Anti-Money Laundering Requirements for FCMs and IBs NFA Web Seminar September 28, 2006

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Anti-Money Laundering Requirements for FCMs and
IBsNFA Web SeminarSeptember 28, 2006
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Todays Presenters

• Larry Dyekman
• Director, Communications and Education
• Sharon Pendleton
• Compliance Director
• Carol Wooding
• Assistant General Counsel

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History of AML Requirements

• October 2001 USA PATRIOT Act signed into law
• April 2002 First federal regulations adopted
• April 2002 NFA adopts Compliance Rule 2-9(c)
  and Interpretive Notice

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Who constitutes a customer?

• For Customer Identification Program purposes, a
  customer is an individual or entity that opens a
  new account on or after October 1, 2003.
• In instances where the firm holds an account in
  the name of an intermediary, the customer of the
  FCM/IB is the intermediary, not the underlying
  beneficiary of the account.
• If an intermediary opens an account in a pools
  name, the customer is the pool and not the
  underlying beneficiaries.

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Required Components of a Firms CIP

• Procedures that require the firm to collect
  certain identifying information and perform
  certain verification procedures
• Procedures on what records must be kept and for
  how long
• Procedures on comparing new customers with
  certain government lists and
• Procedures on providing notice to customers.

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What identification information must be
collected for individuals?

• Customers name, date of birth and residential or
  business address.
• If the individual is a U.S. person, the firm must
  obtain the individuals social security number.
• If the individual is a non-U.S. person, the firm
  must obtain either a taxpayer identification
  number, a passport number and the country of
  issuance, an alien identification card number, or
  the number and country of issuance of any other
  government-issued document evidencing nationality
  or residence that has a photograph on it or
  something similar to identify the individual.

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

• The entitys name, its principal place of
  business, local office or other physical
  location.
• If it is a U.S. entity, the firm must obtain its
  taxpayer identification number.
• If it is a non-U.S. entity, the firm must obtain
  a government-issued identification number, or if
  none, an alternative government-issued document
  that certifies the existence of the business or
  enterprise.

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Verifying customer identification information

• A firm is required to have risk-based procedures
  to verify the identity of each customer to the
  extent reasonable and practicable.
• Information may be verified using documentary
  methods, non-documentary methods or a combination
  of both.
• The program must identify under what
  circumstances the firm will use each method.

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Keeping customer identification documents

• All the identity information the firm obtains
  from the customer
• Either a copy or a description of a document that
  was relied on. This description must indicate the
  type of document, the identification number of
  the document, the place of issuance and
  expiration date
• A description of any non-documentary methods used
  and the results and
• If there were any substantive discrepancies noted
  during the process, how they were resolved.

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Records retention requirements

• Firms are required to maintain the record of the
  identifying information for 5 years after the
  account is close.
• All other records must be maintained for 5 years
  after the record is made.
• If a customer opens multiple accounts at separate
  times, the identifying information must be kept
  for 5 years after the last account is closed.
• If a customer updates information, the firm must
  maintain the original information as well as the
  updated information.

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Comparing new customers with certain government
lists

• Office of Foreign Assets Controls Specially
  Designated Nationals List
• If a customer is located in one of the sanctioned
  countries, the FCM or IB needs to review the
  sanctioning document or contact OFAC to determine
  the breadth of any restrictions.

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A firms CIP must include procedures to provide
customers with adequate notice that the firm is
requesting information to verify their identity.
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When an FCM relies on an IB to conduct the CIP

• The reliance must be reasonable under the
  circumstances.
• The IB is required to have an AML compliance
  program and is regulated by a federal functional
  regulator.
• The IB enters into a contract requiring that it
  certify annually to the FCM or IB that it has
  implemented an AML program and that it will
  perform the CIP (or a portion of it).

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Auditing for AML compliance

• Obtain a copy of an FCMs or IBs CIP and review
  it to make sure it contains all the required
  components.
• Test the program to make sure it is being
  followed.

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Suspicious Activity Monitoring Requirements

• The FCMs or IBs compliance program must outline
  its procedures for monitoring for suspicious
  activity.
• However, NFA does not require that each firm
  monitor for suspicious activity in the same way.

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Suspicious Activity Reporting Requirements

• For transactions that occurred after May 18,
  2004, FCMs and IBs are required to file an SAR-SF
  form (the SF stands for securities futures) with
  FinCEN to report certain transactions.
• FCMs and IBs must file an SAR-SF form for a
  transaction or transactions that are done through
  the firm that involve in the aggregate at least
  5,000 in funds or other assets and the FCM/IB
  knows, suspects or has reason to suspect one of
  the following

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Suspicious Activity Reporting Requirements

• The transaction involves funds that come from
  illegal activity or a part of a transaction
  designed to conceal that the funds are from
  illegal activity.
• The transaction is designed to avoid BSA
  reporting requirements.
• The transaction doesnt appear to serve any
  business or apparent lawful purpose.
• It uses the FCM or IB to facilitate a criminal
  transaction.

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

• Review the firms procedures for monitoring for
  suspicious activity and make sure that the
  procedures are reasonable for the firms
  operations.
• Review a sample of accounts for suspicious
  activities.
• Ask the firm if they found any suspicious
  activity and if so, what type of investigation
  was conducted and if the activity resulted in the
  filing of an SAR.

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Information Sharing Requirements

• FCMs are required to search their records for any
  current accounts and accounts maintained by a
  subject named on FinCENs Web site.
• If the FCM finds a match, the FCM must report the
  match to FinCEN through the Web site usually
  within 14 days of the list being published.

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Recordkeeping Requirements Related to Information
Sharing Requests

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

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Common AML Audit Problem Areas

• Annual review of the firms AML program.
• Annual AML training requirement.

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Questions?
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Contact Information for Todays Presenters

• Larry Dyekman
• Ldyekman_at_nfa.futures.org
• Sharon Pendleton
• Spendleton_at_nfa.futures.org
• Carol Wooding
• Cwooding_at_nfa.futures.org