Proposed Adoption of Interpretive Notice
Regarding FCM And IB Anti-Money Laundering Program
(to read as follows)
INTERPRETIVE NOTICE
NFA COMPLIANCE RULE 2-9:
FCM AND IB ANTI-MONEY LAUNDERING PROGRAM
NFA's Board of Directors recently adopted NFA Compliance Rule 2-9(c) to impose these requirements on NFA Member FCMs and IBs.4 NFA recognizes, of course, that the exact form of program adopted by a Member will vary based on a Member's type of business, the size and complexity of its operations, the breadth and scope of its customer base, the number of firm employees and the firm's resources. Nevertheless, the Board believes that certain minimum standards must be a part of any adequate program. The purpose of this interpretive notice ("Notice") is to highlight those minimum standards and provide Members with additional guidance on satisfying the requirements of Compliance Rule 2-9(c). Members must be aware, however, that the laws in this area are changing rapidly and that they need to conduct a regular review of their anti-money laundering program to ensure that the program is in compliance with any subsequent changes to the federal law or NFA Rules.
Many of the procedures discussed in the Notice are practices that firms may already employ in their businesses. In particular, bank or bank holding company-owned FCMs or IBs are already required to comply with certain components of the anti-money laundering programs of the banks. FCMs may also have procedures in place related to deposits of cash or cash-like instruments and procedures to obtain identifying information on customers. FCMs and IBs should use their existing programs and procedures as the building blocks for their anti-money laundering compliance programs. Moreover, FCMs and IBs that are registered as broker-dealers under the federal securities laws are subject to similar anti-money laundering requirements. In most cases, programs that comply with requirements applicable to the securities industry will comply with the requirements of this Notice.
Money laundering occurs when funds from an illegal/criminal activity are moved through the financial system in such a way as to make it appear that the funds have come from legitimate sources. Money laundering usually follows three stages. First, cash or cash equivalents are placed into the financial system. Second, the money is transferred or moved to other accounts (e.g. futures accounts) through a series of financial transactions designed to obscure the origin of the money (e.g. executing trades with little or no financial risk or transferring account balances to other accounts). Finally, the funds are reintroduced into the economy so that the funds appear to have come from legitimate sources (e.g. closing a futures account and transferring the funds to a bank account). Trading accounts that are carried by FCMs are one vehicle that can be used to launder illicit funds. In particular, a trading account could be used to execute financial transactions that help obscure the origin of the funds. FCMs and IBs need to be aware of potential money laundering abuses that could occur in a customer account and implement a compliance program to deter, detect and report potentially suspicious activity.
The starting point is for an FCM and IB to adopt a policy statement that clearly outlines the firm's policy against money laundering and its commitment to follow all applicable laws and regulations to ensure that its business is not used to facilitate money laundering. The policy statement should also make clear that all employees of the firm have a responsibility to follow the firm's written anti-money laundering procedures and controls, and to abide by all applicable laws and regulations involving anti-money laundering programs. The policy statement also should discuss the consequences of not following these procedures. The firm's procedures and controls should enable personnel to recognize suspicious customers and transactions; require them to report suspicious or unusual activity to appropriate supervisory personnel, including senior management; and ensure that the firm maintains an adequate audit trail to assist law enforcement agencies in any investigation. The key components of these policies, procedures and controls are discussed below.
Although the types of reliable information/documentation a firm should require before opening an account will vary based on, among other things, the nature of the business of the FCM or IB and the type of customer (e.g. corporation, trust, individual, etc.), the ultimate goal in obtaining this information should be to learn the true identity of the customer; the nature of the customer's business; and the intended purpose of the customer's transactions.
Therefore, a firm should obtain certain minimum information. For all customers, a firm should obtain the customer's name and address and for non-natural persons, the customer's principal place of business. For an account of a U.S. person, a firm should obtain the customer's social security number or taxpayer identification number. For an account of a natural person that is not a U.S. person, a firm should obtain a current passport or other valid government identification document. Firm procedures should require that firm personnel obtain and maintain copies of any documents used to identify and verify the customer's identity and maintain those records in accordance with firm procedures and regulatory requirements.6
A firm's procedures should also include a mechanism to identify potentially high-risk accounts in the account opening process and devote additional resources to monitoring these accounts. Although attempts to launder money can come from numerous sources, FCMs and IBs should be aware that certain types of entities or entities from certain geographic locations are more vulnerable to money laundering. FCMs and/or IBs should consult government generated lists of high risk countries, restricted countries that are subject to sanctions by the Office of Foreign Assets and Control ("OFAC") and non-cooperative jurisdictions to determine whether a customer seeking to open an account is from one of those jurisdictions.7 If the customer is from one of the identified restricted, high risk or non-cooperative jurisdictions, the FCM and/or IB needs to determine what, if any, additional due diligence is necessary in deciding whether to accept the account and if the account is accepted, what, if any, additional monitoring of account activity is appropriate. OFAC also maintains a list of Specially Designated Nationals and Blocked Persons that identifies known or suspected terrorists or terrorist organizations. If the customer's name appears on this list, the firm needs to immediately report this to federal law enforcement.8
An FCM may carry and an IB may introduce accounts for other intermediated accounts, such as omnibus accounts and accounts for commodity pools and other collective investment vehicles. Traditionally, with respect to such intermediated accounts, the FCM or IB will have little or no contact with the underlying participants or beneficiaries. In general, the FCM and IB would be responsible for a risk-based analysis of the money laundering risks posed by the intermediary and the pool or other collective investment vehicle.9 In most instances, this risk-based analysis will result in the FCM or IB not having to conduct due diligence with respect to the underlying participants or beneficiaries.
FCMs may also carry accounts introduced or referred by a regulated intermediary located in a foreign jurisdiction. In those instances, the FCM must make a risk-based determination whether it can rely on the foreign intermediary's due diligence with respect to its customer. Some factors to consider in making this determination include whether the foreign intermediary is located in a FATF member jurisdiction; the FCM's historical experience with the foreign intermediary; and the intermediary's reputation in the investment business.
FCMs also execute transactions on a give-up basis, where the broker executing the trade has little or no contact with the underlying customer. The executing and carrying FCMs would be responsible for conducting a risk-based analysis of the money laundering risks posed by the transactions. In the vast majority of instances, this risk-based analysis will result in the FCM that carries the account being responsible for carrying out the customer identification and verification procedures.
For some firms, appropriate manual monitoring of transactions in excess of a certain dollar amount may constitute acceptable review for suspicious transactions, while other firms may need to implement an automated monitoring process. Although in some instances the carrying FCM may be in the best position to monitor accounts for suspicious transactions, an FCM or IB that is involved in the order flow process should be alert to suspicious transactions and, where appropriate, refuse to accept a suspicious order and report such suspicious activity to the carrying FCM and its DSRO.10
Examples of suspicious transactions are those that have no business or apparent lawful purpose, are unusual for the customer, or lack any reasonable explanation. As discussed above, recognizing suspicious transactions requires familiarity with the firm's customers, including the customer's business practices, trading activity and patterns. What constitutes a suspicious transaction will vary depending on factors such as the identity of the customer and the nature of the particular transaction.
Since suspicious transactions may occur at the time an account is opened or at any time throughout the life of an account, FCMs and IBs must train appropriate staff to monitor trading activity in order to detect unusual behavior. Identifying suspicious activity may prove difficult and often requires subjective evaluation because the activity may be consistent with lawful transactions.
One area that firms should give heightened scrutiny is wire transfer activity. Monitoring of this area should include review of unusual wire transfers, including those that involve an unexpected or extensive number of transfers by a particular account during a particular period and transfers involving certain countries identified as high risk or non-cooperative.11
Firms should provide employees with examples of behavior or activity that should raise a "red flag" and cause further inquiry. These "red flags" may alert employees to possible suspicious activity. Some examples of "red flags" that could cause further investigation include:12
Monitoring accounts for suspicious activities is a fruitless activity without timely and effective follow-up and investigative procedures. Although the internal structure for reporting suspicious activities will vary from firm to firm, each firm's compliance program must require employees to promptly notify identified firm personnel of any potential suspicious activity. Appropriate supervisory personnel must evaluate the activity and decide whether the activity warrants reporting to its DSRO or FinCEN.14 In making this determination, an IB should consult with its carrying FCM.
NFA Compliance Rule 2-9(c) also requires that a Member firm designate an individual or individuals to oversee the anti-money laundering program. This person may be the compliance officer that is responsible for other compliance areas of the firm. Although the compliance officer need not be a designated principal or Associate Member, the person should ultimately report to the firm's senior management.
The firm must provide this compliance officer with sufficient authority and resources to effectively implement the firm's anti-money laundering program. Among other duties with respect to suspicious activity reporting, this person should:
Obviously, the person responsible for overseeing the anti-money laundering procedures should not be the same employee responsible for the functional areas where money-laundering activity may occur.
Another important component of NFA Compliance Rule 2-9(c) is the requirement that FCM and IB Members provide ongoing education and training for all appropriate personnel. This training program should include annual training on the firm's policies and procedures, the relevant federal laws and NFA guidance issued in this area. Firms should also maintain records to evidence their compliance with this requirement.
NFA Compliance Rule 2-9(c) also requires that an FCM and IB Member provide for annual independent testing of the adequacy of its money laundering compliance program. A firm can satisfy this requirement with its own personnel (such as an internal audit staff) that is independent of the personnel working in the areas that are exposed to potential money laundering or by hiring an outside party with experience with this type of auditing.15 In either circumstance, the audit function should test all affected areas to ensure that personnel understand and are complying with the anti-money laundering policies and procedures and that these policies and procedures are adequate. The results of any audit should be documented and reported to the firm's senior management or an internal audit committee or department, and follow up should be done to ensure that any deficiencies in the firm's anti-money laundering program are addressed and corrected.
Money-laundering schemes in the financial services industry lessen the public's faith in the integrity of the system. Therefore, NFA Members must ensure that they take adequate steps to identify and verify the identity of their customers and to detect, deter and report suspicious transactions that could be part of a money-laundering scheme. The guidelines set forth in this Notice should provide FCMs and IBs with the tools needed to develop an effective anti-money laundering program. Member firms should keep in mind, however, that this is an evolving area and NFA expects to provide further guidance as additional requirements in this area are imposed.
