Anti-Money Laundering Rules Affecting Futures Commission Merchants
FIA/SIA Letters to the Financial Crimes Enforcement Network regarding the Final Rule for Section 312 of the USA Patriot Act.
Federal Register, March 30, 2006: http://www.fincen.gov/71fr16040_1506_aa29.pdf Anti-Money Laundering: Regulators Post Guidance on CIP Rule
The Commodity Futures Trading Commission and the Treasury Department have issued interpretative guidance regarding the requirements that all futures commission merchants and introducing brokers establish customer identification programs. The eight-page guidance is organized as a series of questions and answers, and addresses such issues as whether pension plan administrators should be defined as customers for the purposes of these requirements, the scope of the existing account exclusion, and valid forms of identification.
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Anti-Money Laundering: Final Rule Issued for Reporting Suspicious Activity
The U.S. Treasury Department has issued a final regulation requiring futures commission merchants and introducing brokers to file reports with the Financial Crimes Enforcement Network when they detect suspicious activity. This requirement applies to transactions in funds or assets of at least $5,000. The procedures for monitoring suspicious activity and filing must now be incorporated in the firm's written anti-money laundering compliance program. Failure to file or a late filing of a suspicious activity report is subject to civil money and criminal penalties. The effective date of the rule is Dec. 22 and the applicability date is May 18, 2004.
A committee of FIA Law and Compliance Division chaired by Bill McCoy of Morgan Stanley has been working with Treasury and the CFTC to express the FIA's views in the drafting process and to garner further guidance on open issues related to anti-money laundering compliance requirements. On July 9, the FIA filed a comment letter supporting the proposed SAR rules but requesting clarification in certain areas. The letter (see link below) asked Treasury how the rules would apply in certain situations, such as with futures commission merchants that are also registered as broker-dealers. The FIA also suggested that executing and clearing brokers involved in "give-ups" with the same customer should be required to file only one suspicious activity report and urged Treasury to allow the sharing of information about suspicious activity between U.S. FCMs and foreign brokers and between U.S. FCMs and CTAs where they share the same customers.
The final rule clarifies that an FCM/BD can file a single SAR report to either an appropriate securities or futures regulator or SRO. When two FCMs are involved in a transaction with the same customer, such as in a "give-up" arrangement, either firm filing a SAR report can satisfy the obligation of both FCMs to file. Treasury will be issuing guidance on how financial institutions can file joint SARs in the appropriate circumstances. On the issue of sharing information with entities that are not "financial institutions" under the Bank Secrecy Act, such as CTAs and foreign brokers, Treasury noted that because foreign entities are not "financial institutions" they are not eligible for protections under the Bank Secrecy Act.
In addition, the FIA has been seeking clarification with respect to another important area of AML compliance--the customer identification requirements. On July 22, FIA sent a letter (see link below) requesting clarification on these rules. Treasury has not yet issued any guidance on this matter.
The FIA on July 22 sent a letter to the CFTC requesting clarification on several issues raised by the final rules implementing section 326 of the USA Patriot Act. Industry groups were encouraged to submit questions and proposed answers to issues raised by the final rules. The Treasury Department is expected to gather issues and publish guidance in areas where many industries express common concerns. FIA raised questions concerning when a customer can be said to open a "new account" therefore requiring that customer identification procedures be undertaken, when an FCM and IB can rely upon another financial institution including an affiliate to perform some of the CIP functions, when an FCM can rely on a foreign financial institution subject to similar anti-money laundering requirements to perform customer identification procedures, and identifying who is the executing broker’s customer in the case of a three party give-up arrangement. FIA offered that when the give-up arrangement is entered into with an account manager acting on behalf of the manager’s customers, the executing FCM’s customer for purposes of AML customer identification requirements would be the account manager, not the underlying customers. The carrying FCM would be responsible for verifying the identity of the underlying customers.
The FIA has asked the Treasury Department to clarify a proposed rule that will require futures commission merchants and introducing brokers to alert the government whenever they detect suspicious activity by their customers. In a comment letter filed on July 7, the FIA expressed support for the rule and asked Treasury to clarify it will apply in certain situations, such as with FCMs that are also registered as broker-dealers with securities regulators. The letter also suggested that executing and clearing brokers with the same customer should be required to file only one suspicious activity report, and urged Treasury to allow the sharing of information about suspicious activity between U.S. FCMs and foreign brokers and between U.S. FCMs and commodity trading advisors, where both sides share the same customers.
To help guide the Treasury Department as it develops anti-money laundering rules and regulations for futures commission merchants, the FIA submitted a letter on March 6 describing certain characteristics of the futures industry that should be considered in the rule-making process. For example, many futures transactions are executed and cleared on behalf of intermediaries, such as other brokers and collective investment vehicles. In such circumstances, the letter said, FCMs should be allowed to rely on these intermediaries to identify customers and verify that they are not engaged in suspicious activities. Treasury took this view when it issued proposed rules in July 2002, and the letter urged the agency to maintain this position, even when the intermediary is located outside the U.S.
The letter went on to describe situations where both the FCM and the intermediary have a direct relationship with the underlying customer. Even in such situations, the FCM should be allowed to rely on the intermediary to identify customers, the letter said, since the introducing broker or advisor has a more direct relationship with the customer and is in a better position to verify their identity. “We understand that this approach…does not relieve an FCM of the obligation to verify the identity of its customers. It simply permits the FCM to rely on another party to perform this function when such reliance is reasonable,” the letter said.
With respect to give-up arrangements, the letter suggested that the anti-money laundering obligation should fall on the carrying broker, rather than the executing broker, since the carrying broker has a more direct and more comprehensive relationship with the customer. The letter described in detail how give-up relationships work in both the domestic and cross-border context, and urged Treasury to apply this rationale in both contexts.
10-4-2002: Proposed Suspicious Activity Reports by the Securities and Futures Industry (SAR-SF)
9/6/2002: Section 326 Proposed Rule-Customer Identification
4/3/2002: Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activities Attention: Propose Rule - Special Information Sharing - Section 314
3/1/2002: Re: Proposed Amendment to the Bank Secrecy Act Regulations - Requirements of Brokers or Dealers in Securities to Report Suspicious Transactions
FIA Responds to FinCEN Ownership Identification Rule (Oct. 2, 2014)
The Financial Crimes Enforcement Network, the anti-money laundering arm of the U.S. Treasury Department, issued a proposal on July 30 that would require financial institutions to look through the companies for which they provide services and identify their owners. One of the provisions would require futures commission merchants and introducing brokers to identify and verify any individual who owns 25% or more of a legal entity that is a customer.
On Oct. 2, FIA filed a comment letter responding to the proposed rule. The comment letter questions the need to make customer due diligence a “fifth pillar” of anti-money laundering program requirements; requests additional exemptions to the customer definition; suggests additions to the text of the rule; proposes enhancements to customer due diligence procedures; asks for clarification on the treatment of intermediated accounts; and recommends expanding the implementation time frame to 24 months.