.responsible.for.determining.whether.the.transaction.or.account.activity.warrants.further.investigation.and.for.making.the. final. determination. with. respect. to. the. filing. of. a. SAR‑SF.. . Such. person(s).need. not. be. the. one(s). conducting. the. investigation. and. the. firm. may. elect. to.delegate.this.responsibility.to.more.senior.personnel,.such.as.the.AML.compliance.officer,.or.an.individual.or.committee.from.another.area.of.the.firm,.such.as.the.office.of.the.General.Counsel,.the.Legal.Department,.or.Corporate.Security...In.the.appropriate.case,.outside.counsel.could.be.retained.to.assist.in.this.process.

7.5.2. TimingofSARsThe.SAR.rules.require.that.a.SAR.be.filed.no.later.than.30.calendar.days.from.

the.date.of.the.initial.detection.of.the.suspicious.activity,.unless.no.suspect.can.be.identified,.in.which.case,.the.time.period.for.filing.a.SAR.is.extended.to.60.days...A.SAR.may.be.filed.with.FinCEN.using.FinCEN.Form.101.81.If.the.suspicious.activity.involves.violations.requiring.immediate.attention,.such.as.terrorist.activity,.firms.are.also.required.to.immediately.notify.appropriate.law.enforcement.by.telephone,.in.addition.to.filing.a.SAR...In.these.circumstances,.firms.are.also.encouraged.to.call.FinCEN’s.Financial.Institutions.Hotline...The.time.period.to.file.a.SAR.starts.

80 Transactionswhicharethesubjectofreportsmadebyabroker-dealerduallyregisteredasanFCM,thatreportsundereitherthebroker-dealerortheFCMSARruletotheappropriateregulatororapplicableSRO,asappropriate,alsofallwithintheexception.68Fed.Reg.65392;65395-96(Nov.20,2003).

81 SeeFinCENForm101,available athttp://www.fincen.gov/forms/fin101_sar-sf.pdf.

82 SeeBSAAdvisoryGroup,“Section5-IssuesandGuidance,”TheSARActivityReview-Trends,Tips&Issues(“May2006SARActivityReview“),at44-46(May2006).“Thephrase‘initialdetection’shouldnotbeinterpretedasmeaningthemomentatransactionishighlightedforreview…[Afirm’s]automatedaccountmonitoringsystemorinitialdiscoveryofinformation,suchassystem-generatedreports,mayflagthetransaction,[but]thisshouldnotbeconsideredinitialdetectionofpotentialsuspiciousactivity.”Id.at45.

| ��

when.a.firm,.in.the.course.of.its.review.of.customer.activity.or.transactions,.or.as.a.result.of.other.factors,.reaches.the.conclusion.in.which.it.knows,.or.has.reason.to.suspect,.that.the.activity.or.transactions.under.review.meet.one.or.more.of.the.definitions.of.suspicious.activity.82.If.the.suspicious.activity.occurs.over.a.period.of.time,.a.firm.should.file.a.report.regarding.the.activity.at.least.every.90.days.to.advise.law.enforcement.of.the.ongoing.nature.of.the.activity.83.Additionally,.in.this.circumstance,. a. firm. may. determine. that. it. is. appropriate. to. take. other. action,.such.as.terminating.its.relationship.with.the.customer.involved.

7.5.3. RequestsbyLawEnforcementtoMaintainAccountsThe.decision.to.maintain.or.close.an.account.should.be.made.by.a.financial.

institution.in.accordance.with.its.own.standards.and.guidelines...Although.there.is. no. requirement. that. a. financial. institution. maintain. a. particular. account.relationship,.complying.with.a.request.from.law.enforcement.to.maintain.accounts.may. further.efforts. to.combat.money. laundering,. terrorist.financing,.and.other.crimes,. and. therefore. the. Committee. concurs. with. FinCEN’s. recommendation.that. the.firm.notify. law.enforcement.before.making.any.decision.regarding. the.status.of.the.account.if.a.firm.is.aware,.through.a.request.from.law.enforcement,.such.as.a.subpoena.or.a.314(a).Request,.that.an.account.is.under.investigation.84

If.a.law.enforcement.agency.requests.that.a.firm.maintain.a.particular.account,.the.firm.should.ask.for.a.written.request.from.the.relevant.law.enforcement.agency,.consistent.with.the.guidelines.provided.by.FinCEN.

7.5.4. SupportingDocumentationThe. firm. should. also. designate. a. person. or. persons. to. be. responsible. for.

maintaining.copies.of.all.documentation,.records.and.communications.relating.to.a.reported.transaction...A.firm.is.required.to.maintain.a.copy.of.the.SAR‑SF.and.the.original.or.business.record.equivalent.of.any.supporting.documentation.for.a.period.of.five.years.from.the.date.of.filing.the.SAR‑SF...Supporting.documentation.under.SAR.regulations.refers.to.all.documents.or.records.that.assisted.a.firm.in.making. the. determination. that. certain. activity. required. a. SAR. filing.. . A. firm.must.identify.supporting.documentation.at.the.time.the.SAR‑SF.is.filed,.and.this.documentation.must.be.maintained.by.the.firm.as.such...The.manner.in.which.a.firm.maintains.supporting.documentation.may.vary.from.firm.to.firm,.but.each.firm.should.prescribe.its.own.method.in.its.AML.program.written.procedures.85

83 SeeSARActivityReviewMay2006,at36.

84 SeeFinCENGuidance,Requests by Law Enforcement for Financial Institutions to Maintain Accounts(June13,2007),available athttp://www.fincen.gov/Maintaining_Accounts_Guidance.pdf.

85 SeegenerallyFinCENGuidance,Suspicious Activity Report Supporting Documentation,FIN-2007-G003,(June13,2007),available athttp://www.fincen.gov/Supporting_Documentation_Guidance.pdf.

�� |

7.5.5. ConfidentialityofSARsA.firm.that.files.a.SAR‑SF.is.prohibited.from.notifying.any.person.involved.in.

the.reported.transaction.that.a.report.has.been.made.86.This.prohibition.does.not.apply.to.requests.for.either.a.copy.of.the.SAR‑SF.or.the.supporting.documentation.underlying.the.SAR‑SF.from.FinCEN,.the.SEC,.the.SROs.(exercising.their.examination.authority),. or. other. law. enforcement. or. regulatory. agencies.87. A. firm. otherwise.subpoenaed.or.requested.to.disclose.a.SAR‑SF.or.the.information.contained.therein.should.decline.to.produce.such.information.and.notify.FinCEN.88

7.5.6. SharingSARswithControllingCompaniesA.broker‑dealer.may.share.a.SAR‑SF.with.a.parent.entity,.whether.domestic.

or. foreign,. and. if. the. corporate. structure. includes. multiple. parent. entities,. the.broker‑dealer’s.SAR‑SF.may.be.shared.with.each.parent.entity.89

Before. a. broker‑dealer. may. share. a. SAR‑SF. with. its. parent. entity,. a. filing.firm. must. have. a. written. confidentiality. agreement. in. place. specifying. that. the.parent.entity.(or.entities).must.protect.the.confidentiality.of.the.SAR‑SF.through.appropriate.internal.controls...The.confidentiality.agreement.should.also.require.that. a. recipient. foreign. parent. entity. must. not. disclose. any. SAR‑SF,. or. the. fact.that. such. report. has. been. filed.. . If. the. parent. entity. (or. entities). is. a. non‑U.S..entity,.the.confidentiality.agreement.should.address.concerns.about.the.ability.of.the. foreign.parent.entity. to.protect. the.SAR‑SF. in. light.of.possible. requests. for.disclosure.abroad.that.may.be.subject.to.foreign.law...However,.the.parent.entity.may.disclose,.without.permission,.underlying.information.from.the.SAR‑SF.about.the.customer.and.the.transaction(s).reported,.provided.it.does.not.explicitly.reveal.that.a.SAR‑SF.was.filed.and.that.information.is.not.otherwise.subject.to.disclosure.restrictions...

FinCEN.has.not.yet.provided.guidance.with.respect.to.sharing.a.SAR‑SF.with.a.non‑parent.affiliate,.either.within.the.U.S..or.abroad...Until.such.time,.a.broker‑dealer.should.not.share.SAR‑SFs.with.non‑parent.entities.

7.6. StateReportingRequirementsAlthough.some.states.have.enacted.their.own.reporting.requirements,.most.

will.be.satisfied.by.reporting.to.the.federal.government...Nonetheless,.whenever.

86 31U.S.C.§5318(g)(2007).

87 31C.F.R.§103.19(e)(2007).

88 FinCENhasprovidedguidanceforrespondingtosuchrequests.SeeBSAAdvisoryGroup,“Section4-IssuesandGuidance,”The SAR Review Trends, Tips & Issue,at45(Aug.2004),available athttp://www.fincen.gov/sarreviewissue7.pdf.

89 See generallyFinCENGuidance on Sharing of Suspicious Activity Reports by Securities Broker-Dealers, Futures Commission Merchants and Introducing Brokers in Commodities(Jan.20,2006),available athttp://www.fincen.gov/sarsharingguidance01202006.pdf.

| ��

any.type.of.transaction.report.under.the.BSA.is.filed.with.the.federal.government,.firms. should. ascertain. whether. the. relevant. state. law. requires. a. duplicate. or.comparable.form.to.be.filed.with.a.state.authority...

7.7. ReviewofSuspiciousActivityWhere.an.account.has.been.selected.to.undergo.further.review.for.possible.

money. laundering.or. suspicious.activity,. the.firm.may.utilize.various.analytical.approaches.depending.upon.its.resources,.its.corporate.structure,.and.its.business.activity...The.extent.of.any.analysis.is.also.dependent.upon.the.nature.and.source.of.the.inquiry.. .Depending.on.the.size.of.the.firm’s.AML.unit,.and.the.size.and.resources.of.the.firm,.some.or.all.of.the.analytic.work.may.be.performed.by.other.areas.of.the.firm.

8. MonitoringofAccountActivityA. firm. should. adopt. procedures. setting. forth. appropriate. parameters. and.

methods.of.monitoring.account.activity.so.that.unusual.or.suspicious.transactions.can.be.detected.

8.1. MonitoringGenerallyAn. objective. of. a. firm’s. AML. efforts. is. to. identify. potentially. suspicious.

and. unusual. activity. in. its. customers’. and. employees’. accounts.. . Monitoring.transactions.is.essential.to.determining.if.any.particular.transaction.is.unusual.or.suspicious.in.nature.or.may.be.related.to.money.laundering.

The.process.of.monitoring.transactional.activity.can.be.a.complex.and.costly.process.and.will.necessarily.vary.from.firm.to.firm,.depending.on.the.type.of.firm.involved,. its.size,. its.customer.base,. its.business,.and.its.resources.. .Given.these.factors,.monitoring.can.be.accomplished.in.a.number.of.ways,.including.the.use.of.internal.or.external.automated.monitoring.systems.specific.to.the.firm;.the.manual.monitoring. of. account. activity. by. various. branch,. operations. or. compliance.personnel;.or.through.reliance.on.the.system.utilized.by.the.parent.company.or.an.affiliated.entity..

In.designing.its.monitoring.efforts,.a.firm.should.endeavor.to.capture.activity.that.could.be.considered.suspicious.or.unusual.so.that.appropriate.action.can.be.taken...To.capture.suspicious.or.unusual.activity,.a.firm.must.monitor.a.sufficient.amount. of. activity. to. permit. identification. of. red. flags,. such. as. unusually. large.or.atypical.transactions,.changes.in.transaction.volume,.or.transactions.involving.high. risk. jurisdictions,. including. tax. havens. and. jurisdictions. designated. as.warranting.special.measures.or.NCCT.jurisdictions.90.Accordingly,.a.firm.should.monitor.for.the.following:

90 SeeFINRASmallFirmTemplate,at16-17.

�� |

• WireTransferActivity.Afirmshouldperformsometypeofmonitoringforwiretransfers.Whetherconductedmanuallyorbyuseofanautomatedsystem,parametersforwireactivitycouldincludespecificdollarthresholds,volumeorvelocitythresholdsandwiresdirectedtowardcertaingeographicdestinationsidentifiedas"high‑risk";

• Deposits.Whereafirmacceptscash(i.e.,currency),someformofmonitoringshouldbeconductedwithrespecttocash.Iftherearelimitationsontheamountsthatcanbereceived,themonitoringshouldlookforexceptionstothepolicy.Iftherearenolimitations,thefirmshouldataminimumlookfordepositsaggregatinginexcessof$10,000;

• MonetaryInstruments.Ifafirmacceptscashorcashequivalents,includingcashier'schecks,moneyordersandtraveler'schecks,itshouldhaveproceduresinplacetomonitorforthestructuringofsuchdeposits.

Because. not. every. transaction. can. be. monitored,. a. firm. could. consider.developing.certain.types.of.specialized.or.exception.reports.that.can.be.reviewed.periodically.for.indications.of.suspicious.or.unusual.account.activity.

9. InformationSharingwithLawEnforcementand otherFinancialInstitutions

Section.314.of.the.PATRIOT.Act.is.aimed.at.encouraging.greater.cooperation.among. financial. institutions,. regulators,. and. law. enforcement. in. efforts. against.money.laundering.and.the.financing.of.terrorism...

9.1. InformationRequestsbyFinCENFinCEN,. acting. on. behalf. of. a. federal. law. enforcement. agency. that. is.

investigating. money. laundering. or. terrorist. activity,. may. require. any. financial.institution,.pursuant.to.Section.314(a).of.the.PATRIOT.Act,..to.search.its.records.to. determine. whether. the. financial. institution. maintains. or. has. maintained.accounts.for,.or.has.engaged.in.transactions.with,.named.individuals,.entities,.or.organizations.. . In. response. to. such. a. “314(a). Request,”. firms. must. search. their.account.records.for.any.current.account.and.any.account.maintained.during.the.preceding.twelve.months.for.a.named.suspect...Firms.are.required.to.search.for.transactions.that.are.required.to.be.recorded.and.that.have.been.conducted.during.the.preceding.six.months.by,.or.on.behalf.of,.a.named.suspect...

Generally,.firms.have.two.weeks.from.the.date.that.the.request.is.transmitted.to.respond.to.a.314(a).request.if.an.account.or.transaction.match.is.found...If.a.match.is.located,.the.firm.must.provide.to.FinCEN:.the.account.number;.the.name.of.the.account.holder.and,.if.an.individual,.identifying.information.for.the.account.holder;.and,.in.the.case.of.transactions,.the.date.and.type.of.each.transaction...Firms.should.ensure.that.any.information.responsive.to.such.requests.from.FinCEN.is.provided.in.the.manner.and.in.the.time.frame.specified.in.the.request,.although.

| ��

firms.need.not.respond.to.the.request.if.the.search.does.not.result.in.a.match...

Each. firm. must. designate. a. person. to. be. the. point. of. contact. at. the. firm.for. receiving. 314(a). Requests. from. FinCEN,. which. now. utilizes. a. secure. Web‑based.delivery.and.reporting.system.in.place.of.its.former.e‑mail.delivery.system...Identifying. information.about. the.contact.person.must.be.provided. to.FinCEN.upon.request...Additionally,.the.firm.should.notify.its.primary.federal.regulator.or.SRO,.to.update,.change,.add.or.delete.its.point.of.contact.information.91

A.firm.may.not.disclose.the.fact.that.it.has.received.a.FinCEN.314(a).Request...Moreover,.a.firm.may.not.use.a.FinCEN.314(a).Request. for.any.purpose.other.than.to.report.matching.information.to.FinCEN,.to.determine.whether.to.establish.or. maintain. an. account,. or. to. engage. in. a. transaction,. or. to. assist. the. firm. in.complying.with.any.AML.requirement.set.forth.in.the.regulations.that.implement.the.BSA...The.firm.must.implement.procedures.for.maintaining.the.confidentiality.of.the.request.and.any.responsive.information...

9.2. VoluntaryInformationSharingTreasury.has.also.implemented.a.rule.pursuant.to.Section.314.of.the.PATRIOT.

Act. that. establishes. procedures. for. voluntary. information. sharing. between. or.among.financial.institutions...Information.may.only.be.shared.between.or.among.financial. institutions. or. associations. of. financial. institutions. that. are. required.to.have.AML.programs.. .The.voluntary.sharing.of. information.must.be. for. the.purpose.of.identifying.and.reporting.activities.that.may.involve.money.laundering.or.terrorist.activity...A.firm.that.shares.information.pursuant.to.the.rule.is.protected.under.the.PATRIOT.Act.from.any.liability.for.such.sharing.or.for.any.failure.to.provide.notice.of.such.sharing.

A.financial.institution.that.intends.to.share.information.under.the.rule.must.file.a.notice.with.FinCEN.using.the.form.provided.by.FinCEN,.and.must.submit.a. new. form. to. FinCEN. each. year.92. A. firm. is. also. required. to. take. reasonable.steps. to. verify. that. the. institution. with. which. it. intends. to. share. information.has. also. filed. the. required. notice. with. FinCEN.. . Information. received. from.another.financial. institution.pursuant.to.the. information.sharing.rule.may.only.be.used.for.(1).identifying/reporting.on.money.laundering.or.terrorist.activities;.(2).determining.whether. to.establish.or.maintain.an.account,.or. to.engage. in.a.transaction;.or.(3)..assisting.the.firm.in.complying.with.any.AML.requirement.set.

91 FinCEN,ChangingYourPointofContactfor314(a)(Apr.10,2007),available athttp://www.fincen.gov/poc_change_314a.pdf.See generally,FinCEN,Section 314(a) Information Requests,available athttp://www.fincen.gov/fi_infoappa.html(containing314(a)factsandfigures,andotherinformationrelatedto314(a)Request).

92 FinCEN,FinancialInstitutionNotificationForm,On-line314(b)Registration,available at http://www.fincen.gov/314b_main.html;and314(b)FillableMailInForm,available at http://www.fincen.gov/314b.pdf.

�0 |

forth.in.the.regulations.that.implement.the.BSA.

10. AMLTrainingAll.appropriate.personnel.should.be.trained.regarding.the.firm’s.AML.policies.

and.procedures,.as.required.by.the.PATRIOT.Act....

10.1. TrainingGenerallyA.firm.should.train.all.appropriate.new.employees.with.respect.to.its.AML.

procedures,. including. the. detection. of. unusual. or. suspicious. transactions. and.compliance.with.the.various.federal.rules,.regulations.and.reporting.requirements...The.firm’s.AML.policy,.as.well.as.other.relevant.firm.manuals.or.materials,.such.as.the.firm’s.Code.of.Ethics.or.Code.of.Conduct,.which.should.incorporate.a.section.explaining.the.firm’s.AML.policy,.should.be.made.available.to.all.new.employees.

All. appropriate. employees. should. receive. training. annually. to. ensure. that.they.are.knowledgeable.about.their.role.in.the.firm’s.AML.efforts...In.addition,.a.firm.should.determine.which.of.its.employees.need.to.receive.additional.specific.periodic.training.relative.to.money.laundering.prevention...Other.business.units.or.areas.that.may.also.benefit.from.training.include.Treasury,.Operations,.Margin,.Credit,. Corporate. Security,. Audit,. and. Legal. and. Compliance.. . Firms. should.maintain.evidence.of.their.training.efforts.

Employee.training.can.take.a.variety.of.forms,.including.live.presentations,.educational. videos,. on‑line. training. modules. or. the. use. of. other. media.. . In.addition,.bulletins.or.other.guidance.documents.can.be.distributed.or.circulated.to. employees. firm‑wide,. or. to. select. groups. of. employees. as. appropriate. (i.e.,.registered. representatives. in. particular. branch. locations,. cashiering,. margin,. or.operations.personnel)...Departments.within.the.firm,.such.as.Compliance,.Legal,.Internal.Audit,.and.Human.Resources,.as.well.as.outside.vendors,.can.all.assist.in.developing.the.firm’s.training.programs.and.in.training.firm.personnel...

Firms. should. be. aware. that. FINRA. provides. a. variety. of. AML. education.and. training. programs,. including. live. events,. online. workshops,. webcasts,. e‑learning.courses.and.phone‑in.workshops. SIFMA.also.offers.industry.members.opportunities. for. AML. education. through. conferences,. seminars. and. regular.email.updates.93

10.2. RelevantTopicstobeAddressedA.firm.should.endeavor.to.tailor.the.contents.of.its.AML.training.to.the.specific.

needs.and.business.of.the.organization...In.so.doing,.the.following.themes.should.be.addressed:.the.firm’s.KYC.and.CIP.policy.and.procedures;.the.critical.role.of.

93 Firmscanfindcontinuingeducationinformationavailable athttp://www.sifma.org/sifmaevents.aspx.

| ��

employee’s. in. the. firm’s. AML. compliance. efforts;. the. Firm’s. required. reporting.obligations;.potential. indicators.of. suspicious.activity;. the.rules.and.regulations.for. reporting. currency. transactions,. transportation. of. monetary. instruments.and.suspicious.activity;. the.firm’s.procedures. for.reporting.such.transactions.or.activity;.and.the.civil.and.criminal.penalties.associated.with.money.laundering.

Firms. should. also. contemplate. updating. their. training. materials. to. reflect.recent.developments,.techniques.or.money.laundering.trends.identified.by.various.government.agencies.such.as.FinCEN,.including.their.SAR.Activity.Reviews,.their.interpretations.of.and.guidance.on.the.BSA.regulations;.its.advisories.concerning.money. laundering. or. terrorist. financing. threats. and. vulnerabilities;. and. FATF.publications,. such. as. Annual. Reports. and. Newsletters,. information. about.FATF.Standards,.NCCT.Reports,. and. reports.on.money. laundering. trends.and.techniques.94

11. OtherBSAReportingandRecordkeepingRequirementsFirms. should. implement. written. procedures. with. regard. to. BSA. reporting.

and.recordkeeping.requirements,.including.those.relating.to.transactions.in.cash.or. cash. equivalents,. such. as. traveler’s. checks,. money. orders,. cashier’s. checks.and. bearer. bonds.. . These. procedures. should. address. the. following. reporting.requirements.

11.1. CurrencyTransactionsReportsSecurities.firms.must.file.a.Currency.Transaction.Report.(“CTR”),.FinCEN.

Form.104,.each.time.a.client.makes.a.deposit,.withdrawal,.exchange.of.currency.or.other.payment.or.transfer.of.more.than.$10,000.in.currency.(i.e.,.more.than.$10,000. in. one. transaction. or. more. than. $10,000. in. multiple. transactions. –. by.the.same.person.–.in.one.business.day).. .Currency.includes.coins.and.currency.of.United.States,.or.any.other.currency.that.circulates.and.is.used.as.money,.but.does.not.include.bank.checks.or.other.negotiable.instruments...CTRs.must.be.filed.within.15.days.of.the.transaction.

In.the.event.that.a.transaction.meeting.the.CTR.reporting.requirements.is,.for.various.reasons,.also.considered.suspicious,.a.separate.SAR‑SF.should.be.filed...

In.the.event.that.a.currency.transaction.is.$10,000.or.less.and.is.considered.suspicious,.FinCEN.has.advised.that.only.a.SAR‑SF.should.be.filed.95

94 FATFpublicationscanbefoundathttp://www.fatf-gafi.org/pages/0,3417,en_32250379_32237235_1_1_1_1_1,00.html.

95 SeeFinCENSAR-SFForm101aInstructions,When to File a Report,¶6(May2004).

�� |

11.2. ReportsofInternationalTransportationofCurrency orMonetaryInstruments

Securities. firms. must. also. file. a. Report. of. International. Transportation. of.Currency.or.Monetary.Instruments.(“CMIR”),.FinCEN.Form.105,.with.the.U.S..Customs.Service.when.they.transport.or.receive.currency.or.monetary.instruments.exceeding.$10,000.at.one.time.into.or.out.of.the.country...Monetary.instruments.include. currency,. traveler’s. checks,. all. negotiable. instruments,. and. securities. in.bearer.form...CMIR.reports.must.be.filed.at.the.time.of.transportation.or.within.15.days.of.receipt.of.funds.or.such.monetary.instruments.

11.3. ForeignBankAccountReportsSecurities.firms.must.report.having.financial.interest.in,.or.signature.authority.

over.bank.accounts,.securities.accounts,.or.other.financial.accounts.in.a.foreign.country. that,.when.aggregated,. exceed.$10,000. in.value.at. any. time.during. the.calendar. year,. on. a. Report. of. Foreign. Bank. and. Financial. Accounts. (“FBAR”),.Treasury’s.Form.TD.F.90‑22.1...FBARs.must.be.filed.by.June.30.after.the.calendar.year. of. the. subject. matter. of. the. report.. . Generally,. the. filing. of. such. firms. is.handled.by.a.firm’s.tax.department,.and.not.the.AML.compliance.officer..

11.4. FundsTransferRulesandRecordkeepingMoreover,. securities. firms. effecting. transmittals. or. transfers. of. funds,.

including.wire.fund.transfers,.of.$3,000.or.more.must.collect,.retain.and.record.on.the.transmittal.order.certain.information.regarding.the.transfer,.including.the.name.and.address.of.the.transmitter.and.recipient,.the.amount.of.the.transmittal.order,.the.identity.of.the.recipient’s.financial.institutions,.and.the.account.number.of.the.recipient...Securities.firms.are.also.required.to.verify.the.identity.of.transmitters.and.recipients.that.are.not.established.customers.96

11.5. ProhibitionAgainstStructuredTransactionsIt.is.illegal.for.any.person.to.structure.transactions.to.evade.the.above.reporting.

requirements.of.the.BSA...It.is.also.illegal.for.anyone.to.assist.another.person.in.structuring.transactions.to.evade.the.reporting.requirements...Therefore,.securities.firms.must.have.policies.and.procedures.prohibiting.employees.from.assisting.any.person. in. structuring. transactions. to. avoid. a. CTR. or. CMIR. or. circumventing.any.of.the.other.recordkeeping.and.reporting.requirements.of.the.BSA,.and.for.reviewing.the.transactions.and.determining.whether.a.SAR‑SF.should.be.filed.

96 FinCENnolongergrantsaconditionalexceptiontotheserules.Therefore,afirmmustincludeacustomer’struenameandstreetaddressinafundstransmittalorder,evenifcompleteinformationaboutthefundstransfercouldbemadeavailableefficientlytolawenforcementofficials.68Fed.Reg.66708(Nov.28,2003).

| ��

12. IndependentTestingofAMLProgramA.firm.should.develop.an.independent.testing.program,.required.under.the.

PATRIOT.Act,.designed.to.ascertain.whether.those.individuals,.departments.or.units. that.have. the.primary.responsibility. for.detecting.money. laundering.are.in. compliance. with. the. firm’s. AML. procedures.97. The. testing. program. should.also.be.designed.to.evaluate.the.effectiveness.of. the.firm’s.AML.program.and,.with. only. certain. exceptions,. should. provide. for. at. least. annual. testing. (on. a.calendar‑year.basis).98.Independent.testing.must.be.performed.by.a.designated.person.with.a.working.knowledge.of.applicable.requirements.under.the.BSA,.the.PATRIOT.Act,.and.its.implementing.regulations..99.

The.designated.person.may.be.either.a.qualified.employee.or.outside.party.that. is. independent. of. conflicts. of. interest.. . Independent. testing. may. not. be.conducted.by.the.designated.AML.compliance.officer,.any.person.who.performs.the.functions.being.tested,.or.a.person.who.reports.to.such.persons,.unless.certain.conditions.are.present,.in.which.case.the.firm.may.make.an.exception.100

The.AML.program.should.also.include.formal.mechanisms.for.the.reporting.of.test.results.to.senior.management.and/or.the.internal.audit.committee,.as.well.as. the.procedures.for.addressing.and.rectifying.any.inadequacies.reported.. .A.firm’s.final.written.audit.report.and.the.firm’s.response.to.the.report,.including.how.the.firm.resolved.the.issues.noted.in.the.report.or.any.decisions.not.to.follow.the.findings.of.such.report,.should.be.maintained.by.the.AML.compliance.officer.or.designated.person.for.the.firm’s.records..

13. GeneralRecordkeepingRequirementsA.firm.should.adopt.specific.record.retention.policies.consistent.with.the.

various.recordkeeping.and.reporting.requirements.embodied.within. the.BSA,.the.Federal.Funds.Transfer.Rules.and.other.such.rules.promulgated.by.the.firm’s.

97 SeeNASDIM-3011-1.

98 Ifamemberdoesnotexecutetransactionsforcustomersorotherwiseholdcustomeraccountsoractasanintroducingbrokerwithrespecttocustomeraccounts(e.g.,engagessolelyinproprietarytradingorconductsbusinessonlywithotherbroker-dealers),itsindependenttestingisrequiredeverytwoyears(onacalendar-yearbasis).NASDRule3011(c).

99 SeeNASDIM-3011-1(b).

100Allfourofthefollowingconditionsmustbemettopermitaperson,whoeitherreportstoapersonwhoperformsthefunctionsbeingtestedortothedesignatedAMLcomplianceofficer,toconducttheindependenttesting:(1)thereisnootherqualifiedinternalpersonneltoconductthetest;(2)writtenanti-retaliationpoliciesandproceduresareineffect,i.e.,therearemechanismsinplacetoaddressanyconflictthatresultsfromallowingthetesttobedonebyapersonwhoreportstotheAMLcomplianceofficerorotherpersonbeingtested;(3)ifpossible,thepersonthatconductedthetestshouldreportthetestresultstoapersonwhoissuperiortotheAMLcomplianceofficerorotherpersonbeingtested;and(4)thefirmmusthaveareasonablerationalethatisdocumentedastowhyithadnoalternativethantoconductindependenttestinginthemannersetforthinthisexception.IfthetestresultsarenotreportedtoasuperioroftheAMLcomplianceofficerorotherpersonbeingtested,thefirmmustalsodocumentareasonableexplanationfornotdoingso.NASDIM-3011-1(c)(3).

�� |

regulators,.including.Treasury,.the.SEC,.and.the.SROs...The.firm’s.recordkeeping.policies.should.be.reviewed.by.firm.personnel.

14. AMLContactsFirms.should.disseminate.information.on.whom.to.contact.for.AML.questions.

or.issues.within.the.firm...As.part.of.that.effort,.firm.personnel.should.be.provided.with.specific.points.of.contact,.including.telephone.numbers...Firms.that.already.have.a.hotline.or.an.information.line.for.other.purposes.could.advise.employees.that. they. can. utilize. the. same. number. for. AML. purposes,. as. well,. in. order. to.discuss.such.matters.on.a.confidential.basis..101

15. RelationshipBetweenIntroducingBrokersandClearingBrokersIn.the.AML.context,.the.issues.surrounding.KYC,.CIP,.and.suspicious.activity.

reporting. become. even. more. complex. when. viewed. in. terms. of. the. respective.responsibilities.of.the.introducing.brokerage.firms.and.the.firms.that.clear.securities.transactions. on. their. behalf.. . Clearing. agreements. have. traditionally. allocated.compliance. responsibilities. between. introducing. and. clearing. brokers,. with. the.introducing. broker. assuming. more. of. the. KYC. and. suitability. responsibilities.due.to.its.primary.relationship.with.the.customer...Such.responsibilities.generally.include. the. responsibility. to. take. reasonable. steps. to. know. the. customer,. the.customer’s.investment.objectives.and.investment‑related.activities...In.the.context.of.AML.compliance,.however,.both.U.S..introducing.brokers.and.clearing.brokers.have.independent.AML.responsibilities.and,.with.one.exception,.cannot.delegate.responsibilities.to.the.other...

The.only.area.where.the.regulators.have.thus.far.permitted.the.introducing.broker.and.the.clearing.broker.to.delegate.fully.their.independent.responsibilities.is. with. respect. to. CIP. obligations,. where. the. introducing. broker. and. clearing.broker.can.rely.on.the.other.to.meet.some.or.all.of.its.CIP.obligations,.provided.that.certain.conditions.are.met...However,.FinCEN.has.acknowledged.the.need.for.introducing.brokers.to.work.with.their.clearing.broker.in.order.for.both.to.meet.their. responsibilities. with. respect. to. suspicious. activity. reporting.. . Separately,.FinCEN. has. also. recognized. the. difference. in. responsibilities. between. clearing.brokers.and.introducing.brokers. in.the.context.of.Section.312.of. the.PATRIOT.Act..102

15.1. ApportionmentofResponsibilitiesBetweenthePartiesConsistent.with.the.terms.of.NYSE.Rule.382.and.NASD.Rule.3230,.and.in.

order.to.meet.their.independent.obligations,.clearing.agreements.should.apportion.

101Asnotedabove,afirmmustalsoprovidethecontactinformationforitsAMLcomplianceofficertoitsrelevantSRO(s).

102See generally,FinCEN,SecuritiesandFutures312Guidance.

| ��

all.AML.responsibilities.between.the.introducing.broker.and.the.clearing.broker...For.example,. the.clearing.agreement. should. specifically. set. forth. the. respective.obligations. between. the. introducing. broker. and. the. clearing. broker. relating. to.compliance. with. applicable. U.S.. AML. laws,. rules. and. regulations,. related. SEC,.SRO.and.bank.rules.(where.the.broker‑dealer. is.a.subsidiary.of.a.bank‑holding.company),.and.the.BSA.reporting.and.recordkeeping.responsibilities,. including.reporting.of.currency.transactions.and.filing.of.SAR‑SFs...The.apportionment.of.responsibilities.should.also.address.compliance.with.Sections.313.and.319.of.the.PATRIOT.Act,.as.well.as.Section.312.of.the.PATRIOT.Act...It.is.important.to.note,.however,.that.regardless.of.the.apportionment.of.AML.responsibilities.contained.in.the.clearing.agreement,.with.the.exception.of.the.CIP.requirements,.both.the.introducing.broker.and.clearing.broker.retain.full.independent.responsibility.for.their.other.AML.obligations,.unless.FinCEN.guidance.indicates.otherwise..

15.2. DelegationofCIPResponsibilitiesPursuantto theRelianceAgreements

Under.the.CIP.Rule,.a.clearing.broker.can.rely.on.an.introducing.broker.to.fulfill.the.identification.and.verification.responsibilities.for.shared.customers.if.the.clearing.broker.satisfies.the.reliance.requirements,.as.discussed.above.in.section.4..4.. .Under.the.rule,.the.reliance.must.be.reasonable,.and.the.introducing.firm.must.enter.into.a.reliance.agreement.with.the.clearing.broker.whereby.it.certifies.annually.to.the.clearing.broker.that.it.has.implemented.an.AML.program.and.will.perform.its.contractual.obligations.according.to.the.elements.of.a.CIP.as.required.pursuant.to.the.CIP.Rule...The.financial.institution.on.which.the.clearing.broker.relies.must.also.be.subject.to.the.AML.requirements.under.the.PATRIOT.Act.and.must.be.regulated.by.a.federal.functional.regulator...Introducing.brokers.registered.with.the.SEC.would.clearly.fall.into.this.category...So.long.as.the.clearing.broker’s.reliance. is.reasonable.and. it.has.obtained.the.necessary.reliance.agreement.and.annual.certifications,.the.clearing.broker.will.be.protected.by.a.safe.harbor.under.which.it.would.not.be.responsible.for.any.failure.of.the.introducing.firm.to.fulfill.its.obligations.under.the.CIP.Rule..

15.3. SpecialDueDiligenceandEnhancedDueDiligenceFinCEN.has.acknowledged.the.difference.in.responsibilities.between.clearing.

brokers.and.introducing.brokers. in.the.context.of.Section.312.of. the.PATRIOT.Act.. . Specifically,. with. respect. to. correspondent. accounts,. clearing. brokers. are.not. required. to. perform. special. due. diligence. and. enhanced. due. diligence. on.foreign.financial.institutions.introduced.pursuant.to.a.clearing.agreement.with.a.U.S..introducing.broker,.unless.the.clearing.broker.establishes.a.relationship.with.the.introduced.foreign.financial.institution.such.that.it.would.require.the.clearing.

103See generallyFinCEN,SecuritiesandFutures312Guidanceat3-5.

�� |

broker.to.make.a.suitability.determination.in.order.to.recommend.the.purchase,.sale. or. exchange. of. any. security.103. Additionally,. as. part. of. a. clearing. broker’s.general.AML.obligations,.a.clearing.broker’s.AML.program.should.include.risk‑based.procedures.to.assess,.among.others.things,.whether.the.introducing.broker.establishes.or.maintains.correspondent.accounts.for.foreign.financial.institutions,.the.customer.base.of. the. introducing.broker,.and.should.address.circumstances.that.may.require.additional.due.diligence.with.respect.to.certain.introduced.high.risk.accounts.

In.addition,.clearing.brokers.are.not. required. to.perform.due.diligence.on.private. banking. accounts. introduced. by. an. introducing. broker. if. the. clearing.broker.does.not.offer.or.maintain.a.private.banking.account.for.such.introduced.customer...However,.as.part.of.a.clearing.broker’s.AML.program,.it.should.assess.the.money.laundering.risks.posed.by.an.introducing.broker,.and.should.consider,.among.other.things,.whether.or.not.the.introducing.broker.offers.private.banking.accounts.and.the.customer.base.of.the.introducing.broker..

15.4. MonitoringofSuspiciousActivityBoth. the. introducing. broker. and. the. clearing. broker. have. an. independent.

responsibility. to. monitor. account. activity. for. suspicious. transactions,. and. may.have. separate. criteria. for. evaluating. those. transactions.. . However,. they. may. be.able. to.apportion.certain.monitoring. functions.between. them. in.order. to.meet.their. separate. monitoring. obligations.. . For. example,. the. clearing. broker. may.provide. the. introducing. broker. with. exception. reports,. which. the. introducing.broker.then.reviews.and.evaluates.for.reporting.its.own.unusual.activities...Based.upon.the.apportionment.of.responsibilities.and.subject.to.a.reasonable.request.by.the.introducing.broker,.clearing.brokers.may.consider.developing.certain.tools,.or.enhancing.existing.tools,.which.might.assist.the.introducing.broker.in.analyzing.the.transactional.activity.of.its.customer...These.tools.could.include.reports.intended.to.assist.the.introducing.firm.in.supervising.and.monitoring.customer.accounts,.such.as.exception.reports.reflecting.deposit.and.trading.activity.that.might.detect.possible.money.laundering.activity,.including.the.structuring.of.deposits...Clearing.brokers.should.include.these.reports.on.the.list.of.reports.required.to.be.provided.to.introducing.brokers.at.the.inception.of.the.clearing.relationship.and.annually.thereafter..104

Clearing.brokers.are.also.responsible.for.monitoring.transactions.in.introduced.accounts...While.they.are.not.expected.to.review.every.such.transaction,.clearing.brokers. should. also. conduct. their. own. high. level. monitoring. of. this. activity.and. where. permitted. by. law,. work. with. the. introducing. firms. to. identify. such.suspicious.activity..

104SeeNYSERule382andNASDRule3250,requiringclearingbrokerstoprovideintroducingfirmsandtheirdesignatedSROannuallywithalistofexceptionreports.

| ��

15.5. CommunicationsWithRespecttoSuspiciousTransactionsBoth. the. introducing. broker. and. the. clearing. broker. have. an. independent.

responsibility. to. monitor. account. activity. for. suspicious. transactions,. and.may. have. separate. criteria. for. evaluating. those. transactions.. . At. the. very. least,.introducing.brokers.and.clearing.brokers.should.develop.effective.communication.procedures. between. the. two. firms. for. instances. when. questionable. activity. or.potential.indications.of.suspicious.activity.are.detected.by.either.firm...To.facilitate.the. detection. of. suspicious. activity,. registered. introducing. and. clearing. brokers.also.can.share.information...The.Committee.recommends.use.of.Section.314(b).of.the.PATRIOT.Act.to.provide.both.brokers.the.additional.protection.of.the.safe.harbor.in.this.area...

When.a.particular.transaction.is.deemed.suspicious.under.the.criteria.of.both.the.introducing.and.clearing.broker,.and.each.has.an.independent.obligation.to.file.a.SAR‑SF,.the.suspicious.activity.reporting.rule.allows.the.two.to.file.one.SAR‑SF,.provided.that.the.SAR‑SF.contains.all.the.relevant.facts..105

105FinCENannounceditsintentiontoimplementrevisedSARformstofacilitatejointfilingforfinancialinstitutions,includingthesecuritiesandfuturesindustries.See72Fed.Reg.23891(May1,2007).

�� |

APPENDIX A. The.following.sets.forth.the.provisions.of.the.PATRIOT.Act.that.are.applicable.to.broker‑dealers,.and.the.date.that.the.applicable.rules.implementing.these.provisions.took.effect.

Section 352(a):..The.Interim.Final.Rule.requiring.registered.broker‑dealers.to.establish.comprehensive.anti‑money.laundering.programs.became.effective.on.April.24,.2002.

Section 326:..Broker‑dealers.were.to.fully.implement.their.written.Customer.Identification.Programs.to.verify.the.identity.of.new.accountholders.by.October.1,.2003.

Sections 313/319(b):..Broker‑dealers.were.required.to.comply.with.the.rules.implementing.section.313,.prohibiting.correspondent.accounts.for.foreign.shell.banks,.and.section.319(b),.which.requires.broker‑dealers.to.obtain.ownership.and.other.information.regarding.accounts.maintained.by.foreign.banks,.by.March.31,.2003...Both.requirements.can.be.fulfilled.by.obtaining.a.foreign.bank.certification.

Section 312:..The.rules.requiring.broker‑dealers.to.comply.with.the.due.diligence.provisions.for.correspondent.and.private.banking.accounts.became.effective.on.July.5,.2006.for.accounts.established.on.or.after.that.date,.and.October.2,.2006.for.accounts.in.existence.prior.to.that.date...The.Final.Rule.for.enhanced.due.diligence.is.effective.for.broker‑dealers.on.February.5,.2008.for.all.accounts.established.on.or.after.that.date,.and.on.May.5,.2008,.for.all.accounts.established.before.February.5,.2008.

Section 311: Effective.October.26,.2001,.Section.311.authorized.the.Secretary.of.the.Treasury.to.require.broker‑dealers.to.take.one.or.more.of.five.special.measures.against.foreign.jurisdictions,.foreign.financial.institutions,.transactions.involving.such.jurisdictions.or.institutions,.or.one.or.more.types.of.accounts,.that.are.determined.to.pose.a.primary.money.laundering.concern.to.the.United.States...The.first.special.measure.was.imposed.on.December.26,.2002...A.current.list.of.the.special.measures.that.broker‑dealers.must.comply.with.is.available.on.the.FinCEN.website,.at.http://www.fincen.gov/reg_section311.html.

Section 356(a):..Effective.July.31,.2002,.broker‑dealers.were.required.to.file.Suspicious.Activity.Reports.(“SAR‑SFs”).for.transactions.occurring.after.December.30,.2002.

Section 314:..The.rules.requiring.information.sharing.with.federal.law.enforcement.agencies,.and.permitting.voluntary.information.sharing.among.financial.institutions,.became.effective.September.26,.2002.

| ��

�0 |

| ��

�� |

NewYork Washington London HongKong www.SIFMA.org

preliminary guidance for deterring money laundering … · 2008 guidance for deterring money...

Documents