[Continued from Customer Identification Program (CIP): Common Questions – Part I]

What Is A “Reasonable Time” To Verify Customers’ Identities?

A customer’s identity must be verified within a “reasonable time” before or after the customer’s account is opened. The rule does not specify what counts as a “reasonable time,” and the Adopting Release for the Broker-Dealer CIP Rule emphasizes that broker-dealers must be reasonably flexible when undertaking such verification. The broker-dealer must be able to undertake verification before or after an account if opened, as the amount of time needed may depend on various factors, which is part of the firm’s risk assessment.  A firm’s CIP procedures must enable the broker-dealer to form a reasonable belief that it knows the true identity of each customer.

Broker-dealers are generally not required to look at the beneficiaries of a trust or similar account – they must only verify the identity of the named account holder. Broker-dealers are also generally not required to look at the beneficial owners of an omnibus account that was established by an intermediary, as long as the intermediary is identified as the account holder. However, AML compliance programs are risk-based: if an account if determined to be higher risk, more information may be required, even from beneficiaries of trust or omnibus accounts.

Can Some Elements of a Firm’s CIP be Outsourced?

A firm may be able to rely on another financial institution for some or all of the parts of the firm’s CIP. A firm’s CIP procedures may specify when the broker-dealer will rely on another financial institution (including an affiliate) to perform any procedures of the broker-dealer’s CIP; this specification must be in respect to a customer of the broker-dealer that is opening or has established an account (or similar business relationship) with the other financial institution to provide services, dealings, or other financial transactions.

To rely on another financial institution, the following criteria must be met:

  • The broker-dealer must establish that the reliance is reasonable under the circumstances.
  • The other financial institution must implement the AML compliance program requirements established by the BSA, as well as being regulated by a Federal functional regulator.
  • The other financial institution must contractually agree to annually certify to the broker-dealer that they have implemented their own AML program and that they are performing (or are having an agent perform) any specific requirements of the broker-dealer’s CIP.

It is imperative to note, if a broker-dealer does not provide a standard means of documenting the amount that it is relying on another financial institution to perform its CIP, the broker-dealer will remain solely responsible for any failure of the other financial institution to adequately fulfill the broker-dealer’s CIP responsibilities.

For more information on AML compliance programs as a whole, please see our other blogs on the subject. For more information about customer identification programs specifically, please go here instead.