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 regulators’ 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 garageband for windowsarea that is often overlooked in such compliance preparation is the Anti-Money Laundering (“AML”) / Customer Identification Program (“CIP”) 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-dealer’s CIP requirement is triggered when it has a new “customer,” which is a person that opens a “new account.” And, an “account” is a “formal” relationship with a broker-dealer established to effect securities transactions.
This taken into account, the SEC views the concept of “effecting securities transactions” very generally in nature. Further, industry recommendations on CIP processes and procedures note that the definition of an “account” contemplates various types of “non-account” 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 customer‘s identity.
So, how does a firm and its registered reps confirm their customers’ identities? The simplest way is through standard means; such as a driver’s 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 “customer” and “account” 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 firm’s AML/CIP responsibilities and the appropriate actions to be undertaken.
