A broker-dealer must establish, document, and maintain a written Customer Identification Program (CIP) as a part of the broker-dealer’s anti-money laundering (AML) compliance program (31 CFR 1023.220) as required by FINRA Rule 3310. The CIP must be appropriate for the broker-dealer’s size and business, and it must outline the following procedures:
- identity verification procedures
- recordkeeping procedures
- procedures for determining whether a customer appears on any government lists for suspicious activities; and
- procedures for notifying customers of information requests related to identity verification.
These CIP requirements apply to all customers opening a new account, including Delivery Versus Payment (DVP) accounts. Depending on the nature of an account and any risks associated with it, firms may conduct additional due diligence to obtain information on the ultimate beneficial owners of the account and related assets.
How is “Account” Defined Under the CIP Rule?
The CIP rule defines an account as a formal relationship with a broker-dealer established to effect transactions in securities. These transactions may include but are not limited to: purchasing or selling securities; loaning and borrowing securities; and holding securities (or other assets) as safekeeping or collateral. This definition does have two exclusions, though.
An account that the broker-dealer acquires through any acquisition, merger, purchase of assets, or assumption of liability does not count as an “account” because customers don’t initiate these transfers, and, therefore, don’t fall within the scope of Section 326 of the USA PATRIOT Act. Section 326 of the USA PATRIOT Act is the final rule issued by the U.S. Department of Treasury (the “Treasury”) and the U.S. Securities and Exchange Commission (SEC) outlining the minimum requirements for CIP procedures.
The definition of account also excludes an account opened for the purpose of participating in an employee benefits plan that was established under the Employee Retirement Income Security Act of 1974 (ERISA).
How is “Customer” Defined Under the CIP Rule?
For the purposes of the CIP rule, a customer is either a person opening a new account, a person opening a new account for someone who lacks the legal capacity to do so, or a person opening a new account for an entity that is not a legal person. It does not refer to the person who fills out the account opening paperwork or who provides the required information to set up an account, unless such person is also the account holder.
The Financial Crimes Enforcement Network (FinCEN) has also determined that, for CIP purposes, a fully-disclosed introduced account is not a customer of the clearing firm – as long as the firms enter into a clearing agreement where the functions of opening and approving customer accounts, and of directly receiving and accepting orders from the introduced customer, are allocated exclusively to the introducing firm; and, as long as the functions of extending credit, safeguarding funds and securities, and issuing confirmations and statements are allocated to the clearing firm. However, a clearing firm must still do due diligence in identifying, monitoring, and reporting suspicious activities of its introducing brokers and introduced accounts.
The CIP rule does not include persons with trading authority over accounts in the definition of “customer.” Accordingly, the broker-dealer does not have to verify those individuals’ identities. However, FINRA Rule 4512(a)(1)(E) states that if the customer is a corporation, partnership or other legal entity, the names of any persons authorized to transact business on behalf of the entity must be obtained.