Broker-dealers are required to have and follow procedures that enable the firm to form a reasonable belief that it knows the true identity of its customers. At a minimum, firms must collect certain customer identification information from any person attempting to engage in transactions; employ risk-based measures to verify the person’s identity; record customer identification information, including the verification methods used and the results; compare customer identification information with government-provided lists of suspected terrorists (such as OFAC and FinCEN lists); and provide notice that the firm will seek identification information.
There is a limited exemption that allows broker-dealers to rely on their clearing firm or other third party to perform some or all of their customer identification and verification responsibilities if:
- The clearing or third-party entity is subject to a rule implementing the AML program requirements of 31 USC 5318(h) and is regulated by a federal functional regulator (such as the SEC).
- The customer has an account or is opening an account at the clearing firm or third-party firm.
- The reliance is reasonable, under the circumstances.
- The clearing firm or third party enters into a contract with the broker-dealer, requiring it to certify that it has implemented its AML program, and that it will perform the specified requirements of the broker-dealer’s Customer Identification Program (CIP).
If your firm engages the services of a third party, it will not be held responsible for the failure of the clearing firm to adequately fulfill your customer identification program responsibilities, provided that you can establish that your reliance is reasonable and you have obtained the necessary contracts and certifications. A new certification must be obtained annually for as long as your firm will rely on the third party or clearing firm for its CIP.
If your firm utilizes the services of a third party that is not regulated by a federal function regulator and is subject to a rule implementing the AML program requirements of 31 USC 5318(h) (such as an agent or service provider), you must establish internal controls and review the procedures to ensure that the CIP requirement is being implemented. Under these circumstances, your firm will be held responsible for the failure of the third party to fulfill the CIP requirement and is required to maintain records of documentation in your files related to the CIP information collected.
If you have any questions regarding your firm’s Customer Identification Program or reliance on another financial institution, please contact your Compliance Partners account manager at (603) 434-3594. or (888) 734-2667.
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