Body of Knowledge

The USA PATRIOT Act and Bank Secrecy Act together provide a framework for the anti-money laundering (AML) obligations of broker-dealers, mutual funds and investment advisers. In addition, these firms are responsible for compliance with the Office of Foreign Assets Control (OFAC) maintained sanctions programs.

The readings and course materials are designed to familiarize candidates with the requirements of the Bank Secrecy Act, as amended by the USA PATRIOT Act, and the regulations thereunder (the BSA) with respect to broker-dealers, mutual funds and investment advisers. In general, the readings cover the following AML topics:  AML programs, customer identification programs,  special due diligence for correspondent and private banking accounts, suspicious activity reporting, requests for information by United States Department of the Treasury’s  Financial Crimes Enforcement Network (FinCEN) and from other financial institutions and cash reporting.  The readings also cover SEC staff, NASD and FinCEN guidance on these matters.  In addition, the readings provide a general overview of the OFAC maintained sanctions programs and their applicability to broker-dealers, mutual funds, and investment advisers.

 

Readings

1. “Final Rule, Customer Identification Programs for Broker-Dealers,” SEC Release No. 34-47752 (April 28, 2003)  
2. NASD Rule 3011  
3. NASD Notice to Members 02-21 tab500
4. NASD Notice to Members 03-34  
5. NASD Anti-Money Laundering Frequently Asked Questions (3/3/04), items 41 - 50  
6. NASD, Updated Small Firm Template, Anti-Money Laundering (AML) Program: Compliance and Supervisory Procedures, pp 2 - 5; 12 - 26  
7. SIA, Anti-Money Laundering Committee, “Suggested Practices for Customer Identification Programs”, pp. 9 - 30  
8. Requirements that Brokers or Dealers in Securities Report Suspicious Transactions, 67 FR 44048 (July 1, 2002)  
9. NASD Notice to Members 02-47  
10. Anti-Money Laundering Programs for Mutual Funds, 67 FR 21121 (Apr. 29, 2002)  
11. Customer Identification Programs for Mutual Funds, 68 FR 25147 (May 9, 2003)  
12. “Questions and Answers Regarding the Mutual Fund Customer Identification Program Rule,” (Aug. 11, 2003)  
13. Special Due Diligence Programs for Certain Foreign Accounts, 71 FR 496 (Jan. 4, 2006)  

14.

  “Application of the Regulations Regarding Special Due Diligence Programs for Certain Foreign Accounts to NSCC Fund/SERV Accounts,” FIN-2006-G008 (May 3, 2006)  
15. Requirement that Mutual Funds Report Suspicious Transactions, 71 FR 26213 (May 4, 2006)  
16. “Frequently Asked Questions:  Suspicious Activity Reporting Requirements for Mutual Funds,” FIN-2006-G013 (Oct. 4, 2006)  
17. Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity, 67 FR 60585 (Sept. 26, 2002)  
18. Reports Relating to Currency in Excess of $10,000 Received in a Trade or Business, 66 FR 67681 (Dec. 31, 2001)  
19. FinCEN’s Proposed Rule, “Anti-Money Laundering Programs for Investment Advisers,” 68 Fed. Reg. 23646 (May 5, 2003)  
20. SEC Staff No-Action Letter (Feb. 12, 2004); OFAC Frequently Asked Questions #1-- #24 SEC Staff No-Action ofac
21. Bank Secrecy Act Exam Manual, OFAC Overview, pages 135-143  

 

Learning Objective

The candidate should be able to explain how the requirements that AML policies and procedures be based on the significant compliance risks facing the firm and that policies and procedures that be reasonably designed to ensure compliance affect the firm’s compliance programs.

The candidate should also be able to demonstrate a thorough knowledge of the Bank Secrecy Act and related rules, regulations and procedures as they apply to broker-dealers, mutual funds, and investment advisers and be able to:

  • design an AML program, including policies and procedures,
  • design a program for verifying the identity of the firm’s customers,
  • describe appropriate due diligence for correspondent and private banking accounts,
  • monitor for “red flags” related to money laundering or suspicious activities and file suspicious activity reports as required,
  • respond to requests for information from FinCEN (314(a) requests) or share AML related information with other financial institutions and
  • monitor cash transactions and file reports as required.
The candidate should also be able to demonstrate a general understanding of the OFAC sanctions programs as they apply to broker-dealers, mutual funds, and investment advisers.

Learning Outcomes

Broker-Dealer Regulation

Anti-Money Laundering

NASD Rule 3011 and NASD Notice to Members 02-21

After reading these documents, the candidate should be able to:

  • explain how a firm’s AML program should incorporate a risk-based approach that is reasonable designed to detect and report suspicious activity
  • define money laundering
  • list the five minimum requirements of a written AML program
  • identify sample “red flags” for identification of suspicious transactions
  • list the circumstances under which broker-dealers would be required to file Suspicious Activity Reports with FinCEN
  • describe how to respond to requests for information from FinCen
  • list and explain the four duties of the AML Compliance Officer
  • list and describe the topics that should be addressed, at a minimum, in the required training programs on AML issues
  • discuss the role and frequency of an independent testing function for AML compliance

Customer Identification Program (CIP)

"Final Rule, Customer Identification Programs for Broker-Dealers," SEC Release No. 34-47752 (April 28, 2003), implements Section 326 of the USA Patriot Act (pages 1 through 20)

“NASD Notice to Members 03-34”

“NASD Anti-Money Laundering Frequently Asked Questions” (items 41 – 50) reinforces NTM 03-34.

After reading these documents, the candidate should be able to:

  • describe how a firm’s CIP program should incorporate a risk-based approach that is reasonably designed to achieve and monitor compliance with applicable requirements and regulations
  • define account, customer, financial institution, identifying information, and US person as they are used in the Rule
  • list the six the minimum requirements of a written CIP
  • list the customer information that is required to be collected
  • compare documentary with non-documentary means of verification and their recordkeeping requirements
  • describe the circumstances under which the CIP may rely on the performance of another financial institution
  • list and discuss concerns when a firm relies on another financial institution to meet some of its CIP obligations and that financial institution does not qualify for the safe harbor provision
  • explain what the Rule requires regarding the need to check government lists

"Suggested Practices for Customer Identification Programs,” pp. 9 - 30

After reading this document, the candidate should be able to:

  • discuss and differentiate between CIP requirements as they pertain to closely held operating entities; non-operating entities; informal groups; trusts; estates; charitable organizations; unregistered investment companies; omnibus accounts; and high risk accounts

“Updated Small Firm Template, Anti-Money Laundering (AML) Program: Compliance and Supervisory Procedures,” pp 2 - 5; 12 - 26

After reading this document, the candidate should be able to:

  • critique policies designed to address FinCen requests, use of the OFAC list, customer identification and verification, foreign correspondent accounts private banking accounts, monitoring for suspicious activity, record keeping, clearing relationships, training, testing, and employee monitoring
  • discuss how the applicability of such policies might vary based on the characteristics of the firm

Suspicious Activity Reporting

Requirements that Brokers or Dealers in Securities Report Suspicious Transactions; NASD NTM 02-47

After reading these documents, the candidate should be able to:

  • discuss the four categories of transactions that require the filing of a suspicious activity report by a Broker-Dealer
  • describe how Broker-Dealers should use a risk-based approach in monitoring for suspicious transactions
  • summarize the timing for filing a suspicious activity report
  • explain what is meant by patterns of transactions that require filing a suspicious activity report
  • list the exceptions from reporting suspicious activities
  • explain when it would be appropriate to release information in an SAR-SF to other parties such as the person involved in the transaction or another Broker-Dealer
  • state the record keeping requirement for SAR-SF

Note: Although these readings refer to SAR-BD, the current form is SAR-SF

Mutual Fund (Investment Company) Regulation

Most of the AML rules apply equally to broker-dealers and mutual funds.  These rules have not, as yet, been applied to investment advisers.  Consult the investment adviser regulation section below for more information.

Anti-Money Laundering

 “Anti-Money Laundering Programs for Mutual Funds, 67 FR 21117 (Apr. 29, 2002)”

After reading this document, candidates should be able to:

  • explain how a fund’s AML program should incorporate a risk-based approach that is reasonably designed to achieve and monitor compliance with applicable requirements and regulations
  • identify the four basic requirements for a mutual fund’s AML program
  • discuss examples of “red flags” that may indicate potential money laundering in a mutual fund
  • discuss the concept of delegation and the requirements applicable to the delegation of AML duties to a third party
  • explain what approvals are necessary for adopting and implementing a mutual fund’s AML program
  • describe the purpose and focus of AML training
  • explain the independent testing requirement for AML programs
  • explain the role of the AML compliance officer
  • discuss the concept of a “look-through” and identify when it is necessary to look at the underlying beneficiary of an account.

Customer Identification Program (CIP)

“Customer Identification Programs for Mutual Funds, 68 FR 25147 (May 9, 2003)”

After reading this document, candidates should be able to:

  • define the terms account and customer as used in the Final Rule
  • identify the five minimum requirements of a customer identification program
  • identify the customer information that must be collected prior to opening an account
  • contrast verification of a customer’s identity through documentary and non-documentary means
  • explain the procedures a customer identification program must have to address “high risk” customers and situations in which the mutual fund cannot “form a reasonable belief that it knows the true identity of a customer.”
  • identify the record keeping requirements for a customer identification program
  • identify the customer notice requirements
  • explain the difference between “delegation” and “reliance” and the requirements that must be met for relying on another financial institution to carry out the fund’s customer identification program

“Questions and Answers Regarding the Mutual Fund Customer Identification Program Rule,” (Aug. 11, 2003)

After reading this document, candidates should be able to:

  • describe the treatment of accounts opened through NSCC Fund/SERV for purposes of a mutual fund’s customer identification program
  • discuss the SEC staff’s position regarding whether a mutual fund may close the account and redeem the shares of an investor whose identity the fund is unable to verify within a reasonable time after the opening of the account

Suspicious Activity Reporting

“Requirement that Mutual Funds Report Suspicious Transactions,” “Frequently Asked Questions: Suspicious Activity Reporting Requirements for Mutual Funds”

After reading these documents, candidates should be able to:

  • discuss the four categories of transactions that require the filing of a suspicious activity report
  • explain when it would be appropriate to file a joint suspicious activity report with another financial institution
  • summarize the timing for filing a suspicious activity report
  • discuss “red flags” that may indicate the need to file a suspicious activity report and situations that require mandatory notification of law enforcement in addition to filing a suspicious activity report
  • summarize the record keeping requirements for suspicious activity reports
  • explain when it would be appropriate to disclose information relating to a suspicious activity report
  • describe the type and source of information a mutual fund should use to determine whether a suspicious activity report is required
  • explain how a mutual fund should determine what constitutes a “suspicious activity”
  • state whether a fund may satisfy its reporting obligations through a service provider and explain the responsibility of the oversight responsibility of the fund over such service providers
  • identify the regulatory agency responsibility for suspicious activity reporting and BSA compliance examination

Special Due Diligence for Correspondent and Private Banking Accounts

“Special Due Diligence Programs for Certain Foreign Accounts"

After reading this document, candidates should be able to:

  • define the terms “correspondent account,” “private banking account,” “senior foreign political figure” and “foreign financial institution” as used in the Rule
  • describe the minimum due diligence program considerations for private banking accounts (due diligence programs for correspondent accounts for foreign financial institutions are required to be risk-based and reasonably designed to detect and report money laundering)
  • identify and describe relevant risk factors posed by correspondent accounts for foreign financial institutions
  • describe the minimum due diligence program requirements for private banking accounts (due diligence programs for private banking accounts are required to be risk-based and reasonably designed to detect and report money laundering) 

“Application of the Regulations Regarding Special Due Diligence Programs for Certain Foreign Accounts to NSCC Fund/SERV Accounts"

After reading this document, candidates should be able to:

  • discuss the treatment of accounts opened through NSCC Fund/SERV for purposes of correspondent account due diligence

Information Sharing Procedures

 “Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity”

After reading this document, candidates should be able to:

  • contrast information sharing with FinCEN with information sharing with other financial institutions
  • explain the process for responding to a request for information from FinCEN (a 314(a) request). (Knowledge and Guidance)
  • describe the process for voluntarily sharing information with other financial institutions for the purpose of identifying money laundering or terrorist financing
  • explain how firms qualify for the safe harbor for information sharing between financial institutions for the purpose of identifying money laundering or terrorist financing.  (Knowledge and Guidance)

Cash Transaction Reporting

“Reports Relating to Currency in Excess of $10,000 Received in a Trade or Business"

After reading this document, candidates should be able to:

  • define the term “currency” for purposes of cash reporting
  • summarize when and under what circumstances a firm must report the receipt of currency

Investment Adviser Regulation

The 2003 proposed AML rule for investment advisers has not been approved as of the date of this publication.  When investment advisers and broker-dealers collaborate, however, broker-dealers often require the investment adviser to have an AML program on which the broker-dealer can rely.  This proposed rule has become, therefore, a de facto standard for investment advisers.

“Anti-Money Laundering Programs for Investment Advisers”

After reading this document, candidates should be able to:

  • list and describe the elements of anti-money laundering program for investment advisers, under the proposed rule

SEC Staff No-Action Letter

After reading this document, candidates should be able to:

  • describe when broker-dealers may be permitted to rely on investment advisers under the SEC’s no-action letter

Office of Foreign Assets Control

“OFAC Frequently Asked Questions #1-- #24”

After reading this document, candidates should be able to:

  • explain what OFAC does
  • define prohibited transactions
  • explain what is meant by a hit or match
  • describe what the firm should do if it has an OFAC match

“Bank Secrecy Act Exam Manual, OFAC Overview,” pages 135-143

After reading this document, candidates should be able to:

  • identify products, services, customers, and geographic locations that may carry a higher level of OFAC risk
  • assess whether an investment adviser needs to implement an OFAC compliance program and whether such a program requires the use of interdiction software