Customer Identification Programs
The BSA (31 USC § 5318(l)) required Treasury to issue regulations setting forth minimum standards for financial institutions to identify and verify the true identity of customers.
Treasury, FinCEN and the CFTC jointly issued regulation 31 CFR §1026.220 that requires FCMs and IBs to have customer identification programs (CIPs) for identifying and verifying the true identity of customers. A FCM's or IB's written policies and procedures must enable it to form a reasonable belief that it knows the true identity of each customer.
The CIP regulation permits FCMs and IBs to rely on other financial institutions to perform identification/verification functions if the following conditions are met:
- The reliance is reasonable under the circumstances;
- The relied-upon financial institution is subject to an AML program regulation under the BSA and is regulated by a Federal functional regulator; and
- The relied-upon financial institution enters into a contract requiring it to certify annually to the FCM or IB that it has implemented an AML program and that it will perform specified requirements of the CIP.
Pursuant to a CFTC no-action letter issued on March 14, 2005, FCMs and IBs may rely upon certain commodity trading advisors (CTAs) to perform the required CIP procedures even though CTAs are not yet subject to AML program regulation. However, all of the other requirements in the regulation must be met:
(1) The reliance must be reasonable under the circumstances;
(2) The CTA must be regulated by a Federal functional regulator; and
(3) The CTA must enter into a contract requiring it to certify annually to the FCM or IB that it has implemented an AML Program, and that it will perform specified requirements of the CIP
The CIP regulation requires that FCMs and IBs have written policies and procedures for checking customer's names against lists of known or suspected terrorists or terrorist organizations that are prepared by any federal agency and made available to the institution. Although no lists have been designated, financial institutions, including FCMs and IBs, are separately required to comply with the requirements of the Office of Foreign Assets and Control, discussed below.
On June 14, 2004, the staff of the CFTC, FinCEN and Treasury jointly issued guidance, in question-and-answer format, regarding the application of the CIP regulation for FCMs and IBs. This guidance covered topics that were not addressed by the CIP regulation.
One important area of staff guidance addressed the situation where an omnibus account or sub-account or relationship is established by or on behalf of a financial intermediary for the purposes of executing transactions that clear or settle at another financial institution. On February 14, 2006, the staff of the CFTC and FinCEN issued guidance that clarified that if the financial intermediary is the account holder, the intermediary can be treated as the customer for the purposes of the CIP regulation. A FCM is not required to look through the intermediary to the underlying beneficiaries.
Another important area of staff guidance addressed the CIP requirements applicable to FCMs engaged in give-up transactions. On April 20, 2007, the staff of the CFTC and FinCEN issued guidance that clarified that a FCM acting solely as an executing broker in a give-up arrangement is not required to apply its CIP procedures to a customer engaged in a give-up transaction. Conversely, a FCM acting as a clearing broker is required to apply its CIP procedures to a customer engaged in a give-up transaction.