In our previous post on customer identification programs, “Customer Identification Program (CIP): Definitions and Requirements,” we defined “account” and “customer” and went over the minimum requirements for CIP procedures and verification, including touching on non-documentary means of identity verification. This post will get a little more specific, addressing common questions firms have when developing and implementing their customer identification programs.

Do Certain Customers Require Additional Verification?

The CIP rule contains a provision regarding additional verification for certain customers. The Adopting Release explains that, while firms may typically be able to verify customers adequately through documentary and non-documentary methods, there may be instances where those methods are inadequate.

The risk that a firm may not know a customer’s true identity may be heightened by certain types of accounts, such as an online account or an account opened in the name of a corporation, partnership, or trust that is created or conducts substantial business in a jurisdiction that has been designated by the U.S. as a primary money laundering concern, or that has been designated by an international body as non-cooperative or a tax haven.

The U.S. Department of Treasury (the “Treasury”) and the U.S. Securities and Exchange Commission (SEC) emphasize that a firm must take additional steps to identify customers who pose a heightened risk of not being properly identified. Thus, a firm’s CIP must include additional measures that may be used to obtain supplementary information about the identity of the individuals associated with the customer when standard documentary methods prove to be insufficient. For example, if a new account is opened by a customer that is not an individual, and the broker-dealer cannot verify the customer’s identity using documentary and non-documentary methods, the broker-dealer should obtain and verify information about individuals with authority or control over such account.

Additionally, broker-dealers should consider their procedures for obtaining additional information concerning the beneficial owners of higher risk accounts.

Is the CIP Affected by Account Type?

Certain accounts or account types, such as online accounts, may have a heightened CIP risk associated with them. A firm must take additional steps to collect information about customers that pose a heightened risk of not being properly identified. The additional measures used to obtain information when standard documentation is insufficient must be documented in the broker-dealer’s customer identification program and maintained within the firm’s books and records. Firms must also consider the logical consistency of all accounts – is there consistency between the information provided?

Should Firms Collect Account Funding Information?

Except in the case of private banking accounts, there isn’t a specific regulation requiring member firms to collect information regarding the source of account funding. That being taken into account, a firm may decide to document the source of funding as a part of due diligence for a general account based on the account’s assessed risk level. Private banking accounts for non-U.S. personas are defined in the BSA as accounts with a minimum aggregate account deposit of $1 million and with a liaison assigned to the account. For such accounts, the member firm must determine the source of funds for the account and the expected use of the account.

[Continued in Customer Identification Program (CIP): Common Questions – Part II]