The world of private placement transactions is one that is highly scrutinized by both FINRA and the SEC. It seems that with all of the Ponzi schemes and actions for misappropriation of investor monies, private placement transactions are always on the regulatorsâ exam priorities lists. With that in mind, it is imperative that firms participating in such offerings ensure that their compliance programs are kept current and up-to-date. However, an area that is often overlooked in such compliance preparation is the Anti-Money Laundering (âAMLâ) / Customer Identification Program (âCIPâ) process.
As with other products sold by a firm, AML and CIP considerations must be taken into account when dealing with private placement offerings. A firm should ensure that its representatives follow all AML policies and procedures, including verifying the identity of the client.
It is often argued that, with private placement transactions, no account is established with the firm. As such, no CIP information is required. Unfortunately, regulators do not take the same view. Under securities rules and regulations, a broker-dealerâs CIP requirement is triggered when it has a new âcustomer,â which is a person that opens a ânew account.â And, an âaccountâ is a âformalâ relationship with a broker-dealer established to effect securities transactions.
This taken into account, the SEC views the concept of âeffecting securities transactionsâ very generally in nature. Further, industry recommendations on CIP processes and procedures note that the definition of an âaccountâ contemplates various types of ânon-accountâ relationships, as well. It is widely recognized that while a firm may sell private placement offerings to a client without opening an account, it nevertheless still has an obligation to verify the customerâs identity.
So, how does a firm and its registered reps confirm their customersâ identities? The simplest way is through standard means; such as a driverâs license or passport for individuals, articles of incorporation or corporate formation documents for corporate entities, and trust documents for trust clients. In addition, the USA PATRIOT Act states firms must have procedures for determining whether customers appear on any government lists of known terrorists or terrorist organizations. Therefore, firms should have procedures for screening customers initially and on an ongoing basis. This will include running an OFAC search on individual clients, as well as conducting the same searches for entity clients and their senior management teams. Moreover, a firm should ensure that they have documented the source of funds for the investment from an AML perspective.
Firms acting in a placement agent capacity for private placement offerings should ensure they understand the definitions of âcustomerâ and âaccountâ to ensure their AML and CIP protocol is in place and operational. This should include maintaining policies, procedures, and processes around customer identity verification, conducting OFAC searches and documenting the source of investment funds. In addition, firms should implement ongoing training for their registered reps and associated persons and should include these key topics to certify that everyone is aware of the firmâs AML/CIP responsibilities and the appropriate actions to be undertaken.