24 July 2002
Source:
http://www.access.gpo.gov/su_docs/aces/fr-cont.html
Federal Register
Vol. 67, No. 141
Tuesday, July 23, 2002
PROPOSED RULES
Currency and foreign transactions; financial reporting and recordkeeping requirements:
USA PATRIOT Act; implementation—
Commodity Futures Trading Commission; Treasury DepartmentFutures commission merchants and introducing brokers; customer identification programsFederal Deposit Insurance Corporation; Federal Reserve System; National Credit Union Administration; Treasury Department; Treasury Department, Comptroller of the Currency; Treasury Department, Thrift Supervision Office
Banks, savings associations, and credit unions; customer identification programsSecurities and Exchange Commission; Treasury Department
Broker-dealers; customer identification programsMutual funds; customer identification programsTreasury Department
Banks, credit unions, and trust companies that do not have Federal functional regulator; customer identification programs
RULES
Currency and foreign transactions; financial reporting and recordkeeping requirements:
USA PATRIOT Act; implementation—
Treasury DepartmentAnti-money laundering programs for certain foreign accounts; due diligence policies, procedures, and controls
[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48328-48338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-704]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AB90
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA34
Customer Identification Programs for Futures Commission Merchants
and Introducing Brokers
AGENCIES: Financial Crimes Enforcement Network, Treasury; United States
Commodity Futures Trading Commission.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: Treasury, through the Financial Crimes Enforcement Network
(FinCEN), and the United States Commodity Futures Trading Commission
(CFTC or Commission) are jointly issuing a proposed regulation to
implement section 326 of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA PATRIOT) Act of 2001 (the Act). Section 326 of the Act
requires Treasury to jointly prescribe with the CFTC a regulation that,
at a minimum, requires
[[Page 48329]]
futures commission merchants and introducing brokers to implement
reasonable procedures to verify the identity of any person seeking to
open an account, to the extent reasonable and practicable, maintain
records of the information used to verify the person's identity, and
determine whether the person appears on any lists of known or suspected
terrorists or terrorist organizations provided to the futures
commission merchant or introducing broker by any government agency.
DATES: Written comments on the proposed rule may be submitted on or
before September 6, 2002.
ADDRESSES: Because paper mail in the Washington, DC area may be subject
to delay, commenters are encouraged to e-mail or fax comments. Comments
should be sent by one method only. Futures commission merchants and
introducing brokers (and their respective trade associations) are
encouraged to submit comments only to the CFTC. Other commenters are
encouraged to submit comments only to FinCEN. All comments will be
considered by Treasury and the CFTC in formulating the final rule.
CFTC: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, Attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521, or by e-mail to
secretary@cftc.gov. Reference should be made to ``Proposed Section 326
Rule `` Customer Identification.''
FinCEN: Comments may be mailed to FinCEN, Section 326 Futures
Industry Comments, PO Box 39, Vienna, VA 22183, or sent to Internet
address regcomments@fincen.treas.gov with the caption ``Attention:
Section 326 Futures Industry Rule Comments'' in the body of the text.
Comments may be inspected at FinCEN between 10 a.m. and 4 p.m. in the
FinCEN Reading Room in Washington, DC. Persons wishing to inspect the
comments submitted must request an appointment by telephoning (202)
354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT:
CFTC: Office of the General Counsel, (202) 418-5120, Commodity
Futures Trading Commission, 1155 21st Street, NW., Washington, DC
20581.
Treasury: Office of the Chief Counsel (FinCEN), (703) 905-3590;
Office of the Assistant General Counsel for Enforcement (Treasury),
(202) 622-1927; or the Office of the Assistant General Counsel for
Banking & Finance (Treasury), (202) 622-0480.
SUPPLEMENTARY INFORMATION:
I. Background
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the USA PATRIOT
Act.\1\ Title III of the Act, captioned ``International Money
Laundering Abatement and Anti-terrorist Financing Act of 2001,'' adds
several new provisions to the Bank Secrecy Act (BSA), 31 U.S.C. 5311 et
seq. These provisions are intended to facilitate the prevention,
detection, and prosecution of international money laundering and the
financing of terrorism.
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\1\ Pub. L. 107-56.
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Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318
that requires the Secretary of the Treasury (Secretary) to prescribe
regulations setting forth minimum standards for financial institutions
and their customers regarding the identity of the customer that shall
apply in connection with the opening of an account at the financial
institution.
Section 326 applies to all ``financial institutions.'' This term is
defined very broadly in the BSA to encompass a variety of entities
including banks, agencies and branches of foreign banks located in the
United States, thrifts, credit unions, brokers and dealers in
securities or commodities,\2\ futures commission merchants, insurance
companies, travel agents, pawnbrokers, check-cashers, casinos, and
telegraph companies, among many others. See 31 U.S.C. 5312(a)(2),
5312(c)(1)(A).
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\2\ Treasury has previously expressed the opinion that
introducing brokers are ``brokers or dealers in commodities'' and
therefore come within this definition of ``financial institution.''
See Financial Crimes Enforcement Network; Anti-Money Laundering
Programs For Financial Institutions, 67 FR 21110, 21111 n.5 (April
29, 2002) (citing 31 U.S.C. 5312 (a)(2)(h)). Nonetheless, Treasury
takes this opportunity to clarify formally that section 5312
(a)(2)(H) includes ``introducing brokers'' within the definition of
``financial institution.''
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For any financial institution engaged in financial activities
described in section 4(k) of the Bank Holding Company Act of 1956
(section 4(k) institutions), the Secretary is required to prescribe the
regulations issued under section 326 jointly with each of the CFTC, the
Securities and Exchange Commission (SEC), and the banking agencies,
namely, the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, and the National Credit
Union Administration (collectively referred to as the banking
agencies). Final regulations implementing section 326 must be effective
by October 25, 2002.
Section 326 provides that the regulations must require, at a
minimum, financial institutions to implement reasonable procedures for
(1) verifying the identity of any person seeking to open an account, to
the extent reasonable and practicable; (2) maintaining records of the
information used to verify the person's identity, including name,
address, and other identifying information; and (3) determining whether
the person's name appears on any lists of known or suspected terrorists
or terrorist organizations provided to the financial institution by any
government agency. In prescribing these regulations, the Secretary is
directed to take into consideration the various types of accounts
maintained by various types of financial institutions, the various
methods of opening accounts, and the various types of identifying
information available.
The following proposal is being issued jointly by Treasury, through
FinCEN, and the Commission. It applies only to persons registered, or
required to be registered, with the Commission as either futures
commission merchants or introducing brokers under the Commodity
Exchange Act (CEA) (7 U.S.C. 1 et seq.), except persons who register
pursuant to section 4f(a)(2) of the CEA. Accordingly, this rule does
not apply to persons who register, or are required to register, as
futures commission merchants or introducing brokers solely because they
effect transactions in security futures products. These section
4f(a)(2) futures commission merchants and introducing brokers must be
registered with the SEC as brokers or dealers, and they are therefore
the subject of rules issued jointly by Treasury and the SEC
implementing section 326. Regulations governing the applicability of
section 326 to other financial institutions, such as those regulated by
the banking agencies, are also the subject of separate regulations.
Treasury, the Commission, the SEC and the banking agencies
consulted extensively in the development of all rules implementing
section 326 of the Act. All of the participating agencies intend the
effect of the rules to be uniform throughout the financial services
industry.
The Secretary has determined that the records required to be kept
by section 326 of the Act have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, to protect against
international terrorism.
[[Page 48330]]
B. Codification of the Joint Proposed Rule
The substantive requirements of the joint proposed rule will be
codified with other Bank Secrecy Act regulations as part of Treasury's
regulations in 31 CFR part 103. To minimize potential confusion by
affected entities regarding the scope of the joint proposed rule, the
CFTC is also proposing to add a provision in its own regulations in 17
CFR part 1 that will cross-reference the regulations in 31 CFR part
103. Although no specific text is being proposed at this time, the
cross-reference will be included in a final rule published by the CFTC
concurrently with the joint final rule issued by Treasury and the CFTC
implementing section 326 of the Act.
II. Section-by-Section Analysis
A. Section 103.123(a) Definitions
Section 103.123 (a)(1) Account. The proposed rule's definition of
``account'' is intended to include all types of futures and commodity
option accounts maintained or introduced by futures commission
merchants and introducing brokers. These include, but are not limited
to: accounts to purchase or sell contracts of sale for future delivery,
options on contracts of sale for future delivery, or options on
physicals in any commodity; cash accounts; margin accounts; prime
brokerage accounts that consolidate trading done at a number of firms;
and accounts for repurchase and commodity loan transactions.
Section 103.123(a)(2) Commission. The proposed rule defines
``Commission'' as the United States Commodity Futures Trading
Commission.
Section 103.123(a)(3) Commodity. The proposed rule defines
``commodity'' as any good, article, service, right, or interest
described in Section 1a(4) of the Commodity Exchange Act, 7 U.S.C.
1a(4).
Section 103.123(a)(4) Customer. The proposed rule defines
``customer'' as any person who opens a new account at a futures
commission merchant or is granted authority to effect transactions with
respect to an account at a futures commission merchant. Where an
account is introduced to a futures commission merchant by an
introducing broker, a person opening the account or granted authority
to effect transactions with respect to the account is a customer of
both the futures commission merchant and the introducing broker.
Under this definition, a person who has an account at the futures
commission merchant prior to the effective date of the proposed rule
would not be a ``customer.'' However, such a person becomes a
``customer'' if the person opens a different account thereafter.
Moreover, a person becomes a ``customer'' each time they open a
different type of account at a futures commission merchant.
Similarly, an outside advisor with trading authority prior to the
effective date of the regulation is not a ``customer.'' However, such a
person being granted trading authority after the effective date is a
customer. This is true even if the person is granted authority with
respect to an account that existed prior to the effective date or the
person had been granted authority for another account prior to the
effective date.
The requirements of section 326 apply to ``customers'' (i.e.,
persons opening new accounts or certain persons being granted trading
authority), but do not apply to persons seeking information about an
account such as a schedule of transaction fees, if an account is not
opened. In addition, transfers of accounts from one futures commission
merchant to another that are not initiated by the customer, for example
as a result of a bankruptcy, merger, acquisition, or purchase of assets
or assumption of liabilities, fall outside of the scope of section 326,
and are not covered by the proposed rule.\3\
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\3\ However, there may be situations involving the transfer of
accounts where it would be appropriate for a futures commission
merchant to verify the identity of customers associated with the
accounts it is acquiring. Therefore, Treasury and the Commission
expect procedures for transfers of accounts to be part of a futrures
commission merchant's overall anti-money laundering program required
under section 352 of the USA PATRIOT Act.
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Section 103.123(a)(5) Futures Commission Merchant. The proposed
rule defines ``futures commission merchant'' as (and therefore applies
to) any persons registered, or required to be registered, with the
Commission as futures commission merchants under the CEA, except
persons who register, or are required to be registered, solely because
they effect transactions in security futures products. These latter
futures commission merchants, who register with the Commission pursuant
to section 4f(a)(2) of the CEA, will be subject to regulations issued
jointly by Treasury and the SEC implementing section 326.
Section 103.123(a)(6) Introducing Broker. The proposed rule defines
``introducing broker'' as (and therefore applies to) any persons
registered, or required to be registered, with the Commission as
introducing brokers under the CEA, except persons who register, or are
required to be registered, solely because they effect transactions in
security futures products. These latter introducing brokers, who
register with the Commission pursuant to section 4f(a)(2) of the CEA,
will be subject to regulations issued jointly by Treasury and the SEC
implementing section 326.
Section 103.123(a)(7) Option. The proposed rule defines ``option''
as an agreement, contract or transaction described in Section 1a(26) of
the Commodity Exchange Act, 7 U.S.C. 1a(26).
Section 103.123(a)(8) Person. The proposed rule defines ``person''
as having the same meaning as provided in section 103.11(z). Thus, the
term includes natural persons, corporations, partnerships, trusts or
estates, joint stock companies, associations, syndicates, joint
ventures, any unincorporated organizations or groups, Indian Tribes,
and all other entities cognizable as legal entities. This means that
any such entity will be considered a ``customer'' for the purposes of
this rule if, after the effective date, the person opens an account or
is granted trading authority with respect to an account.
Section 103.123(a)(9) U.S. person. The proposed rule defines ``U.S.
person'' because U.S. citizens and persons incorporated under U.S. laws
will be required to provide U.S. tax identification numbers whereas
other persons, who may not have a U.S. tax identification number, will
be required to provide other similar numbers. Thus, the rule defines
``U.S. person'' to mean a U.S. citizen or, for persons other than
natural persons, an entity established or organized under the laws of a
State or the United States. The terms ``State'' and ``United States''
are defined in sections 103.11(ss) and 103.11(nn), respectively. A non-
U.S. person is defined in Sec. 103.123(a)(10) as a person who does not
satisfy these criteria.
Section 103.123(a)(11) Taxpayer identification number. The proposed
rule provides that the provisions of Section 6109 of the Internal
Revenue Code and the regulations of the Internal Revenue Service
thereunder determine what constitutes a taxpayer identification number.
B. Section 103.123(b) Customer Identification Program
As indicated above, section 326 requires the Secretary and the
Commission to prescribe regulations requiring futures commission
merchants and introducing brokers to implement ``reasonable
procedures'' for: verifying the identity of customers ``to the extent
reasonable and practicable;'' maintaining records associated with
[[Page 48331]]
such verification; and consulting lists of known or suspected
terrorists or terrorist organizations. Paragraph (b) of the proposed
rule sets forth the requirement that futures commission merchants and
introducing brokers must develop and operate a customer identification
program (CIP).
Paragraph (b) also sets forth certain requirements that each CIP
must possess. These factors include the type of identifying information
available and six assessments based upon the business operations of the
futures commission merchant or introducing broker.
The first factor identified in paragraph (b) is the type of
identifying information available. Thus, in implementing and updating
their CIPs, futures commission merchants and introducing brokers should
consider the type of identifying information that customers can
provide. They should also consider the methods available to verify that
information, and should consider on an on-going basis whether any
additional information or methods are appropriate, particularly as they
become available in the future.
The six business-operations-based risk factors include assessments
of the futures commission merchant's or introducing broker's (1) size;
(2) location; (3) methods of opening accounts; (4) types of accounts
and transactions; (5) customer base; and (6) reliance, if any, on
another futures commission merchant or introducing broker with which it
shares an account relationship. These specific factors are discussed
below in general terms.\4\
The first risk factor to consider is the futures commission
merchant's or introducing broker's size. For example, a large futures
commission merchant or introducing broker that opens a substantial
number of accounts on any given day will have different risks than one
that opens a new account no more than once or twice a month. The same
is true when comparing a futures commission merchant or introducing
broker that has many branches with one that has a single office.
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\4\ This discussion of the risk factors is included because we
believe it is helpful in providing some meaning and context with
respect to the factors. However, we are not attempting to provide
comprehensive definitions of these risk factors or an exhaustive
description of the considerations involved in assessing them.
Instead, we intend our discussion to serve as a starting point for
defining and assessing them.
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The second risk factor is the location of the futures commission
merchant or introducing broker. Futures commission merchants and
introducing brokers should assess whether they are located or have
offices in areas where money laundering activities have been known to
exist or that otherwise increase the risk that attempts will be made to
open accounts for money laundering purposes.
The third risk factor is the method by which customers open
accounts. Accounts opened exclusively on-line present different, and
perhaps greater, risks than those opened in-person on the premises of
the futures commission merchant or introducing broker.
The fourth risk factor is the type of accounts and transactions
that are offered by the futures commission merchant or introducing
broker. Futures commission merchants and introducing brokers should
assess whether there are different risks (and degrees of risk)
associated with the various types of accounts they provide to customers
(e.g., futures, options on futures, prime-brokerage) and transactions
they execute in those accounts (e.g., longs, shorts, spreads).
The fifth risk factor to be considered is customer base. Futures
commission merchants and introducing brokers should assess the risks
associated with different types of customers. For example, futures
commission merchants and introducing brokers should examine whether
they are opening accounts for customers located in countries the
Secretary determines to be of ``primary money laundering concern''
pursuant to section 311 of the Act. In addition, certain legal entities
may pose greater risks (e.g., a closely-held corporation as opposed to
one that is publicly traded).
Each CIP also should address the risks that may be posed by
different types of intermediated accounts. With respect to
intermediated accounts, such as omnibus accounts and accounts for
commodity pools and other collective investment vehicles,\5\ a futures
commission merchant or introducing broker may have little or no
information about the identities and transaction activities of the
underlying participants or beneficiaries of such accounts.\6\ In most
instances, given Treasury's risk-based approach to anti-money
laundering programs for financial institutions generally, it is
expected that the focus of each futures commission merchant's and
introducing broker's CIP will be the intermediary itself, and not the
underlying participants or beneficiaries. Thus, futures commission
merchants and introducing brokers should assess the risks associated
with different types of intermediaries based upon an evaluation of
relevant factors, including the type of intermediary; its location; the
statutory and regulatory regime that applies to a foreign intermediary
(e.g., whether the jurisdiction complies with the European Union anti-
money laundering directives or has been identified as non-cooperative
by the Financial Action Task Force); the futures commission merchant's
or introducing broker's historical experience with the intermediary;
references from other financial institutions regarding the
intermediary; and whether the intermediary is itself a BSA financial
institution required to have an anti-money laundering program.\7\
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\5\ The term ``collective investment vehicle'' is not defined in
regulations under the CEA but is commonly used to describe an entity
through which persons combine funds (i.e., cash) or other assets,
which are invested and managed by the entity. See generally 65 FR
24127 (April 25, 2000) (CFTC rule regarding exclusion for certain
persons from the definition of the term ``commodity pool
operator'').
\6\ Similarly, when a customer has given a commodity trading
advisor discretionary trading authority over its account, the
commodity trading advisor and not the futures commission merchant
(or introducing broker) may be the financial institution with the
most information regarding the customer. Treasury, however, has
temporarily exempted commodity trading advisors from the requirement
to establish anti-money laundering programs as required by section
352 of the Act. 67 FR 21110, 21112 (April 29, 2002). At such time as
Treasury proposes or promulgates regulations requiring commodity
trading advisors to establish anti-money laundering programs, it
will provide guidance regarding the permissible interrelation
between commodity trading advisors and futures commission merchants
(or introducing brokers) in order to satisfy their respective BSA
obligations.
\7\ Treasury's interim final rule requiring mutual funds to
establish anti-money laundering programs provided for similar
treatment of omnibus accounts. 67 FR 21117 (April 29, 2002); see
also proposed 31 CFR 103.131.
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The sixth risk factor requires an assessment of whether the futures
commission merchant or introducing broker can rely on another futures
commission merchant or introducing broker, with which it shares an
account relationship, to undertake any of the steps required by this
proposed rule with respect to the shared account.\8\ A shared account
relationship may occur in at least two different circumstances: (1) An
introducing broker introduces a customer to a futures commission
merchant and (2) an executing futures commission merchant executes a
customer's order and then ``gives up'' this filled order to a clearing
futures
[[Page 48332]]
commission merchant who carries the customer's account.\9\ We
anticipate that futures commission merchants and introducing brokers
sharing accounts may realize efficiencies by dividing up the
requirements in this proposed rule pursuant to either their introducing
agreements (in the context of introduced business) or give-up
agreements (in the context of give-up business).\10\ For example, the
introducing broker may undertake to obtain the identifying information
from customers as required in paragraph (c) and the futures commission
merchant may undertake the verification procedures as required in
paragraph (d). Or, in another example, the clearing futures commission
merchant may undertake the procedures required for paragraphs (c) and
(d) both for its own behalf and on behalf of the executing futures
commission merchant. Nonetheless, in both examples, each financial
institution would still be responsible for ensuring that each
requirement in the proposed rule is met with respect to a customer.
Accordingly, a futures commission merchant or introducing broker must
assess whether the other firm can be relied on to fulfill its allocated
responsibilities. Moreover, a futures commission merchant or
introducing broker is expected to cease such reliance if it is no
longer reasonable.
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\8\ Treasury and the Commission recognize that a related issue
arises in the context of a firm that is registered both with the SEC
as a broker-dealer and with the Commission as a futures commission
merchant or introducing broker. Neither Treasury nor the Commission
intend the effect of this proposed rule to require that both the
securities and futures firm identify, and verify the identity of,
their customers. For example, if a futures firm has a bifurcated
compliance department handling, respectively, the securities and
futures sides of its business, the futures firm could perform the
required customer identification and verification procedures and the
securities firm could rely on it.
\9\ Although no formal survey has been conducted, the Commission
has been advised that a significant percentage of all customer
trades on U.S. exchanges are effected using an executing futures
commission merchant. A customer may elect to use one or more
executing futures commission merchants for a number of reasons. In
certain circumstances, the customer's carrying futures commission
merchant may not be a member of a particular exchange on which the
contract in question is listed for trading. In others, particularly
in the case of larger institutional customers, the customer may
elect to use one or more executing futures commission merchants in
order not to disclose its intentions to other market participants.
Finally, certain futures commission merchants simply develop a
reputation for being able to execute transactions in particular
contracts well.
\10\ An executing futures commission merchant subject to this
proposed rule could obtain from a clearing futures commission
merchant, either as part of a give-up agreement or on a transaction-
by-transaction basis, a certification that the latter has performed
the required customer identification or verification functions. For
example, the U.K.''s Joint Money Laundering Steering Group (JMLSG),
an association of U.K. Financial Services Industry Trade
Associations, recommends that its members employ a variation of the
certification approach. For give-up business, the JMLSG's Money
Laundering Guidance Notes state: ``Where an executing broker and a
clearing broker are undertaking an exchange transaction on behalf of
the same customer, the clearing broker should provide the
appropriate written assurance that it will have obtained and
recorded evidence of the identity of the underlying client.'' See
www.jmlsg.org.uk.
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Paragraph (b) also requires that the identity verification
procedures must enable each futures commission merchant and introducing
broker to form a reasonable belief that it knows the true identity of
its customers. This provision makes clear that, while there is
flexibility in establishing these procedures, each futures commission
merchant and introducing broker is responsible for exercising
reasonable efforts to ascertain the identity of each customer.
Finally, paragraph (b) requires that futures commission merchants
and introducing brokers incorporate their CIPs into their overall anti-
money laundering programs required under section 352 of the Act (31
U.S.C. 5318(h)) and National Futures Association (NFA) Compliance Rule
2-9(c).\11\ This requirement is intended to make clear that the CIP is
not a separate program, but is merely one component of each futures
commission merchant's and introducing broker's overall anti-money
laundering program that is designed to ensure compliance with all other
applicable rules and regulations promulgated under the Act and the BSA.
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\11\ Section 352 requires financial institutions to establish
anti-money laundering programs that, at a minimum, include (1) the
development of internal policies, procedures, and controls; (2) the
designation of a compliance officer; (3) an ongoing employee
training program; and (4) an independent audit function to test
programs. On April 23, 2002, the Commission approved rule changes
submitted by the NFA setting forth for member futures commission
merchants and introducing brokers the minimum requirements for these
programs.
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C. Section 103.123(c) Required Information
The first step in verifying identity is obtaining identifying
information from customers. Paragraph (c) of the proposed rule provides
that each futures commission merchant's and introducing broker's CIP
must specify identifying information that customers are required to
provide. It also sets forth certain information that must be obtained
at a minimum and provides that the CIP must require the futures
commission merchant and introducing broker to obtain this minimum
information before an account is opened or trading authority is
granted.
The minimum information that must be obtained from each customer is
(1) name, (2) date of birth, if applicable, (3) address, and (4) U.S.
taxpayer identification number (e.g., social security number or
employer identification number) or if the person is not a U.S. person,
a U.S. taxpayer identification number, an alien identification card
number, or the number and country of issuance of any other government-
issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.\12\ The term ``similar safeguard'' is
included to permit the use of any biometric identifiers that may be
used in addition to, or instead of, photographs. With respect to the
address requirement, each customer must provide both a mailing and
residence address (if a natural person) or principal place of business
(if not a natural person).
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\12\ Treasury and the Commission understand these categories of
identification numbers for foreign citizens generally are applicable
to natural persons. Accordingly, we seek comment on the types of
numbers that could be provided by other persons.
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The rule only specifies the minimum identifying information that
must be obtained from each customer. Futures commission merchants and
introducing brokers, in assessing the risk factors in paragraph (b),
should determine whether additional identifying information is
necessary to form a reasonable belief as to the true identity of each
customer. There may be certain types of customers or circumstances
where it is reasonable to obtain other identifying information in
addition to the minimum. If a futures commission merchant or
introducing broker, in examining the nature of its business and
operations, determines that additional information should be obtained
in certain cases, it should set forth guidelines in its CIP indicating
when this shall occur.
Treasury and the Commission recognize that a new business may need
access to an account at a futures commission merchant or introducing
broker before it has received an employer identification number from
the Internal Revenue Service. For this reason, the proposed regulation
contains a limited exception to the requirement that a taxpayer
identification number must be provided prior to establishing or adding
a signatory to an account. Accordingly, a CIP may permit a futures
commission merchant or introducing broker to open or add a signatory to
an account for a person other than an individual (such as a
corporation, partnership, or trust) that has applied for, but has not
received, an employer identification number. However, in such a case,
the CIP must require that the futures commission merchant or
introducing broker obtain a copy of the application before it opens or
adds a signatory to the account and obtain the employee identification
number within a reasonable period of time after an account is
established or a signatory is added to an account. Currently, the IRS
indicates that the issuance of an employer identification number can
[[Page 48333]]
take up to five weeks. This length of time, coupled with when the
person applied for the employer identification number, should be
considered by the futures commission merchant or introducing broker in
determining the reasonable period of time within which the person
should provide its employer identification number to the futures
commission merchant or introducing broker.
D. Section 103.123(d) Required Verification Procedures
After obtaining identifying information from a customer, futures
commission merchants and introducing brokers must take steps to verify
the accuracy of that information in order to reach a point where they
can form a reasonable belief as to the true identity of the customer.
Accordingly, paragraph (d) of the proposed rule requires each futures
commission merchant's and introducing broker's CIP to have procedures
for verifying the accuracy of the identifying information provided by
the customer. Because the proposed rule requires futures commission
merchants and introducing brokers to form a reasonable belief that they
know the true identity of each customer, the extent of the verification
for each customer will depend on the steps necessary for futures
commission merchants and introducing brokers to form such a belief.
Paragraph (d) requires that the verification procedures must be
undertaken within a reasonable time before or after a customer's
account is opened or a customer is granted authority to effect
transactions with respect to an account. This flexibility must be
exercised in a reasonable manner, given that verifications too far in
advance may become stale and verifications too long after an account is
opened may provide money laundering opportunities to persons who would
not have had such opportunities if verification occurred sooner. The
amount of time it will take a futures commission merchant or
introducing broker to verify the identity of a customer may depend on
the type of account opened, whether the customer opens the account in
person, and on the type of identifying information available. In
addition, although an account is opened, a futures commission merchant
or introducing broker may choose to place limits on the account, such
as restricting the number of transactions or the dollar value of
transactions, until a customer's identity is verified. Therefore, the
proposed rule provides futures commission merchants and introducing
brokers with the flexibility to use a risk-based approach to determine
when the identity of a customer must be verified relative to the
opening of an account or granting of trading authority.\13\
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\13\ Treasury and the Commission note that it is possible that
futures commission merchants and introducing brokers could violate
other laws by permitting a customer to transact business prior to
verifying the customer's identity. See, e.g., 31 CFR part 500,
prohibiting transactions involving designated foreign countries or
their nationals.
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As mentioned above, a person becomes a customer each time they open
a new account or are granted trading authority. Therefore, upon the
opening of each account, the verification requirements of this rule
would apply. However, if a customer whose identification has been
verified previously opens a new account, a futures commission merchant
or introducing broker would not need to verify the customer's identity
a second time, provided it (1) previously verified the customer's
identity in accordance with procedures consistent with this rule, and
(2) continues to have a reasonable belief that it knows the true
identity of the customer.
The rule provides for two methods of verifying identifying
information: use of documents and use of non-documentary means. For
example, using documents would include obtaining a driver's license or
passport from a natural person or articles of incorporation from a
company. Non-documentary methods would include cross-checking the
information provided by a customer against that supplied by a credit
bureau or consumer reporting agency.
The proposed rule requires each futures commission merchant's and
introducing broker's CIP to address both methods of verification.
Depending on the type of customer and the method of opening an account,
it may be more appropriate to use either documents or non-documentary
methods. However, in some cases, it may be appropriate to use both
methods. The CIP should set forth guidelines describing when documents,
non-documentary methods, or a combination of both will be used.
The risk that a futures commission merchant or introducing broker
will not know a customer's identity will be heightened for certain
types of accounts, such as accounts opened in the name of a
corporation, partnership, or trust that is created or conducts
substantial business in jurisdictions designated as primary money
laundering concerns or that have been designated as non-cooperative by
an international body, such as the Financial Action Task Force.
Obtaining sufficient information to verify a given customer's
identity can reduce the risk that a futures commission merchant or
introducing broker will be used as a conduit for money laundering and
terrorist financing. Each futures commission merchant's and introducing
broker's identity verification procedures must be based on its
assessment of the factors described in paragraph (b) of the proposed
rule. Accordingly, when those assessments suggest a heightened risk,
the futures commission merchant and introducing broker should prescribe
additional verification measures.
1. Verification Through Documents
Paragraph (d)(1) provides that the CIP must describe when a futures
commission merchant or introducing broker will verify identity through
documents and set forth the documents that will be used for this
purpose. The rule also lists certain documents that are suitable for
verification. For natural persons, these documents may include:
unexpired government-issued identification evidencing nationality or
residence and bearing a photograph or similar safeguard. For other
persons, suitable documents would be ones showing the existence of the
entity, such as registered articles of incorporation, a government-
issued business license, a partnership agreement, or a trust
instrument.
2. Verification Through Non-Documentary Methods
Paragraph (d)(2) provides that the CIP must describe non-
documentary verification methods and when such methods will be employed
in addition to, or instead of, using documents. The rule allows for the
exclusive use of non-documentary methods because some accounts are
opened by telephone, mail, or over the Internet. However, even if the
customer presents documents, it may be appropriate to use non-
documentary methods as well. In the end, each futures commission
merchant and introducing broker is responsible for employing sufficient
verification methods to be able to form a reasonable belief that it
knows the true identity of the customer.
The proposed rule sets forth certain non-documentary methods that
would be suitable for verifying identity. These methods include
contacting a customer after the account is opened; obtaining a
financial statement; comparing the identifying information provided by
the customer against fraud and bad check databases to determine whether
any of the information is associated with known incidents of fraudulent
behavior (negative verification); comparing the identifying information
with
[[Page 48334]]
information available from a trusted third party source, such as a
credit report from a credit bureau or consumer reporting agency
(positive verification); and checking references with other financial
institutions. Futures commission merchants and introducing brokers also
may wish to analyze whether there is logical consistency between the
identifying information provided, such as the customer's name, street
address, ZIP code, telephone number (if provided), date of birth, and
social security number (logical verification).
Paragraph (d)(2) also provides that the CIP must require the use of
non-documentary methods in certain cases; specifically, when a natural
person is unable to present an unexpired government issued
identification document that bears a photograph or similar safeguard or
when a futures commission merchant or introducing broker is presented
with unfamiliar documents to verify the identity of a customer, does
not obtain documents to verify the identity of a customer, does not
meet a customer face-to-face, or is otherwise presented with
circumstances that increase the risk the futures commission merchant or
introducing broker will be unable to verify the true identity of a
customer through documents.
Thus, non-documentary methods should be used when the futures
commission merchant or introducing broker cannot examine original
documents. In addition, Treasury and the Commission recognize that
identification documents, including those issued by a government
entity, may be obtained illegally and may be fraudulent. In light of
the recent increase in identity fraud, futures commission merchants and
introducing brokers are encouraged to use non-documentary methods, even
when a customer has provided identification documents.
E. Section 103.123(e) Government Lists
Section 326 of the Act also requires reasonable procedures for
determining whether a customer's name appears on any list of known or
suspected terrorists or terrorist organizations provided by any
government agency. The proposed rule implements this requirement and
clarifies that the requirement applies only with respect to lists
circulated by the Federal government.
In addition, the proposed rule states that futures commission
merchants and introducing brokers must follow all Federal directives
issued in connection with such lists. This provision makes clear that
futures commission merchants and introducing brokers must have
procedures for responding to circumstances when a customer is named on
a list.
F. Section 103.123(f) Customer Notice
Section 326 of the Act contemplates that financial institutions
will provide their customers with ``adequate notice'' of the customer
identification procedures. Therefore, each futures commission
merchant's and introducing broker's CIP must include procedures for
providing customers with adequate notice that the futures commission
merchant or introducing broker is requesting information to verify
their identity. A futures commission merchant or introducing broker may
satisfy the notice requirement by generally notifying its customers
about the procedures it must comply with to verify their identities.
For example, a futures commission merchant or introducing broker may
post a sign in its lobby or provide customers with any other form of
written or oral notice. If an account is opened electronically, such as
through an Internet website, the futures commission merchant or
introducing broker may provide notice electronically.
G. Section 103.123(g) Lack of Verification
Paragraph (g) of the proposed rule states that each futures
commission merchant's and introducing broker's CIP must include
procedures for responding to circumstances in which it cannot form a
reasonable belief that it knows the true identity of a customer.
Generally, each futures commission merchant and introducing broker
should only maintain an account for a customer when it has a reasonable
belief that it knows the customer's true identity.\14\ Thus, each
futures commission merchant's and introducing broker's CIP should
specify the actions to be taken when it cannot form a reasonable
belief. There also should be guidelines for when an account will not be
opened. In addition, the CIP should address the terms under which a
customer may conduct transactions while a customer's identity is being
verified. The CIP should specify at what point, after attempts to
verify a customer's identity have failed, an account that has been
opened should be closed. Finally, the procedures should include a
process for determining whether, in connection with conducting customer
identification or verification, a Suspicious Activity Report should be
filed.
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\14\ There are some exceptions to this basic rule. For example,
a futures commission merchant or introducing broker may introduce or
maintain an account, at the direction of law enforcement,
notwithstanding that it does not know the true identity of a
customer.
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H. Section 103.123(h) Recordkeeping
Section 326 of the Act requires procedures for maintaining records
of the information used to verify a person's identity, including name,
address, and other identifying information. Paragraph (h) of the
proposed rule sets forth recordkeeping procedures that must be included
in each futures commission merchant's and introducing broker's CIP.
These procedures must provide for the maintenance of all information
and documents obtained pursuant to the CIP. Information that must be
maintained includes all identifying information provided by a customer
pursuant to paragraph (c). Thus, the futures commission merchant and
introducing broker must make a record of each customer's name, date of
birth (if applicable), addresses, and tax identification number or
other number. Futures commission merchants and introducing brokers also
must maintain copies of any documents that were relied upon to verify
identity pursuant to paragraph (d)(1), evidencing the type of document
and any identification number it may contain. For example, if a
customer produces a driver's license, the futures commission merchant
or introducing broker must make a copy of the driver's license that
clearly indicates it is a driver's license and legibly depicts any
identification number on the license.
Futures commission merchants and introducing brokers also must make
and maintain records evidencing the methods and results of measures
undertaken to verify the identity of a customer pursuant to paragraph
(d)(2). For example, if a futures commission merchant or introducing
broker obtains a report from a credit bureau concerning a customer, the
report must be maintained. Futures commission merchants and introducing
brokers also must make and maintain records of the resolution of any
discrepancy in the identifying information obtained. To continue with
the previous example, if the customer provides a residence address that
is different from the address shown on the credit report, the futures
commission merchant or introducing broker must document how it resolved
this discrepancy or, if the discrepancy was not resolved, how it formed
a reasonable belief notwithstanding the discrepancy.
Futures commission merchants and introducing brokers must retain
all of these records for five years after the date an account is closed
or the grant of
[[Page 48335]]
authority to effect transactions with respect to an account is revoked.
In all other respects, the records must be maintained in accordance
with the requirements of Commission Rule 1.31.\15\
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\15\ 17 CFR 1.31.
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Nothing in this proposed rule modifies, limits or supersedes
section 101 of the Electronic Records in Global and National Commerce
Act, Public Law 106-229, 114 Stat. 464 (15 U.S.C. 7001) (E-Sign Act).
Thus, futures commission merchants and introducing brokers may use
electronic records to satisfy the requirements of this rule, as long as
the records are maintained in accordance with Commission Rules 1.4 and
1.31.\16\
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\16\ 17 CFR 1.4, 1.31.
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Treasury and the Commission emphasize that the collection and
retention of information about a customer as an ancillary part of
collecting identifying information, do not relieve futures commission
merchants and introducing brokers from their obligations to comply with
anti-discrimination laws or regulations.
I. Section 103.123(i) Approval of Program
Paragraph (i) of the proposed rule requires that each futures
commission merchant's and introducing broker's CIP be approved by its
most senior level (e.g., board of directors, managing partners, board
of managers or other governing body performing similar functions) or by
persons specifically authorized by that body to approve such a program.
J. Section 103.123(j) Exemptions
Section 326 states that the Secretary and the Federal functional
regulator jointly issuing the rule may by order or regulation exempt
any financial institution or type of account from this rule in
accordance with such standards and procedures as the Secretary may
prescribe. The proposed rule provides that the Commission, with the
concurrence of the Secretary, may exempt any futures commission
merchant or introducing broker that registers with the Commission.
However, it excludes from this exemptive authority futures commission
merchants and introducing brokers that register pursuant to section
4f(a)(2) of the CEA. These are firms that register as futures
commission merchants or introducing brokers solely because they deal in
security futures products. The exemptive authority with respect to
these firms is addressed in the rule issued jointly by Treasury and the
SEC.
In issuing exemptions under the proposed rule, the Secretary and
the Commission shall consider whether the exemption is consistent with
the purposes of the BSA, and in the public interest, and may consider
other necessary and appropriate factors.
III. Request for Comments
Treasury and the Commission invite comment on all aspects of the
proposed rule, and specifically seek comment on the following issues:
1. Whether the proposed definition of ``account'' is appropriate.
2. How the proposed rule should apply to various types of accounts
that are designed to allow a customer to transact business immediately.
3. Ways that futures commission merchants and introducing brokers
can comply with the requirement to obtain both the address of a
person's residence, and, if different, the person's mailing address in
situations involving natural persons who lack a permanent address.
4. Whether non-U.S. persons that are not natural persons will be
able to provide futures commission merchants and introducing brokers
with the identifying information required in Sec. 103.123(c)(4), or
whether other categories of identifying information should be added to
this section. Commenters on this issue should suggest other means of
identification that futures commission merchants and introducing
brokers currently use or should use in this circumstance.
5. Whether the proposed rule will subject futures commission
merchants and introducing brokers to conflicting State laws. Treasury
and the Commission request that commenters cite and describe any
potentially conflicting State laws.
6. The extent to which the verification procedures required by the
proposed rule make use of information that futures commission merchants
and introducing brokers currently obtain in the account opening
process. We note that the legislative history of section 326 indicates
that Congress intended ``the verification procedures prescribed by
Treasury [to] make use of information currently obtained by most
financial institutions in the account opening process.'' See H.R. Rep.
No. 107-250, pt. 1, at 63 (2001).
IV. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies in connection with
their conducting or sponsoring any collection of information as defined
by the PRA. Because this proposed rulemaking contains information
collection requirements within the meaning of the PRA, FinCEN has
submitted the information collection requirements in this proposed rule
to the Office of Management and Budget (OMB) for its review in
accordance with 44 U.S.C. 3507(d).
An agency may not conduct or sponsor, and a person is not required
to respond to, an information collection unless it displays a currently
valid OMB control number.
The proposed rule requires futures commission merchants and
introducing brokers to implement reasonable procedures to (1) maintain
records of the information used to verify the person's identity and (2)
provide notice of these procedures to customers. These recordkeeping
and disclosure requirements are required under section 326 of the Act.
The Commission estimates that approximately 188 futures commission
merchants and 1593 introducing brokers will need to implement a CIP.
Further, the Commission estimates that each futures commission merchant
and introducing broker will need to spend approximately 10 hours per
year to meet the recordkeeping requirements of the proposed rule.\17\
Further, Treasury and the Commission estimate that each futures
commission merchant and introducing broker will need to spend
approximately one hour per year to meet the disclosure requirements of
the new rule. Therefore, the estimated paperwork burden of this
proposed rule is calculated as follows:
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\17\ The Commission believes that futures commission merchants
and introducing brokers already obtain from their customers most, if
not all, of the information required under the proposed rule. See
Commission Rule 1.37, 17 CFR 1.37 (requiring futures commission
merchants and introducing brokers to obtain the customer's true
name, address, principal occupation or business, name of guarantor,
and name of person controlling the account), and NFA Compliance Rule
2-30 (futures commission merchants and introducing brokers are
required to obtain, with respect to customers that are individuals,
the customer's true name, address, principal occupation or business,
estimated annual income and net worth, and approximate age). Futures
commission merchants and introducing brokers are required to
maintain these records pursuant to Commission Rule 1.31, 17 CFR
1.31, and NFA Compliance Rule 2-10.
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Estimated number of respondents: 1781.
Estimated average annual burden for the recordkeeping requirements
of the proposed rule for each respondent: 10 hours.
Estimated average annual burden for the disclosure requirements of
the proposed rule per each respondent: 1 hour.
Estimated total annual burden: 19,591 hours.
[[Page 48336]]
Treasury and the Commission invite comment on:
(1) Whether the collections of information contained in the notice
of proposed rulemaking are necessary for the proper performance of each
agency's functions, including whether the information has practical
utility;
(2) The accuracy of the Commission's estimate of the burden of the
proposed information collections;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collections on
respondents, including the use of automated collection techniques or
other forms of information technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them (preferably by
fax (202-395-6974)) to Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Office of Management and
Budget, Paperwork Reduction Project (1506), Washington, DC 20503 (or by
the Internet to jlackeyj@omb.eop.gov), with a copy to FinCEN by mail or
the Internet at the addresses previously specified.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires federal agencies, in promulgating rules, to consider the
impact of those rules on small entities. The rule proposed today would
affect futures commission merchants and introducing brokers. The CFTC
previously established certain definitions of ``small entities'' to be
used in evaluating the impact of its rules in accordance with the
RFA.\18\ The Commission has previously determined that futures
commission merchants are not small entities for the purpose of the
RFA.\19\ With respect to introducing brokers, the Commission has stated
that it would evaluate within the context of a particular rule proposal
whether all or some affected introducing brokers would be considered to
be small entities and, if so, the economic impact on them of any
rule.\20\ The Commission believes that all introducing brokers will be
affected by this rule, including small introducing brokers. However,
the Commission does not believe that the economic impact of the rule
will be significant. First, the information being collected by
introducing brokers is, for the most part, already required to be
collected by CFTC rules and by self-regulatory organization rules.\21\
Second, each introducing broker will be able to tailor its CIP to fit
its own size and needs; the rule provides for flexibility in how they
will meet their requirements. Lastly, the CFTC believes that any
expenditure associated with establishing and implementing a CIP will be
commensurate with the size of an introducing broker. If an introducing
broker is small, its economic burden should be de minimis. For these
reasons, the Commission does not expect the rule, as proposed herein,
to have a significant economic impact on a substantial number of small
entities. Accordingly, it is hereby certified pursuant to 5 U.S.C.
605(b), that the proposed rule will not have a significant economic
impact on a substantial number of small entities. Treasury and the
Commission invite the public to comment on this finding.
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\18\ See 47 FR 18618 (April 30, 1982).
\19\ See 47 FR at 18619.
\20\ See id.
\21\ See, supra, page 34 n.17.
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VI. Commission's Analysis of the Costs and Benefits Associated With the
Proposed Rule
Section 15(a) of the CEA requires the CFTC to consider the costs
and benefits of its action before issuing a new regulation. The CFTC
understands that, by its terms, section 15(a) does not require the CFTC
to quantify the costs and benefits of a new regulation or to determine
whether the benefits of the proposed regulation outweigh its costs. Nor
does it require that each proposed rule be analyzed in isolation when
that rule is a component of a larger package of rules or rule
revisions. Rather, section 15(a) simply requires the CFTC to ``consider
the costs and benefits'' of its action.
Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the CFTC could in its discretion give
greater weight to any one of the five enumerated areas of concern and
could in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the CEA.
Section 326 of the Act requires Treasury and the Commission to
prescribe regulations setting forth minimum standards for futures
commission merchants and introducing brokers regarding the identities
of customers that shall apply in connection with the opening of an
account. The statute also provides that the regulations issued by
Treasury and the Commission must, at a minimum, require financial
institutions to implement reasonable procedures for: (1) Verification
of customers' identities; (2) determination of whether a customer
appears on a government list; and (3) maintenance of records related to
customer verification. The proposed rule implements this statutory
mandate by requiring futures commission merchants and introducing
brokers to (1) establish a CIP; (2) obtain certain identifying
information from customers; (3) verify identifying information of
customers; (4) check customers against lists provided by federal
agencies; (5) provide notice to customers that information may be
requested in the process of verifying their identities; and (6) make
and maintain records. The Commission believes that these requirements
are reasonable and practicable, as required by section 326 and,
therefore, that the costs associated with them are attributable to the
statute. Moreover, while the proposed rule specifies certain minimum
requirements, futures commission merchants and introducing brokers will
be able to design their CIPs in a manner most appropriate to their
business models and customer bases. This flexibility should help them
to tailor their CIPs appropriately, while still meeting the statutory
requirements of section 326.
The proposed rule is not related to the marketplace and thus should
not affect the protection of market participants; the efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; or sound risk management practices. This proposed rule does,
however, address other public interest considerations, namely, the
prevention and detection of money laundering and financing of
terrorism. As noted elsewhere in this preamble, the CFTC believes the
costs associated with implementing CIPs, which are mandated by section
326 of the Act, will be small. On the other hand, the benefits include
a reduced risk of futures commission merchants and introducing brokers
unwittingly aiding criminals, including terrorists, in laundering money
or moving funds for illicit purposes. Additionally, the
[[Page 48337]]
implementation of such programs should make it more difficult for
persons to successfully engage in fraudulent activities involving
identity theft.
VII. Executive Order 12866
Treasury has determined that this proposed rule is not a
``significant regulatory action'' for purposes of Executive Order
12866. The rule follows closely the requirements of section 326 of the
Act. Moreover, as indicated above, Treasury and the Commission believe
that futures commission merchants and introducing brokers already have
procedures in place that fulfill most of the requirements of the
proposed rule. First, the procedures are a matter of good business
practice. Second, futures commission merchants and introducing brokers
already are required to have BSA compliance programs that address many
of the requirements detailed in this notice of proposed rulemaking.
Third, futures commission merchants and introducing brokers should
already have compliance programs in place to ensure they comply with
Treasury's Office of Foreign Assets Control rules prohibiting
transactions with certain foreign countries or their nationals.
Accordingly, a regulatory impact analysis is not required.
Lists of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Banks, Banking, Brokers, Commodity futures,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Law enforcement, Penalties, Reporting and recordkeeping
requirements, Securities.
Authority and Issuance
For the reasons set forth in the preamble, part 103 of title 31 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as
follows:
Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31
U.S.C. 5311-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub
L. 107-56, 115 Stat. 307.
2. Subpart I of part 103 is amended by adding new section 103.123
to read as follows:
Sec. 103.123 Customer Identification Programs for futures commission
merchants and introducing brokers.
(a) Definitions. For the purposes of this section:
(1) Account means any formal business relationship with a futures
commission merchant, including, but not limited to, those established
to effect transactions in contracts of sale for future delivery,
options on contracts of sale for future delivery, or options on
physicals in any commodity.
(2) Commission means the United States Commodity Futures Trading
Commission.
(3) Commodity means any good, article, service, right, or interest
described in Section 1a(4) of the Commodity Exchange Act, 7 U.S.C.
1a(4).
(4) Customer. (i) The term customer means:
(A) Any person who opens a new account with a futures commission
merchant; and
(B) Any person who is granted authority to effect transactions with
respect to an account with a futures commission merchant.
(ii) Where an account is introduced to a futures commission
merchant by an introducing broker, a person opening the account or
granted authority to effect transactions with respect to the account is
a customer of both the futures commission merchant and the introducing
broker.
(5) Futures commission merchant means any person registered or
required to be registered as a futures commission merchant with the
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.),
except persons who register pursuant to section 4f(a)(2) of the
Commodity Exchange Act, 7 U.S.C. 6f(a)(2).
(6) Introducing broker means any person registered or required to
be registered as an introducing broker with the Commission under the
Commodity Exchange Act, except persons who register pursuant to section
4f(a)(2) of the Commodity Exchange Act.
(7) Option means an agreement, contract or transaction described in
Section 1a(26) of the Commodity Exchange Act, 7 U.S.C. 1a(26).
(8) Person has the same meaning as that term is defined in
Sec. 103.11(z).
(9) U.S. person means:
(i) A U.S. citizen; or
(ii) A corporation, partnership, trust or person (other than an
individual) that is established or organized under the laws of a State
or the United States.
(10) Non-U.S. person means a person that is not a U.S. person.
(11) Taxpayer identification number. The provisions of section 6109
of the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the
regulations of the Internal Revenue Service promulgated thereunder
shall determine what constitutes a taxpayer identification number.
(b) Customer Identification Program. Each futures commission
merchant and introducing broker shall implement a written Customer
Identification Program (Program) that shall be based on the type of
identifying information available and on an assessment of the varying
risks associated with the futures commission merchant's or the
introducing broker's size, location, methods of opening accounts, types
of accounts and transactions, customer base, and reliance, if any, on
another futures commission merchant or introducing broker with which it
shares an account relationship. Each futures commission merchant's and
introducing broker's procedures must enable it to form a reasonable
belief that it knows the true identity of its customers. The Program
should be a part of each futures commission merchant's and introducing
broker's anti-money laundering program required under 31 U.S.C.
5318(h).
(c) Required information--(1) General. Except as permitted by
paragraph (c)(2) of this section, each Program shall require the
futures commission merchant or the introducing broker to obtain
specified identifying information about each of their customers. The
Program shall require that this minimum information be obtained prior
to opening a customer's account or granting a customer authority to
effect transactions with respect to an account. At a minimum, the
specified identifying information shall include:
(i) Name;
(ii) Date of birth, for natural persons;
(iii) Addresses:
(A) Residence and mailing (if different) for natural persons; or
(B) Principal place of business and mailing (if different) for
persons other than natural persons; and
(iv) Identification number:
(A) For U.S. persons, a U.S. taxpayer identification number (e.g.,
social security number, or employer identification number); or
(B) For non-U.S. persons, a U.S. taxpayer identification number, a
passport number and country of issuance, an alien identification card
number, or the number and country of issuance of any other government-
issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.
(2) Limited exception. The Program may permit the futures
commission
[[Page 48338]]
merchant or introducing broker to open or add a signatory to an account
for a person other than an individual (such as a corporation,
partnership, or trust) that has applied for, but has not received, an
employer identification number. However, in such a case, the futures
commission merchant or introducing broker must obtain a copy of the
application before it opens or adds a signatory to the account and
obtain the employer identification number within a reasonable period of
time after it opens or adds a signatory to the account.
(d) Required verification procedures. Each Program shall contain
risk-based procedures for verifying the identity of customers, to the
extent reasonable and practicable. Such verification must occur within
a reasonable time before or after the customer's account is opened or
the customer is granted authority to effect transactions with respect
to an account. A futures commission merchant or introducing broker need
not verify the information about an existing customer who opens a new
account or who is granted authority to effect transactions with respect
to a new account, if it previously verified the customer's identity in
accordance with procedures consistent with this paragraph (d), and
continues to have a reasonable belief that it knows the true identity
of the customer.
(1) Verification through documents. Each Program must describe when
the futures commission merchant or introducing broker will verify
identity through documents and set forth the documents that it will use
for this purpose. Suitable documents for verification may include:
(i) For natural persons, an unexpired government-issued
identification evidencing nationality or residence and bearing a
photograph or similar safeguard; and
(ii) For persons other than natural persons, documents showing the
existence of the entity, such as registered articles of incorporation,
a government-issued business license, a partnership agreement, or a
trust instrument.
(2) Verification through non-documentary methods. Each Program must
describe non-documentary methods the futures commission merchant or
introducing broker will use to verify their customer's identity and
when these methods will be used in addition to, or instead of, relying
on documents. These non-documentary methods may include, but are not
limited to, contacting a customer; obtaining a financial statement;
independently verifying information through credit bureaus, public
databases, or other sources; and checking references with other
financial institutions. Non-documentary methods shall be used when: a
natural person is unable to present an unexpired government-issued
identification document that bears a photograph or similar safeguard;
the futures commission merchant or introducing broker is presented with
unfamiliar documents to verify the identity of a customer; the futures
commission merchant or introducing broker does not obtain documents to
verify the identity of a customer; does not meet a customer face-to-
face; or is otherwise presented with circumstances that increase the
risk the futures commission merchant or introducing broker will be
unable to verify the true identity of a customer through documents.
(e) Government lists. Each Program shall include procedures for
determining whether a customer's name appears on any list of known or
suspected terrorists or terrorist organizations provided to the futures
commission merchant or introducing broker by any federal government
agency. Futures commission merchants and introducing brokers shall
follow all federal directives issued in connection with such lists.
(f) Customer notice. Each Program shall include procedures for
providing customers with adequate notice that the futures commission
merchant or introducing broker is requesting information to verify
their identity.
(g) Lack of verification. Each Program shall include procedures for
responding to circumstances in which the futures commission merchant or
introducing broker cannot form a reasonable belief that it knows the
true identity of a customer.
(h) Recordkeeping. (1) The Program shall include procedures for
maintaining a record of all information obtained pursuant to the
Program, including:
(i) All identifying information provided by a customer pursuant to
paragraph (c) of this section, and copies of any documents that were
relied on pursuant to paragraph (d)(1) of this section evidencing the
type of document and any identification number it may contain;
(ii) The methods and results of any measures undertaken to verify
the identity of a customer through non-documentary methods pursuant to
paragraph (d)(2) of this section; and
(iii) The resolution of any discrepancy in the identifying
information obtained.
(2) Futures commission merchants and introducing brokers must
retain all records made or obtained when verifying the identity of a
customer pursuant to a Program until five years after the date the
account of the customer is closed or the grant of authority to effect
transactions with respect to an account is revoked. In all other
respects, the records shall be maintained pursuant to the provisions of
17 CFR 1.31.
(i) Approval of program. Each Program shall be approved by the
futures commission merchant's or introducing broker's board of
directors, managing partners, board of managers or other governing body
performing similar functions or by a person or persons specifically
authorized by such bodies to approve the Program.
(j) Exemptions. The Commission, with the concurrence of the
Secretary, may by order or regulation exempt any futures commission
merchant or introducing broker that registers with the Commission
(except futures commission merchants or introducing brokers that
register pursuant to section 4f(a)(2) of the Commodity Exchange Act) or
any type of account from the requirements of this section. In issuing
such exemptions, the Commission and the Secretary shall consider
whether the exemption is consistent with the purposes of the Bank
Secrecy Act, and in the public interest, and may consider other
necessary and appropriate factors.
Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
Dated: July 10, 2002.
Jean A. Webb,
Secretary of the Commodity Futures Trading Commission.
[FR Doc. 02-18195 Filed 7-22-02; 8:45 am]
BILLING CODE 4810-02-P
[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48289-48299]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-700]
[[Page 48289]]
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Part III
Department of the Treasury
31 CFR Part 103
Office of the Comptroller of the Currency
12 CFR Part 21
Office of Thrift Supervision
12 CFR Part 563
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Federal Reserve System
12 CFR Parts 208 and 211
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Federal Deposit Insurance Corporation
12 CFR Part 326
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National Credit Union Administration
12 CFR Part 748
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Commodity Futures Trading Commission
17 CFR Part 1
Securities and Exchange Commission
17 CFR Part 240
Transactions and Customer Identification Programs; Proposed Rules
[[Page 48290]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 21
[Docket No. 02-11]
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 211
[Docket No. R-1127]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 326
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563
[No. 2002-27]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 748
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA31
Customer Identification Programs for Banks, Savings Associations,
and Credit Unions
AGENCIES: The Financial Crimes Enforcement Network, Treasury; Office of
the Comptroller of the Currency, Treasury; Board of Governors of the
Federal Reserve System; Federal Deposit Insurance Corporation; Office
of Thrift Supervision, Treasury; National Credit Union Administration.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), together with the Office of the
Comptroller of the Currency (OCC), the Board of Governors of the
Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), the Office of Thrift Supervision (OTS), and the
National Credit Union Administration (NCUA) (collectively, the
Agencies) are jointly issuing a proposed regulation to implement
section 326 of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001 (the Act). Section 326 requires the Secretary of
the Treasury (Secretary) to jointly prescribe with each of the
Agencies, the Securities and Exchange Commission (SEC), and the
Commodity Futures Trading Commission (CFTC), a regulation that, at a
minimum, requires financial institutions to implement reasonable
procedures to verify the identity of any person seeking to open an
account, to the extent reasonable and practicable; maintain records of
the information used to verify the person's identity; and determine
whether the person appears on any lists of known or suspected
terrorists or terrorist organizations provided to the financial
institution by any government agency. The proposed regulation applies
to banks, savings associations, and credit unions.
DATES: Written comments on the proposed rule may be submitted on or
before September 6, 2002.
ADDRESSES: Because paper mail in the Washington area may be subject to
delay, commenters are encouraged to e-mail or fax comments. Comments
should be sent by one method only. Financial institution commenters are
encouraged to submit comments only to their Federal functional
regulator. Non-financial institution commenters are encouraged to
submit comments only to FinCEN. All comments will be considered by
Treasury and the Agencies in formulating the final rule.
OCC: Please direct your comments to: Office of the Comptroller of
the Currency, 250 E Street, SW., Public Information Room, Mailstop 1-5,
Washington, DC 20219, Attention; Docket No. 02-11; FAX number (202)
874-4448; or Internet address: regs.comments@occ.treas.gov. Comments
may be inspected and photocopied at the OCC's Public Reference Room,
250 E Street, SW., Washington, DC. You can make an appointment to
inspect comments by calling (202) 874-5043.
Board: Comments should refer to Docket No. R-1127 and may be mailed
to Secretary, Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, NW., Washington, DC 20551; sent by FAX
to (202) 452-3819 or (202) 452-3102; or sent by e-mail to
regs.comments@federalreserve.gov. Members of the public may inspect
comments in Room MP-500 between 9 a.m. and 5 p.m. on weekdays pursuant
to section 261.12 (except as provided in section 261.14) of the Board's
Rules Regarding Availability of Information, 12 CFR 261.12 and 261.14.
FDIC: Comments should be directed to: Executive Secretary,
Attention: Comments/OES, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429. Comments may be hand-delivered
to the guard station at the rear of the 550 17th Street Building
(located on F Street), on business days between 7 a.m. and 5 p.m. In
addition, comments may be sent by fax to (202) 898-3838, or by
electronic mail to comments@FDIC.gov. Comments may be inspected and
photocopied in the FDIC Public Information Center, Room 100, 801 17th
Street, NW., Washington, DC, between 9 a.m. and 4:30 p.m., on business
days.
OTS: Comments may be mailed to Regulation Comments, Chief Counsel's
Office, Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552, Attention: No. 2002-27; FAX number (202) 906-6518, Attention:
No. 2002-27; or Internet address regs.comments@ots.treas.gov,
Attention: No. 2002-27 and include your name and telephone number.
Comments may also be hand delivered to the Guard's Desk, East Lobby
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days,
Attention: Regulation Comments, Chief Counsel's Office, No. 2002-27.
OTS will post comments and the related index on the OTS Internet Site
at www.ots.treas.gov. In addition, you may inspect comments at the
Public Reading Room, 1700 G St. NW., by appointment. To make an
appointment for access, you may call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-7755. (Please identify the materials you would like to inspect to
assist us in serving you.) We schedule appointments on business days
between 10 a.m. and 4 p.m. In most cases, appointments will be
available the business day after the date we receive a request.
NCUA: Direct comments to the Secretary of the Board. Mail or hand-
deliver comments to: National Credit Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314-3428. You may fax comments to (703)
518-6319, or e-mail comments to regcomments@NCUA.gov. To inspect
comments, please contact the Office of General Counsel, (703) 518-6540;
or the Office of Examination and Insurance, (703) 518-6360.
FinCEN: Comments may be mailed to FinCEN, Section 326 Bank Rule
Comments, P.O. Box 39, Vienna, VA 22183, or sent to Internet address
regcomments@fincen.treas.gov with the caption ``Attention: Section 326
Bank Rule Comments'' in the body of the text. Comments may be inspected
at FinCEN between 10 a.m. and 4 p.m. in the FinCEN Reading Room in
Washington,
[[Page 48291]]
DC. Persons wishing to inspect the comments submitted must request an
appointment by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT:
OCC: Office of the Chief Counsel (202) 874-3295.
Board: Enforcement and Special Investigations Sections: (202) 452-
5235; (202) 728-5829; or (202) 452-2961.
FDIC: Special Activities Section, Division of Supervision, and
Legal Division at (202) 898-3671.
OTS: Office of the Chief Counsel, (202) 906-6012.
NCUA: Office of General Counsel, (703) 518-6540; or Office of
Examination and Insurance, (703) 518-6360.
Treasury: Office of the Chief Counsel (FinCEN), (703) 905-3590;
Office of the Assistant General Counsel for Enforcement (Treasury),
(202) 622-1927; or the Office of the Assistant General Counsel for
Banking & Finance (Treasury), (202) 622-0480.
SUPPLEMENTARY INFORMATION:
I. Background
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the USA PATRIOT
Act, Public Law 107-56. Title III of the Act, captioned ``International
Money Laundering Abatement and Anti-terrorist Financing Act of 2001,''
adds several new provisions to the Bank Secrecy Act (BSA), 31 U.S.C.
5311 et seq. These provisions are intended to facilitate the
prevention, detection, and prosecution of international money
laundering and the financing of terrorism.
Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318
that requires the Secretary to prescribe regulations setting forth
minimum standards for financial institutions that relate to the
identification and verification of any person who applies to open an
account.
Section 326 applies to all ``financial institutions.'' This term is
defined very broadly in the BSA to encompass a variety of entities
including banks, agencies and branches of foreign banks in the United
States, thrifts, credit unions, brokers and dealers in securities or
commodities, insurance companies, travel agents, pawnbrokers, dealers
in precious metals, check-cashers, casinos, and telegraph companies,
among many others. See 31 U.S.C. 5312(a)(2).
For any financial institution engaged in financial activities
described in section 4(k) of the Bank Holding Company Act of 1956
(section 4(k) institutions), the Secretary is required to prescribe the
regulations issued under section 326 jointly with each of the Agencies,
the SEC, and the CFTC (the Federal functional regulators). Final
regulations implementing section 326 must be effective by October 25,
2002.
Section 326 of the Act provides that the regulations must contain
certain requirements. At a minimum, the regulations must require
financial institutions to implement reasonable procedures for (1)
verifying the identity of any person seeking to open an account, to the
extent reasonable and practicable; (2) maintaining records of the
information used to verify the person's identity, including name,
address, and other identifying information; and (3) determining whether
the person appears on any lists of known or suspected terrorists or
terrorist organizations provided to the financial institution by any
government agency.
In prescribing these regulations, the Secretary is directed to take
into consideration the various types of accounts maintained by various
types of financial institutions, the various methods of opening
accounts, and the various types of identifying information available.
The following proposal is being issued jointly by Treasury and the
Agencies. It applies only to a financial institution that is a ``bank''
as defined in 31 CFR 103.11(c) that is subject to regulation by one of
the Agencies,\1\ and any foreign branch of an insured bank. Regulations
governing the applicability of section 326 to other financial
institutions, including section 4(k) institutions regulated by the SEC
and the CFTC, will be issued separately.
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\1\ Published elsewhere in this separate part of this issue of
the Federal Register is a separate Treasury proposal implementing
section 326 for banks that are not subject to regulation by a
Federal functional regulator, including certain state-chartered
uninsured trust companies and non-federally insured credit unions.
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Treasury, the Agencies, the SEC, and the CFTC consulted extensively
in the development of all rules implementing section 326 of the Act.
All of the participating agencies intend the effect of the rules to be
uniform throughout the financial services industry.
The Secretary has determined that the records required to be kept
by section 326 of the Act have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, to protect against
international terrorism.
In addition, Treasury under its own authority is proposing
conforming amendments to 31 CFR 103.34, which currently imposes
requirements concerning the identification of bank customers.
B. Codification of the Joint Proposed Rule
The substantive requirements of the joint proposed rule will be
codified with other Bank Secrecy Act regulations as part of Treasury's
regulations in 31 CFR part 103. To minimize potential confusion by
affected entities regarding the scope of the joint proposed rule, each
of the Agencies is also proposing to add a nonsubstantive provision in
its own regulations in either 12 CFR part 21, 12 CFR parts 208 and 211,
12 CFR part 326, 12 CFR part 563, or 12 CFR part 748, that will cross-
reference the regulations in 31 CFR part 103. Although no specific text
is being proposed at this time, the cross-references will be included
in individual final rules published concurrently with the joint final
rule issued by Treasury and the Agencies implementing section 326 of
the Act.
II. Section-by-Section Analysis
A. Regulations Implementing Section 326
Definitions
Section 103.121(a)(1) Account. The proposed rule's definition of
``account'' is based on the statutory definition of ``account'' that is
used in section 311 of the Act. ``Account'' means each formal banking
or business relationship established to provide ongoing services,
dealings, or other financial transactions. For example, a deposit
account, transaction or asset account, and a credit account or other
extension of credit would each constitute an account.
Section 311 of the Act does not require that this definition be
used for regulations implementing section 326 of the Act. However, to
the extent possible, Treasury and the Agencies propose to apply
consistent definitions for each of the regulations implementing the Act
to reduce confusion. ``Deposit accounts'' and ``transaction accounts,''
which as previously noted, are considered ``accounts'' for purposes of
this rulemaking, are themselves defined terms. In addition, the term
``account'' is limited to banking and business relationships
established to provide ``ongoing'' services, dealings, or other
financial transactions to make clear that this term is not intended to
cover infrequent transactions such as the occasional purchase of a
money order or a wire transfer.
Section 103.121(a)(2) Bank. As discussed above, the proposal adopts
the definition of ``bank'' already used in 31 CFR 103.11(c), which
encompasses
[[Page 48292]]
virtually all of the financial institutions regulated by the Agencies,
including banks, savings associations, and credit unions. Any branch,
agency, or representative office of a foreign bank in the United
States, as well as any Edge corporation, would be subject to this joint
regulation under the existing definition of ``bank.''\2\ However, the
definition is modified to include ``any foreign branch of an insured
bank'' to make clear that the procedures required by this regulation
must be implemented throughout the bank, no matter where its offices
are located. These procedures also apply to bank subsidiaries to the
same extent as existing BSA compliance program requirements. We note
that securities broker-dealers, futures commission merchants, insurance
companies, and investment companies will be subject to forthcoming
rules implementing section 326, whether or not they are affiliated with
a bank.
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\2\ Section 103.11(c) defines bank to include ``each agent,
agency, branch, or office within the United States of any person
doing business in one or more of the capacities listed below: * * *.
(8) a bank organized under foreign law; (9) any national banking
association or corporation acting under the provisions of section
[25a] of the [Federal Reserve Act] (12 U.S.C. 611-32).''
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Section 103.121(a)(3) Customer. The proposed rule defines
``customer'' to mean any person seeking to open a new account.
Accordingly, the term ``customer'' includes a person applying to open
an account, but would not cover a person seeking information about an
account, such as rates charged or interest paid on an account, if the
person does not actually open an account. ``Customer'' includes both
individuals and other persons such as corporations, partnerships, and
trusts. In addition, any person seeking to open an account at a bank,
on or after the effective date of the final rule, will be a
``customer,'' regardless of whether that person already has an account
at the bank.
The proposed rule also defines a ``customer'' to include any
signatory on an account. Thus, for example, an individual with signing
authority over a corporate account is a ``customer'' within the meaning
of the proposed rule. A signatory can become a ``customer'' when the
account is opened or when the signatory is added to an existing
account.
The requirements of section 326 of the Act apply to any person
``seeking to open a new account.'' Accordingly, transfers of accounts
from one bank to another, that are not initiated by the customer, for
example, as a result of a merger, acquisition, or purchase of assets or
assumption of liabilities, fall outside of the scope of section 326,
and are not covered by the proposed regulation.\3\
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\3\ However, there may be situations involving the transfer of
accounts where it would be appropriate for a bank to verify the
identity of customers associated with the accounts that it is
acquiring. Therefore, Treasury and the Agencies expect procedures
for transfers of accounts to be part of a bank's existing BSA
program.
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Section 103.121(a)(4) Federal functional regulator. The proposed
rule defines ``Federal functional regulator'' by reference to
Sec. 103.120(a)(2). Accordingly, this term means each of the Agencies
(as well as the SEC and the CFTC)
Section 103.121(a)(5) Person. The proposed rule defines ``person''
by reference to Sec. 103.11(z). This definition includes individuals,
corporations, partnerships, trusts, estates, joint stock companies,
associations, syndicates, joint ventures, other unincorporated
organizations or groups, certain Indian Tribes, and all entities
cognizable as legal personalities.
Section 103.121(a)(6) U.S. Person. Under the proposed rule, for an
individual, ``U.S. person'' means a U.S. citizen. For persons other
than an individual, ``U.S. person'' means an entity established or
organized under the laws of a State or the United States. A non-U.S.
person is defined in Sec. 103.121(a)(7) as a person who does not
satisfy these criteria.
Section 103.121(a)(8) Taxpayer identification number. The proposed
rule continues the provision in current Sec. 103.34(a)(4), which
provides that the provisions of section 6109 of the Internal Revenue
Code and the regulations of the Internal Revenue Service thereunder
determine what constitutes a taxpayer identification number.
Customer Identification Program: Minimum Requirements
Section 103.121(b)(1) General Rule. Section 326 of the Act requires
Treasury and the Agencies to jointly issue a regulation that
establishes minimum standards regarding the identity of any customer
who applies to open an account. Section 326 then prescribes three
procedures that Treasury and the Agencies must require institutions to
implement as part of this process: (1) Identification and verification
of persons seeking to open an account; (2) recordkeeping; and (3)
comparison with government lists.
Rather than imposing the same list of specific requirements on
every bank, regardless of its circumstances, the proposed regulation
requires all banks to implement a Customer Identification Program (CIP)
that is appropriate given the bank's size, location, and type of
business. The proposed regulation requires a bank's CIP to contain the
statutorily prescribed procedures, describes these procedures, and
details certain minimum elements that each of the procedures must
contain.
In addition, the proposed rule requires that the CIP be written and
that it be approved by the bank's board of directors or a committee of
the board. This latter requirement highlights the responsibility of a
bank's board of directors to approve and exercise general oversight
over the bank's CIP.
Under the proposed regulation, the CIP must be incorporated into
the bank's anti-money laundering (BSA) program.\4\ A bank's BSA program
must include (1) internal policies, procedures, and controls to ensure
ongoing compliance; (2) designation of a compliance officer; (3) an
ongoing employee training program; and (4) an independent audit
function to test programs. Each of these requirements also applies to a
bank's CIP.
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\4\ All insured depository institutions currently must have a
BSA program. See 12 CFR 21.21 (OCC), 12 CFR 208.63 (Board), 12 CFR
326.8 (FDIC), 12 CFR 563.177 (OTS), and 12 CFR 748.2 (NCUA). In
addition, all financial institutions are required by 31 U.S.C.
5318(h) to develop and implement an anti-money laundering program.
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Unlike other sections of 31 CFR 103, the proposed regulation
explicitly states that the CIP must be a part of a bank's BSA program.
This language is included to make clear that the CIP is not a separate
program. However, this statement should not be read to create any
negative inference about a bank's need to establish and maintain a BSA
program that is designed to ensure compliance with all other sections
of 31 CFR 103.
Section 103.121(b)(2) Identity Verification Procedures. Under
section 326 of the Act, the regulations issued by Treasury and the
Agencies must require banks to implement and comply with reasonable
procedures for verifying the identity of any person seeking to open an
account, to the extent reasonable and practicable. The proposed
regulation implements this requirement by providing that each bank must
have risk-based procedures for verifying the identity of a customer
that take into consideration the types of accounts that banks maintain,
the different methods of opening accounts, and the types of identifying
information available. These procedures must enable the bank to form a
reasonable belief that it knows the true identity of the customer.
Under the proposed regulation, a bank must first have procedures
that specify
[[Page 48293]]
the identifying information that the bank must obtain from any
customer. The proposed regulation also sets forth certain, minimal
identifying information that a bank must obtain prior to opening an
account or adding a signatory to an account. Second, the bank must have
procedures describing how the bank will verify the identifying
information provided. The bank must have procedures that describe when
it will use documents for this purpose and when it will use other
methods, either in addition or as an alternative to using documents for
the purpose of verifying the identity of a customer.
While a bank's CIP must contain the identity verification
procedures set forth above, these procedures are to be risk-based. For
example, a bank need not verify the identifying information of an
existing customer seeking to open a new account, or who becomes a
signatory on an account, if the bank (1) previously verified the
customer's identity in accordance with procedures consistent with this
regulation, and (2) continues to have a reasonable belief that it knows
the true identity of the customer. The proposal requires a bank to
exercise reasonable efforts to ascertain the identity of each customer.
Although the main purpose of the Act is to prevent and detect money
laundering and the financing of terrorism, Treasury and the Agencies
anticipate that the proposed regulation will ultimately benefit
consumers. In addition to deterring money laundering and terrorist
financing, requiring every bank to establish comprehensive procedures
for verifying the identity of customers should reduce the growing
incidence of fraud and identity theft involving new accounts.\5\
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\5\ Last year, over 86,000 complaints were logged into the
Identity Theft Complaint database established by the Federal Trade
Commission (FTC). Forms of identity theft commonly reported included
(1) credit card fraud, where one or more new credit cards were
opened in the victim's name; (2) bank fraud, where a new bank
account was opened in the victim's name; and (3) fraudulent loans,
where a loan had been obtained in the victim's name. See Statement
of J. Howard Beales, Director, Bureau of Consumer Protection, FTC,
to the Senate Committee on the Judiciary, Subcommittee on
Technology, March 20, 2002.
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Section 103.121(b)(2)(i) Information Required. The proposed
regulation provides that a bank's CIP must contain procedures that
specify the identifying information the bank must obtain from a
customer. At a minimum, a bank must obtain from each customer the
following information prior to opening an account or adding a signatory
to an account: name; address; for individuals, date of birth; and an
identification number, described in greater detail below. To satisfy
the requirement that a bank obtain the address of a customer, Treasury
and the Agencies expect a bank to obtain both the address of an
individual's residence and, if different, the individual's mailing
address. For customers who are not individuals, the bank should obtain
an address showing the customer's principal place of business and, if
different, the customer's mailing address.
For U.S. persons a bank must obtain a U.S. taxpayer identification
number (e.g., social security number, individual taxpayer
identification number, or employer identification number). For non-U.S.
persons a bank must obtain one or more of the following: a taxpayer
identification number; passport number and country of issuance; alien
identification card number; or number and country of issuance of any
other government-issued document evidencing nationality or residence
and bearing a photograph or similar safeguard. The basic information
that banks would be required to obtain under this proposed regulation
reflects the type of information that financial institutions currently
obtain in the account-opening process and is similar to the identifying
information currently required for each deposit or share account opened
(see 31 CFR 103.34(a)(1)). The proposed regulation uses the term
``similar safeguard'' to permit the use of any biometric identifiers
that may be used in addition to, or instead of, photographs.
Treasury and the Agencies recognize that a new business may need
access to banking services, particularly a bank account or an extension
of credit, before it has received an employer identification number
from the Internal Revenue Service. For this reason, the proposed
regulation contains a limited exception to the requirement that a
taxpayer identification number must be provided prior to establishing
or adding a signatory to an account. Accordingly, a CIP may permit a
bank to open or add a signatory to an account for a person other than
an individual (such as a corporation, partnership, or trust) that has
applied for, but has not received, an employer identification number.
However, in such a case, the CIP must require that the bank obtain a
copy of the application before it opens or adds a signatory to the
account and obtain the employee identification number within a
reasonable period of time after an account is established or a
signatory is added to an account. Currently, the IRS indicates that the
issuance of an employer identification number can take up to five
weeks. This length of time, coupled with when the person applied for
the employer identification number, should be considered by the bank in
determining the reasonable period of time within which the person
should provide its employer identification number to the bank.
Section 103.121(b)(2)(ii) Verification. The proposed regulation
provides that the CIP must contain risk-based procedures for verifying
the information that the bank obtains in accordance with
Sec. 103.121(b)(2)(i), within a reasonable period of time after the
account is opened. Treasury and the Agencies considered proposing that
a customer's identity be verified before an account is opened or within
a specific time period after the account is opened. However, we
recognize that such a position would be unduly burdensome for both
banks and customers and therefore contrary to the plain language of the
statute, which states that the procedures must be both reasonable and
practicable. The amount of time it will take an institution to verify
identity may depend upon the type of account opened, whether the
customer is physically present when the account is opened, and the type
of identifying information available. In addition, although an account
may be opened, it is common practice among banks to place limits on the
account, such as by restricting the number of transactions or the
dollar value of transactions, until a customer's identity is verified.
Therefore, the proposed regulation provides a bank with the flexibility
to use a risk-based approach to determine how soon identity must be
verified.\6\
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\6\ It is possible that a bank would, however, violate other
laws by permitting a customer to transact business prior to
verifying the customer's identity. See, e.g., 31 CFR 500,
prohibiting transactions involving designated foreign countries or
their nationals.
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Section103.121(b)(2)(ii)(A) Verification Through Documents. The CIP
must contain procedures describing when the bank will verify identity
through documents and setting forth the documents that the bank will
use for this purpose. For individuals, these documents may include:
unexpired government-issued identification evidencing nationality or
residence and bearing a photograph or similar safeguard. For
corporations, partnerships, trusts, and other persons that are not
individuals, these may be documents showing the existence of the
entity, such as registered articles of incorporation, a government-
issued business license, partnership agreement, or trust instrument.
Section 103.121(b)(2)(ii)(B) Non-Documentary Verification. The
proposed regulation provides that a
[[Page 48294]]
bank's CIP also must contain procedures describing non-documentary
methods the bank will use to verify identity and when these methods
will be used in addition to, or instead of, relying on documents. For
example, the procedures must address situations where an individual is
unable to present an unexpired government-issued identification
document that bears a photograph or similar safeguard; the bank is not
familiar with the documents presented; the account is opened without
obtaining documents; the account is not opened in a face-to-face
transaction; and the type of account increases the risk that the bank
will not be able to verify the true identity of the customer through
documents.
Treasury and the Agencies believe that banks typically require
documents to be presented when an account is opened face-to-face.
Although customers usually satisfy these requirements by presenting
government-issued identification documents bearing a photograph, such
as a driver's license or passport, Treasury and the Agencies recognize
that some customers legitimately may be unable to present those
customary forms of identification when opening an account. For example,
an elderly person may not have a valid driver's license or passport.
Under these circumstances, Treasury and the Agencies expect that banks
will provide products and services to those customers and verify their
identities through other methods. Similarly, a bank may be unable to
obtain original documents to verify a customer's identity when an
account is opened by telephone, by mail, and over the Internet. Thus,
when an account is opened for a customer who is not physically present,
a bank will be permitted to use other methods of verification, to the
extent set forth in the CIP.
While other verification methods must be used when a bank cannot
examine original documents, Treasury and the Agencies also recognize
that original identification documents, including those issued by a
government entity, may be obtained illegally and may be fraudulent. In
light of the recent increase in identity fraud, banks are encouraged to
use other verification methods, even when a customer has provided
original documents.
Obtaining sufficient information to verify a customer's identity
can reduce the risk that a bank will be used as a conduit for money
laundering and terrorist financing. The risk that the bank will not
know the customer's true identity will be heightened for certain types
of accounts, such as accounts opened in the name of a corporation,
partnership, or trust that is created or conducts substantial business
in jurisdictions that have been designated by the United States as a
primary money laundering concern or have been designated as non-
cooperative by an international body. As a bank's identity verification
procedures should be risk-based, they should identify types of accounts
that pose a heightened risk, and prescribe additional measures to
verify the identity of any person seeking to open an account and the
signatory for such accounts.
The proposed regulation gives examples of other non-documentary
verification methods that a bank may use in the situations described
above. These methods could include contacting a customer after the
account is opened; obtaining a financial statement; comparing the
identifying information provided by the customer against fraud and bad
check databases to determine whether any of the information is
associated with known incidents of fraudulent behavior (negative
verification); comparing the identifying information with information
available from a trusted third party source, such as a credit report
from a consumer reporting agency (positive verification); and checking
references with other financial institutions. The bank also may wish to
analyze whether there is logical consistency between the identifying
information provided, such as the customer's name, street address, ZIP
code, telephone number, date of birth, and social security number
(logical verification).\7\
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\7\ Treasury and the Agencies understand that most banks
currently make use of technology that permits instantaneous
negative, positive, and logical verification of identity.
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Section 103.121(b)(2)(iii) Lack of Verification. The proposed
regulation also states that a bank's CIP must include procedures for
responding to circumstances in which the bank cannot form a reasonable
belief that it knows the true identity of a customer.
Generally, a bank should only maintain an account for a customer
when it can form a reasonable belief that it knows the customer's true
identity.\8\ Thus, a bank should have procedures that specify the
actions that it will take when it cannot form a reasonable belief that
it knows the true identity of a customer, including when an account
should not be opened. In addition, a bank's CIP should have procedures
that address the terms under which a customer may conduct transactions
while a customer's identity is being verified. The procedures also
should specify at what point, after attempts to verify a customer's
identity have failed, a customer's account that has been opened should
be closed. Finally, if a bank cannot form a reasonable belief that it
knows the identity of a customer, the procedures should also include
determining whether a Suspicious Activity Report should be filed in
accordance with applicable law and regulation.
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\8\ There are some exceptions to this basic rule. For example, a
bank may maintain an account, at the direction of a law enforcement
or intelligence agency, although the bank does not know the true
identity of a customer.
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Section 103.121(b)(3) Recordkeeping. Section 326 of the Act
requires reasonable procedures for maintaining records of the
information used to verify a person's name, address, and other
identifying information. The proposed regulation sets forth
recordkeeping procedures that must be included in a bank's CIP. Under
the proposal, a bank is required to maintain a record of the
identifying information provided by the customer. Where a bank relies
upon a document to verify identity, the bank must maintain a copy of
the document that the bank relied on that clearly evidences the type of
document and any identifying information it may contain.\9\ The bank
also must record the methods and result of any additional measures
undertaken to verify the identity of the customer. Last, the bank must
record the resolution of any discrepancy in the identifying information
obtained. The bank must retain all of these records for five years
after the date the account is closed.
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\9\ The bank need not keep a separate record of the identifying
information provided by the customer if this information clearly
appears on the copy of the document maintained by the bank.
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Treasury and the Agencies emphasize that the collection and
retention of information about a customer, such as an individual's race
or sex, as an ancillary part of collecting identifying information do
not relieve a bank from its obligations to comply with anti-
discrimination laws or regulations, such as the prohibition in the
Equal Credit Opportunity Act against discrimination in any aspect of a
credit transaction on the basis of race, color, religion, national
origin, sex or marital status, age, or other prohibited
classifications.
Nothing in this proposed regulation modifies, limits or supersedes
section 101 of the Electronic Signatures in Global and National
Commerce Act, Public Law 106-229, 114 Stat. 464 (15 U.S.C. 7001) (E-
Sign Act). Thus, a bank may use electronic records to satisfy the
requirements of this regulation, as long as the records are accurate
and remain
[[Page 48295]]
accessible in accordance with 31 CFR 103.38(d).
Section 103.121(b)(4) Comparison with Government Lists. Section 326
of the Act also requires reasonable procedures for determining whether
the customer appears on any list of known or suspected terrorists or
terrorist organizations provided to the bank by any government agency.
The proposed rule implements this requirement and clarifies that the
requirement applies only with respect to lists circulated by the
Federal government.
In addition, the proposed rule states that the procedures must
ensure that the bank follows all Federal directives issued in
connection with such lists. This provision makes clear that a bank must
have procedures for responding to circumstances when the bank
determines that a customer is named on a list.
Section 103.121(b)(5) Customer Notice. Section 326 of the Act
states that customers of financial institutions shall be required to
comply with the identity verification procedures described above
``after being given adequate notice.'' Therefore, a bank's CIP must
include procedures for providing bank customers with adequate notice
that the bank is requesting information to verify their identity. A
bank may satisfy the notice requirement by generally notifying its
customers about the procedures the bank must comply with to verify
their identities. For example, the bank may post a sign in its lobby or
provide customers with any other form of written or oral notice. If an
account is opened electronically, such as through an Internet website,
the bank may also provide notice electronically.
Section 103.121(c) Exemptions. Section 326 states that the
Secretary (and, in the case of section 4(k) institutions, the
appropriate Federal functional regulator, as defined in section
103.120(a)(2)), may by regulation or order, exempt any financial
institution or type of account from the requirements of this regulation
in accordance with such standards and procedures as the Secretary may
prescribe.
Under the proposed rule, the appropriate Federal functional
regulator, with the concurrence of Treasury, may by order or regulation
exempt any bank or type of account from the requirements of this
section. In issuing such exemptions, the Federal functional regulator
and the Treasury shall consider whether the exemption is consistent
with the purposes of the Bank Secrecy Act, consistent with safe and
sound banking, and in the public interest. The Federal functional
regulator and Treasury also may consider other necessary and
appropriate factors.
Section 103.121(d) Other Information Requirements Unaffected. This
section provides that nothing in section 103.121 shall be construed to
relieve a bank of its obligations to obtain, verify, or maintain
information in connection with an account or transaction that is
required by another provision in part 103. For example, if an account
is opened with a deposit of more than $10,000 in cash, the bank opening
the account must comply with the customer identification requirements
in section 103.121, as well as with the provisions of section 103.22,
which require that certain information concerning the transaction be
reported by filing a Cash Transaction Report (CTR).
B. Conforming Amendments to 31 CFR 103.34
Current section 103.34(a) sets forth customer identification
requirements when certain types of deposit accounts are opened.
Generally, sections 103.34(a)(1) and (2) require a bank, within 30 days
after certain deposit accounts are opened, to secure and maintain a
record of the taxpayer identification number of the customer involved.
If the bank is unable to obtain the taxpayer identification number
within 30 days (or a longer time if the person has applied for a
taxpayer identification number), it need take no further action under
section 103.34 concerning the account if it maintains a list of the
names, addresses, and account numbers of the persons for which it was
unable to secure taxpayer identification numbers, and provides that
information to the Secretary upon request. In the case of a non-
resident alien, the bank is required to record the person's passport
number or a description of some other government document used to
determine identification. Treasury and the Agencies believe that the
requirements of section 103.34(a)(1) and (2) are inconsistent with the
intent and purpose of section 326 of the Act and incompatible with
proposed section 103.121.
Section 103.34(a)(3) currently provides that a bank need not obtain
a taxpayer identification number with respect to specified categories
of persons \10\ opening certain deposit accounts. This proposed rule
does not contain any exemptions from the CIP requirements.
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\10\ The exemption applies to (i) agencies and instrumentalities
of Federal, State, local, or foreign governments; (ii) judges,
public officials, or clerks of courts of record as custodians of
funds in controversy or under the control of the court; (iii) aliens
who are ambassadors; ministers; career diplomatic or consular
officers; naval, military, or other attaches of foreign embassies
and legations; and members of their immediate families; (iv) aliens
who are accredited representatives of certain international
organizations, and their immediate families; (v) aliens temporarily
residing in the United States for a period not to exceed 180 days;
(vi) aliens not engaged in a trade or business in the United States
who are attending a recognized college or university, or any
training program supervised or conducted by an agency of the Federal
Government; (vii) unincorporated subordinate units of a tax exempt
central organization that are covered by a group exemption letter;
(viii) a person under 18 years of age, with respect to an account
opened at part of a school thrift savings program, provided the
annual interest is less than $10; (ix) a person opening a Christmas
club, vacation club, or similar installment savings program,
provided the annual interest is less than $10; and (x) non-resident
aliens who are not engaged in a trade or business in the United
States.
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Treasury and the Agencies are requesting comments on whether any of
these exemptions should apply in the context of the proposed CIP
requirements in light of the intent and purpose of section 326 of the
Act.
Section 103.34(a)(4) provides that section 6109 of the Internal
Revenue Code and the rules and regulations of the Internal Revenue
Service (IRS) promulgated thereunder shall determine what constitutes a
taxpayer identification number. This provision is continued in proposed
section 103.121(a)(8). Section 103.34(a)(4) also provides that IRS
rules shall determine whose number shall be obtained in the case of
multiple account holders. Treasury and the Agencies believe that this
provision is inconsistent with section 326 of the Act, which requires
that banks verify the identity of ``any'' person seeking to open an
account.
For these reasons, Treasury, under its own authority, is proposing
to repeal section 103.34(a).
Section 103.34(b) sets forth certain recordkeeping requirements for
banks. Among other things, section 103.34(b)(1) requires a bank to keep
``any notations, if such are normally made, of specific identifying
information verifying the identity of [a person with signature
authority over an account] (such as a driver's license number or credit
card number).'' Treasury and the Agencies believe that the quoted
language in section 103.34(b)(1) is inconsistent with the requirements
of proposed section 103.121. For this reason, Treasury, under its own
authority, is proposing to delete the quoted language.
C. Technical Amendment to 31 CFR 103.11(j)
Section 103.11(j), which defines the term ``deposit account,''
contains an
[[Page 48296]]
obsolete reference to the definition of ``transaction account,'' which
is defined in section 103.11(hh). Under its own authority, Treasury is
proposing to correct this reference.
III. Request for Comments
Treasury and the Agencies invite comment on all aspects of this
rulemaking, and specifically seek comment on the following issues:
1. Whether the proposed definition of ``account'' is appropriate
and whether other examples of accounts should be added to the
regulatory text.
2. How the proposed regulation should apply to various types of
accounts that are designed to allow a customer to transact business
immediately.
3. Whether the definition of ``bank'' in the proposed regulation
should be amended with respect to the foreign branches of banks by (i)
excluding foreign branches or (ii) clarifying that a foreign branch
must comply only to the extent that the bank's program does not
contravene applicable local law. Treasury and the Agencies request that
commenters cite and describe any potentially conflicting foreign laws
that may apply to the foreign branches of banks.
Comment is requested on this issue because Treasury and the
Agencies recognize that interpreting the BSA to apply to the foreign
branch of a U.S. depository institution could cause practical and legal
problems for that institution if the branch has a conflicting
obligation under applicable local law. The regulation, if adopted as
proposed, may place a foreign branch in a position of potentially
violating local law by implementing aspects of its bank's CIP, which is
described more fully in the Supplemental Information, above.
4. Ways that banks can comply with the requirement that a bank
obtain both the address of an individual's residence, and, if
different, the individual's mailing address in situations involving
individuals who lack a permanent address.
5. Whether non-U.S. persons that are not individuals will be able
to provide a bank with the identifying information required in section
103.121(b)(2)(i)(D)(2), or whether other categories of identifying
information should be added to this section to permit non-U.S. persons
that are not individuals to open accounts. Commenters on this issue
should suggest other means of identification that banks currently use
or should use.
6. Whether the proposed regulation will subject banks to
conflicting State laws. Treasury and the Agencies request that
commenters cite and describe any potentially conflicting State laws.
7. The extent to which the verification procedures required by the
proposed regulation make use of information that banks currently obtain
in the account opening process. Treasury and the Agencies note that the
legislative history of section 326 indicates that Congress intended
``the verification procedures prescribed by Treasury [to] make use of
information currently obtained by most financial institutions in the
account opening process.'' See H.R. Rep. No. 107-250, pt. 1, at 63
(2001).
8. Whether any of the exemptions from the customer identification
requirements contained in current section 103.34(a)(3) should be
continued in section 103.121(c). In this regard, Treasury and the
Agencies request that commenters address the standards set forth in
proposed section 103.121(c) (as well as any other appropriate factors).
IV. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the OCC, Board,
FDIC, and OTS to use plain language in all proposed and final rules
published after January 1, 2000. Therefore, these agencies specifically
invite your comments on how to make this proposal easier to understand.
For example:
Have we organized the material to suit your needs? If not,
how could this material be better organized?
Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be more clearly stated?
Does the proposed regulation contain language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
What else could we do to make the regulation easier to
understand?
V. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (RFA) requires the agency to ``prepare and make
available for public comment an initial regulatory flexibility
analysis'' unless the agency certifies that the rule will not have a
``significant economic impact on a substantial number of small
entities.'' 5 U.S.C. 603, 605(b).\11\
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\11\ The RFA defines the term ``small entity'' in 5 U.S.C. 601
by reference to the definitions published by the Small Business
Administration (SBA). The SBA has defined a ``small entity'' for
banking purposes as a bank or savings institution with less than
$150 million in assets. See 13 CFR 121.201. The NCUA defines ``small
credit union'' as those under $1 million in assets. Interpretive
Ruling and Policy Statement No. 87-2, Developing and Reviewing
Government Regulations (52 FR 35231, September 18, 1987).
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The Agencies have reviewed the impact of this proposed rule on
small banks. Treasury and the Agencies certify that the proposed rule
will not have a significant economic impact on a substantial number of
small entities. The requirements of the proposed rule closely parallel
the requirements for customer identification programs mandated by
section 326 of the Act.
Moreover, Treasury and the Agencies believe that banks already have
implemented prudential business practices and anti-money laundering
programs that involve the key controls that would be required in a
customer identification program in accordance with the proposed
regulation. First, all banks already undertake extensive measures to
verify the identity of their customers as a matter of good business
practice. In addition, banks already must have anti-money laundering
programs that include procedures for identification, verification, and
documentation of customer information.\12\
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\12\ See footnote 3.
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Second, banks already should have compliance programs in place to
check lists provided by the Federal government of known and suspected
terrorists and terrorist organizations. Currently, banks are prohibited
from engaging in transactions involving certain foreign countries or
their nationals under rules issued by the Office of Foreign Assets
Control (OFAC). See 31 CFR 500. Banks should already have compliance
programs in place to ensure that they do not violate OFAC rules.
Treasury and the Agencies understand that many banks, including small
banks, have instituted programs to check other lists provided to them
by the Federal government following the events of September 11, 2001.
Treasury and the Agencies believe that all banks have access to a
variety of resources, such as computer software packages, that enable
them to check lists provided by the Federal government.
Third, Treasury and the Agencies believe the provision in the
proposed rule that requires a bank to provide adequate notice to its
customers that it is requesting information to verify their
[[Page 48297]]
identity will impose minimal costs on banks. Banks may elect to satisfy
that requirement through a variety of low-cost measures, such as by
posting a sign in the bank's lobby or providing any other form of
written or oral notice.
The recordkeeping requirements similarly may impose some costs on
banks, if, for example, some of the information that must be maintained
as a consequence of implementing customer identification programs is
not already retained. Treasury and the Agencies believe that the
compliance burden, if any, is minimized for banks, including small
banks, because the proposed regulation vests a bank with the discretion
to design and implement appropriate recordkeeping procedures, including
allowing banks to maintain electronic records in lieu of (or in
combination with) paper records.
Finally, Treasury and the Agencies believe that the flexibility
incorporated into the proposed rule will permit each bank to tailor its
CIP to fit its own size and needs. In this regard, Treasury and the
Agencies believe that expenditures associated with establishing and
implementing a CIP will be commensurate with the size of a bank. If a
bank is small, the burden to comply with the proposed rule should be de
minimis.
VI. Paperwork Reduction Act
The proposed rule contains recordkeeping and disclosure
requirements that are subject to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.). In summary, the proposed rule requires banks
to implement reasonable procedures to (1) maintain records of the
information used to verify the person's identity and (2) provide notice
of these procedures to customers. These recordkeeping and disclosure
requirements are required under section 326 of the Act.
The proposed rule applies only to a financial institution that is a
``bank'' as defined in 31 CFR 103.11(c),\13\ and any foreign branch of
an insured bank. The proposed rule requires each bank to establish a
written CIP that must include recordkeeping procedures (proposed
section 103.121(b)(3)) and procedures for providing customers with
notice that the bank is requesting information to verify their identity
(proposed section 103.121(b)(5)).
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\13\ This definition includes banks, thrifts, and credit unions.
---------------------------------------------------------------------------
The proposed rule requires a bank to maintain a record of (1) the
identifying information provided by the customer, the type of
identification document(s) reviewed, if any, the identification number
of the document(s), and a copy of the identification document(s); (2)
the means and results of any additional measures undertaken to verify
the identity of the customer; and (3) the resolution of any discrepancy
in the identifying information obtained. These records must be
maintained at the bank for five years after the date the account is
closed (proposed section 103.121(b)(3)). Treasury and the Agencies
believe that little burden is associated with the recordkeeping
requirements outlined in proposed section 103.121(b)(2), because such
recordkeeping is a usual and customary business practice. In addition,
banks already must keep similar records to comply with existing
regulations in 31 CFR part 103 (see, e.g., 31 CFR 103.34, requiring
certain records for each deposit or share account opened).
The proposed rule also requires banks to give customers ``adequate
notice'' of the identity verification procedures (proposed section
103.121(b)(5)). A bank may satisfy the notice requirement by posting a
sign in the lobby or providing customers with any other form of written
or oral notice. If the account is opened electronically, the bank may
provide the notice electronically. Treasury and the Agencies believe
that nominal burden is associated with the disclosure requirement
outlined in proposed section 103.121(b)(5). This section requires a
bank to notify its customers about the procedures the bank has
implemented to verify their identities. However, a bank may choose
among a variety of methods of providing adequate notice and may select
the least burdensome method, given the circumstances under which
customers seek to open new accounts.
A person is not required to respond to a collection of information
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The collection of information requirements
contained in the proposed rule have been submitted to the OMB by
Treasury in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507).
The institutions subject to these requirements include national
banks and Federal branches and agencies (OCC financial institutions);
state member banks and branches and agencies of foreign banks (Board
financial institutions); insured state nonmember banks (FDIC financial
institutions); savings associations (OTS financial institutions); and
federally insured credit unions (NCUA financial institutions).
Estimated number of OCC financial institutions: 2,289.
Estimated number of Board financial institutions: 1,188.
Estimated number of FDIC financial institutions: 5,500.
Estimated number OTS financial institutions: 1,020.
Estimated number of NCUA financial institution: 9,944.
Estimated average annual burden for the recordkeeping requirements
of the proposed rule per each financial institution respondent: 10
hours.
Estimated average annual burden for the disclosure requirements of
the proposed rule per each financial institution respondent: 1 hour.
Estimated total annual recordkeeping and disclosure burden: 219,351
hours.
Treasury and the Agencies request public comment on all aspects of
the recordkeeping and disclosure requirements contained in this
proposed rule, including how burdensome it would be for banks to comply
with these requirements. Also, Treasury and the Agencies request
comment on whether the banks are currently maintaining the records
requested in proposed section 103.121(b)(2). Treasury and the Agencies
also invite comment on:
(1) Whether the collections of information contained in the notice
of proposed rulemaking are necessary for the proper performance of each
agency's functions, including whether the information has practical
utility;
(2) The accuracy of each agency's estimate of the burden of the
proposed information collections;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collections on
respondents, including the use of automated collection techniques or
other forms of information technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information.
Comments concerning the recordkeeping and disclosure requirements
in the proposed rule should be sent (preferably by fax (202-395-6974))
to Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Paperwork Reduction Project (1506), Washington, DC 20503 (or by the
Internet to jlackeyj@omb.eop.gov), with a copy to FinCEN by mail or the
Internet at the addresses previously specified.
[[Page 48298]]
VII. Executive Order 12866
Treasury, the OCC, and OTS have determined that this proposal is
not a ``significant regulatory action'' under Executive Order 12866.
The rule follows closely the requirements of section 326 of the Act.
Treasury, the OCC, and OTS believe that national banks and savings
associations already have procedures in place that fulfill most of the
requirements of the proposed regulation. First, the procedures are a
matter of good business practice. Second, national banks and savings
associations already are required to have BSA compliance programs that
address many of the requirements detailed in this notice of proposed
rulemaking. Third, banks and savings associations should already have
compliance programs in place to ensure they comply with OFAC rules
prohibiting transactions with certain foreign countries or their
nationals.
Treasury, the OCC, and OTS invite national banks, the thrift
industry, and the public to provide any cost estimates and related data
that they think would be useful in evaluating the overall costs of the
rule.
For these reasons, and for the reasons discussed elsewhere in this
preamble, Treasury, the OCC, and OTS believe that the burden stemming
from this rulemaking will not cause the proposed rule to be a
``significant regulatory action.''
Lists of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Banks, banking, Brokers, Currency, Foreign
banking, Foreign currencies, Gambling, Investigations, Law enforcement,
Penalties, Reporting and recordkeeping requirements, Securities.
Authority and Issuance
For the reasons set forth in the preamble, part 103 of title 31 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as
follows:
Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31
U.S.C. 5311-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub
L. 107-56, 115 Stat. 307.
2. Section 103.11(j) is amended by removing ``paragraph (q)'' and
adding ``paragraph (hh)''.
3. Section 103.34 is amended as follows:
a. By removing paragraph (a);
b. By redesignating paragraph (b) introductory text and paragraphs
(b)(1) through (b)(13) as introductory text and paragraphs (a) through
(m), respectively.
c. In newly redesignated introductory text, by removing '', in
addition,'' in the first sentence; and
d. In newly redesignated paragraph (a), by removing '', including
any notations, if such are normally made, of specific identifying
information verifying the identity of the signer (such as a driver's
license number or credit card number)''.
4. Subpart I of part 103 is amended by adding new Sec. 103.121 to
read as follows:
Sec. 103.121 Customer Identification Programs for banks, savings
associations, and credit unions.
(a) Definitions. For purposes of this section:
(1) Account means each formal banking or business relationship
established to provide ongoing services, dealings, or other financial
transactions. For example, a deposit account, a transaction or asset
account, and a credit account or other extension of credit would each
constitute an account.
(2) Bank means a bank, as that term is defined in Sec. 103.11(c),
that is subject to regulation by a Federal functional regulator, and
any foreign branch of an insured bank.
(3) Customer means:
(i) Any person seeking to open a new account; and
(ii) Any signatory on the account at the time the account is
opened, and any new signatory added thereafter.
(4) Federal functional regulator has the same meaning as provided
in Sec. 103.120(a)(2).
(5) Person has the same meaning as provided in Sec. 103.11(z).
(6) U.S. person means:
(i) A U.S. citizen; or
(ii) A corporation, partnership, trust, or person (other than an
individual) that is established or organized under the laws of a State
or the United States.
(7) Non-U.S. person means a person that is not a U.S. person.
(8) Taxpayer identification number. The provisions of section 6109
of the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the
regulations of the Internal Revenue Service promulgated thereunder
shall determine what constitutes a taxpayer identification number.
(b) Customer Identification Program: minimum requirements. (1) In
general. A bank must implement a written Customer Identification
Program (Program) that, at a minimum, includes each of the components
of this section. The Program should be tailored to the bank's size,
location and type of business. The bank's board of directors or a
committee of the board must approve the Program. The Program must be a
part of the bank's anti-money laundering program required under the
regulations implementing 31 U.S.C. 5318(h), 12 U.S.C. 1818(s), and 12
U.S.C. 1786(q)(1).
(2) Identity verification procedures. The Program must include
procedures for verifying the identity of each customer, to the extent
reasonable and practicable. The procedures must be based on the bank's
assessment of the risks presented by the various types of accounts
maintained by the bank, the various methods of opening accounts
provided by the bank, and the type of identifying information
available, and must enable the bank to form a reasonable belief that it
knows the true identity of the customer.
(i) Information required. (A) In general. The Program must contain
procedures that specify the identifying information that the bank must
obtain from each customer. Except as permitted by paragraph
(b)(2)(i)(B) of this section, at a minimum, a bank must obtain the
following information prior to opening or adding a signatory to an
account:
(1) Name;
(2) For individuals, date of birth;
(3) (i) For individuals, residence and, if different, mailing
address; or
(ii) For persons other than individuals, such as corporations,
partnerships, and trusts: principal place of business and, if
different, mailing address;
(4) (i) For U.S. persons, a U.S. taxpayer identification number
(e.g., social security number, individual taxpayer identification
number, or employer identification number); or
(ii) For non-U.S. persons, one or more of the following: a U.S.
taxpayer identification number; passport number and country of
issuance; alien identification card number; or number and country of
issuance of any other government-issued document evidencing nationality
or residence and bearing a photograph or similar safeguard.
(B) Limited exception. The Program may permit the bank to open or
add a signatory to an account for a person other than an individual
(such as a corporation, partnership, or trust) that has applied for,
but has not received, an employer identification number. However, in
such a case, the bank must obtain a copy of the application before
[[Page 48299]]
it opens or adds a signatory to the account and obtain the employer
identification number within a reasonable period of time after it opens
or adds a signatory to the account.
(ii) Verification. The Program must contain risk-based procedures
for verifying the information obtained pursuant to paragraph
(b)(2)(i)(A) of this section within a reasonable time after the account
is established or a signatory is added to the account. A bank need not
verify the information about an existing customer seeking to open a new
account or who becomes a signatory on an account, if the bank
previously verified the customer's identity in accordance with
procedures consistent with this section, and continues to have a
reasonable belief that it knows the true identity of the customer.
(A) Verification through documents. The Customer Identification
Program must contain procedures describing when the bank will verify
identity through documents and setting forth the documents that the
bank will use for this purpose. These documents may include:
(1) For individuals: unexpired government-issued identification
evidencing nationality or residence and bearing a photograph or similar
safeguard; and
(2) For corporations, partnerships, trusts and persons other than
individuals: documents showing the existence of the entity, such as
registered articles of incorporation, a government-issued business
license, partnership agreement, or trust instrument.
(B) Non-documentary verification methods. The Program must contain
procedures that describe non-documentary methods the bank will use to
verify identity and when these methods will be used in addition to, or
instead of, relying on documents. These procedures must address
situations where an individual is unable to present an unexpired
government-issued identification document that bears a photograph or
similar safeguard; the bank is not familiar with the documents
presented; the account is opened without obtaining documents; the
account is not opened in a face-to-face transaction; and the type of
account increases the risk that the bank will not be able to verify the
true identity of the customer through documents. Other verification
methods may include contacting a customer; independently verifying
documentary information through credit bureaus, public databases, or
other sources; checking references with other financial institutions;
and obtaining a financial statement.
(iii) Lack of verification. The Program must include procedures for
responding to circumstances in which the bank cannot form a reasonable
belief that it knows the true identity of a customer.
(3) Recordkeeping. (i) The Program must include procedures for
maintaining a record of all information obtained under the procedures
implementing paragraph (b)(1) of this section. The record must include:
(A) All identifying information provided by a customer pursuant to
paragraphs (b)(2)(i)(A) and (B) of this section;
(B) A copy of any document that was relied on pursuant to paragraph
(b)(2)(ii)(A) of this section that clearly evidences the type of
document and any identification number it may contain;
(C) The methods and result of any measures undertaken to verify the
identity of the customer pursuant to paragraph (b)(2)(ii)(B) of this
section; and
(D) The resolution of any discrepancy in the identifying
information obtained.
(ii) The bank must retain all records for five years after the date
the account is closed.
(4) Comparison with government lists. The Program must include
procedures for determining whether the customer appears on any list of
known or suspected terrorists or terrorist organizations provided to
the bank by any federal government agency. The procedures must also
ensure that the bank follows all federal directives issued in
connection with such lists.
(5) Customer notice. The Program must include procedures for
providing bank customers with adequate notice that the bank is
requesting information to verify their identity.
(c) Exemptions. The appropriate Federal functional regulator with
the concurrence of the Secretary, may by order or regulation, exempt
any bank or type of account from the requirements of this section. In
issuing such exemptions, the Federal functional regulator and the
Secretary shall consider whether the exemption is consistent with the
purposes of the Bank Secrecy Act and with safe and sound banking, and
is in the public interest. The Federal functional regulator and the
Secretary also may consider other appropriate factors.
(d) Other information requirements unaffected. Nothing in this
section shall be construed to relieve a bank of its obligation to
comply with any other provision in this part concerning information
that must be obtained, verified, or maintained in connection with any
account or transaction.
Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
Dated: July 2, 2002.
John D. Hawke, Jr.,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 10, 2002.
Jennifer J. Johnson,
Secretary of the Board.
By order of the Board of Directors of the Federal Deposit
Insurance Corporation this 3rd day of July, 2002.
Valerie J. Best,
Assistant Executive Secretary.
Dated: July 5, 2002. In concurrence, by the Office of Thrift
Supervision.
James E. Gilleran,
Director.
Dated: July 3, 2002.
Becky Baker,
Secretary of the Board, National Credit Union Administration.
[FR Doc. 02-18191 Filed 7-22-02; 8:45 am]
BILLING CODE 4810-02-P
[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48306-48318]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-702]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-46192, File No. S7-25-02]
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA32
Customer Identification Programs For Broker-Dealers
AGENCIES: Financial Crimes Enforcement Network, Treasury; Securities
and Exchange Commission.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), and the Securities and Exchange
Commission are jointly issuing a proposed regulation to implement
section 326 of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001 (the Act). Section 326 requires the Secretary of
the Treasury to jointly prescribe with the Securities and Exchange
Commission a regulation that, at a minimum, requires broker-dealers to
implement reasonable procedures to verify the identity of any person
seeking to open an account, to the extent reasonable and practicable;
maintain records of the information used to verify the person's
identity; and determine whether the person appears on any lists of
known or suspected terrorists or terrorist organizations provided to
the broker-dealer by any government agency.
DATES: Written comments on the proposed rule may be submitted to the
Treasury Department and the Securities and Exchange Commission on or
before September 6, 2002.
ADDRESSES: Because paper mail in the Washington area may be subject to
delay, commenters are encouraged to e-mail comments. Comments should be
sent by one method only.
Treasury: Comments may be mailed to FinCEN, Section 326 Broker-
Dealer Rule Comments, P.O. Box 39, Vienna, VA 22183, or sent to
Internet address regcomments@fincen.treas.gov with the caption
``Attention: Section 326 Broker-Dealer Rule Comments'' in the body of
the text. Comments may be inspected at FinCEN between 10 a.m. and 4
p.m. in the FinCEN Reading Room in Washington, DC. Persons wishing to
inspect the comments submitted must request an appointment by
telephoning (202) 354-6400 (not a toll-free number).
Securities and Exchange Commission: Comments also should be
submitted in triplicate to Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments
also may be submitted electronically at the following e-mail address:
rulecomments@sec.gov. Comment letters should refer to File No. S7-25-
02; this file number should be included on the subject line if e-mail
is used. All comments received will be available for public inspection
and copying at the Commission's Public Reference Room, 450 Fifth
Street, NW, Washington, DC 20549-0102. Electronically submitted comment
letters will be posted on the Commission's Internet web site (http//
www.sec.gov). Personal identifying information, such as names or e-mail
addresses, will not be edited from electronic submissions. Submit only
information you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Treasury: Office of the Chief Counsel
(FinCEN), 703/905-3590; Office of the Assistant General Counsel for
Enforcement (Treasury), 202/622-1927; or the Office of the Assistant
General Counsel for Banking & Finance (Treasury), 202/622-0480.
Securities and Exchange Commission: Division of Market Regulation,
202/942-0177 or marketreg@sec.gov.
SUPPLEMENTARY INFORMATION:
I. Background
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the USA PATRIOT
Act.\1\ Title III of the Act, captioned ``International Money
Laundering Abatement and Anti-terrorist Financing Act of 2001,'' adds
several new provisions to the Bank Secrecy Act (BSA). See 31 U.S.C.
5311 et seq. These provisions are intended to facilitate the
prevention, detection, and prosecution of international money
laundering and the financing of terrorism.
---------------------------------------------------------------------------
\1\ Pub. L. 107-56.
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Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318
that requires the Secretary of the Treasury (Secretary) to prescribe
regulations setting forth minimum standards for financial institutions
and their customers regarding the identity of the customer that shall
apply in connection with the opening of an account at the financial
institution.
Section 326 applies to all ``financial institutions.'' This term is
defined very broadly in the BSA to encompass a variety of entities
including banks, agencies and branches of foreign banks in the United
States, investment companies, thrifts, credit unions, brokers and
dealers in securities or commodities, insurance companies, travel
agents, pawnbrokers, dealers in precious metals, check-cashers,
casinos, and telegraph companies, among many others. See 31 U.S.C.
5312(a)(2).
For any financial institution engaged in financial activities
described in section 4(k) of the Bank Holding Company Act of 1956
(section 4(k) institutions), the Secretary is required to prescribe the
regulations issued under section 326 jointly with each Federal
functional regulator appropriate for such financial institution. The
Federal functional regulators include the Securities and Exchange
Commission (Commission), the Commodity Futures Trading Commission
(CFTC), and the banking agencies (banking agencies), namely, the Office
of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision, and the National Credit Union
Administration. Final regulations implementing section 326 must be
effective before October 25, 2002.
Section 326 provides that the regulations, at a minimum, must
require financial institutions to implement reasonable procedures for
(1) verifying the identity of any person seeking to open an account, to
the extent reasonable and practicable; (2) maintaining records of the
information used to verify the person's identity, including name,
address, and other identifying information; and (3) determining whether
the person appears on any lists of known or suspected terrorists or
terrorist organizations provided to the financial institution by any
government agency.
In prescribing these regulations, the Secretary is directed to take
into consideration the various types of accounts maintained by various
types of financial institutions, the various methods of opening
accounts, and the various types of identifying information available.
[[Page 48307]]
The following proposal is being issued jointly by Treasury and the
Commission. It applies only to persons registered, or required to be
registered, with the Commission as brokers or dealers under the
Securities Exchange Act of 1934 (Exchange Act), except persons who
register pursuant to paragraph (b)(11) of section 15 of the Exchange
Act (15 U.S.C. 78o(b)(11)) solely because they effect transactions in
security futures products. This class of brokers and dealers will be
subject to regulations issued by Treasury and the CFTC separately.
Regulations governing the applicability of section 326 to other
financial institutions, such as those regulated by the banking
agencies, will be issued separately as well.
Treasury, the Commission, the CFTC and the banking agencies
consulted extensively in the development of all rules implementing
section 326 of the Act. All of the participating agencies intend the
effect of the rules to be uniform throughout the financial services
industry.
The Secretary has determined that the records required to be kept
by section 326 of the Act have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, to protect against
international terrorism.
In addition, Treasury under its own authority is proposing
conforming amendments to 31 CFR 103.35, which currently imposes
requirements concerning the identification of bank customers.
B. Codification of the Joint Proposed Rule
The substantive requirements of the joint proposed rule will be
codified with other BSA regulations as part of Treasury's regulations
in 31 CFR part 103. To minimize potential confusion by affected
entities regarding the scope of the joint proposed rule, the Commission
is also proposing to add a provision in its own regulations in 17 CFR
part 240 that will cross-reference the regulations in 31 CFR part 103.
Although no specific text is being proposed at this time, the cross-
reference will be included in a final rule published by the Commission
concurrently with the joint final rule issued by Treasury and the
Commission implementing section 326 of the Act.
II. Section-by-Section Analysis
A. Section 103.122(a) Definitions
Section 103.122(a)(1) Account. The proposed rule's definition of
``account'' is intended to include all types of securities accounts
maintained by brokers or dealers. These include accounts to purchase,
sell, lend or otherwise hold securities or other assets, cash accounts,
margin accounts, prime brokerage accounts that consolidate trading done
at a number of firms, and accounts for repurchase and stock loan
transactions.
Section 103.122(a)(2) Broker-dealer. The proposed rule defines
``broker-dealer'' to include any person registered, or required to be
registered, with the Commission as a broker or dealer under the
Exchange Act, except persons who register, or are required to be
registered, solely because they effect transactions in security futures
products. These latter brokers or dealers, which register with the
Commission pursuant to section 15(b)(11) of the Exchange Act, will be
subject to a separate regulation issued jointly by Treasury and the
CFTC implementing section 326.
Section 103.122(a)(3) Commission. The proposed rule defines
``Commission'' to mean the United States Securities and Exchange
Commission.
Section 103.122(a)(4) Customer. The proposed rule defines
``customer'' as any person who opens a new account at a broker-dealer
or is granted trading authority with respect to an account at a broker-
dealer. Under this definition, a person who has an account at a broker-
dealer prior to the effective date of the regulation would not be a
``customer.'' However, such a person becomes a ``customer'' if the
person opens a different account. Moreover, a person becomes a
``customer'' each time the person opens a different type of account at
a broker-dealer. Thus, if a person opens a cash account and
subsequently opens a margin account, the person would be a ``customer''
for verification purposes on both occasions.
Similarly, a person with trading authority prior to the effective
date of the regulation is not a ``customer.'' However, any person being
granted trading authority after the effective date is a customer. This
is true even if the person is granted trading authority with respect to
an account that existed prior to the effective date or the person had
been granted trading authority for another account prior to the
effective date.
The requirements of section 326 apply to ``customers'' (i.e.,
persons opening new accounts or being granted trading authority), but
do not apply to persons seeking information about an account such as a
schedule of transaction fees, if an account is not opened. In addition,
transfers of accounts from one broker-dealer to another that are not
initiated by the customer, for example as a result of a merger,
acquisition, or purchase of assets or assumption of liabilities, fall
outside of the scope of section 326, and are not covered by the
proposed regulation.\2\
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\2\ However, there may be situations involving the transfer of
accounts where it would be appropriate for a broker-dealer to verify
the identity of customers associated with the accounts it is
acquiring. Therefore, Treasury and the Commission expect procedures
for transfers of accounts to be part of a broker-dealer's overall
anti-money laundering program required under section 352 of the
Patriot Act. See Footnote 5 infra for a discussion of the
requirements of section 352.
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Section 103.122(a)(5) Person. The proposed rule defines ``person''
as having the same meaning as that term is defined in section
103.11(z). Thus, the term includes natural persons, corporations,
partnerships, trusts or estates, joint stock companies, associations,
syndicates, joint ventures, any unincorporated organizations or groups,
Indian Tribes, and all entities cognizable as legal entities.
Section 103.122(a)(6) U.S. person. The proposed rule defines ``U.S.
person'' because U.S. citizens and persons incorporated under U.S. laws
will be required to provide U.S. tax identification numbers whereas
other persons, who may not have a U.S. tax identification number, will
be required to provide other similar numbers. Thus, the rule defines
``U.S. person'' to mean a U.S. citizen or, for persons other than
natural persons, an entity established or organized under the laws of a
State or the United States.\3\
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\3\ The terms ``State'' and ``United States'' are defined in
section 103.11.
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Section 103.122(a)(7) Non-U.S. person. The proposed rule defines a
``Non-U.S. person'' as a person that is not a ``U.S. person'' as that
term is defined in the rule.
Section 103.122(a)(8) Taxpayer identification number. The proposed
rule defines ``taxpayer identification number'' to have the same
meaning as determined under the provisions of section 6109 of the
Internal Revenue Code and the regulations of the Internal Revenue
Service thereunder.
B. Section 103.122(b) Customer Identification Program
Section 326 of the Act requires the Secretary and the Commission to
prescribe regulations requiring broker-dealers to implement and comply
with ``reasonable procedures'' for: verifying the identity of customers
``to the extent reasonable and practicable;'' maintaining records
associated with such verification; and consulting lists of known
terrorists.
[[Page 48308]]
Paragraph (b) of the proposed rule sets forth the requirement that
a broker-dealer must develop and operate a customer identification
program (``CIP'') and sets forth relevant factors for the design of CIP
procedures. The degree to which a CIP is effective will be a function
of a broker-dealer's assessment of these factors and the nature of its
response to them (as manifested in the CIP's procedures and
guidelines). In addition, as section 326 and the proposed rule provide,
the reasonableness of the CIP also will be a function of what is
practicable for the broker-dealer.
In developing and updating CIPs, broker-dealers should consider the
type of identifying information available for customers and the methods
available to verify that information. While certain minimum identifying
information is required in paragraph (c) of this proposed rule and
certain suitable verification methods are described in paragraph (d),
broker-dealers should consider on an ongoing basis whether other
information or methods are appropriate, particularly as they become
available in the future.
Broker-dealers must also base their CIPs on the risks associated
with their business operations. Some relevant risk factors to be
considered are set forth in paragraph (b) and discussed below in
general terms.\4\
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\4\ This discussion of the risk factors is included in the
release because it may be helpful in providing some meaning and
context with respect to the factors. However, it is not meant to
provide comprehensive definitions of these risk factors or an
exhaustive description of the considerations involved in assessing
them. Instead, it should serve as a starting point for defining and
assessing them.
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The first risk factor to consider is the broker-dealer's size. For
example, a large firm that opens a substantial number of accounts on
any given day will have different risks than one that opens a new
account no more than once or twice a month. The same is true with
respect to a firm that has many branches as compared to a firm with one
office.
The second risk factor is the location of the broker-dealer. Firms
should assess whether they are located in areas where money laundering
activities have been known to exist or that otherwise raise the risk
that attempts will be made to open accounts for money laundering
purposes.
The third risk factor is the method by which customers open
accounts at the broker-dealer. Accounts opened exclusively on-line
present different, and perhaps greater, risks than those opened in
person on the firm's premises.
The fourth and fifth risk factors are the types of accounts and
transactions offered by the broker-dealer. Broker-dealers should assess
whether there are different risks (and degrees of risk) associated with
the various types of accounts they provide to customers (e.g., cash,
margin, prime-brokerage) and transactions they execute in those
accounts (e.g., short sales, over-the-counter derivatives, repurchase
and reverse repurchase agreements, block trades).
The sixth risk factor is the customer base. Broker-dealers should
assess the risks associated with different types of customers. For
example, a firm should examine whether it is opening accounts for
customers located in countries the Secretary determines to be of
``primary money laundering concern'' pursuant to section 311 of the
Act. Verification procedures should account for the concerns raised by
such customers. In addition, certain legal entities may pose greater
risks (e.g., a closely held corporation as opposed to one that is
publicly traded).
The seventh risk factor requires an assessment of whether the
broker-dealer can rely on another broker-dealer, with which it shares
an account relationship, to undertake any of the steps required by this
proposed rule with respect to the shared account. A shared account
means an account subject to a carrying or clearing agreement governed
by New York Stock Exchange (NYSE) Rule 382 or National Association of
Securities Dealers, Inc. (NASD) Rule 3230 (i.e., a customer account
introduced by a correspondent broker-dealer to a clearing and carrying
broker-dealer). Rules 382 and 3230 allow correspondents and clearing
firms to set forth in written agreements a division of responsibilities
with respect to the accounts they share.
We anticipate broker-dealers sharing accounts may realize
efficiencies by dividing up the requirements in this proposed rule
pursuant to their clearing agreements. For example, the correspondent
may undertake to obtain the identifying information from customers as
required in paragraph (c), and the clearing firm may undertake the
verification procedures as required in paragraph (d). Nonetheless, both
firms would still be responsible for ensuring that each requirement in
the rule is met with respect to each customer. Accordingly, a broker-
dealer must continually assess whether the other firm can be relied on
to perform its responsibilities. This would include communicating and
coordinating with the other firm on an on-going basis. Moreover, a
broker-dealer is expected to cease such reliance if it is no longer
reasonable.
Paragraph (b) also requires that the identity verification
procedures must enable the broker-dealer to form a reasonable belief
that it knows the true identity of the customer. This provision makes
clear that, while there is flexibility in establishing these
procedures, the broker-dealer is responsible for exercising reasonable
efforts to ascertain the identity of each customer.
Finally, paragraph (b) requires that broker-dealers make their CIPs
part of their overall anti-money laundering programs required under
section 352 of the Act (31 U.S.C. 5318(h)).\5\ This requirement is
intended to make it clear that the CIP is not a separate program, but
rather should be integrated into a broker-dealer's overall anti-money
laundering procedures and policies. However, this should not be read to
create any negative inference about a broker-dealer's need to establish
and maintain an overall money laundering program that is designed to
ensure compliance with all other applicable regulations promulgated
under the Act.
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\5\ Section 352 requires brokers and dealers to establish anti-
money laundering programs that, at a minimum, include (1) the
development of internal policies, procedures, and controls; (2) the
designation of a compliance officer; (3) an ongoing employee
training program; and (4) an independent audit function to test
programs. On April 22, 2002, the Commission approved rule changes
submitted by the NASD and the NYSE. Exchange Act Release No. 45798
(April 22, 2002), 67 FR 20854 (April 26, 2002). These rules (NASD
Rule 3011 and NYSE Rule 445) set forth minimum requirements for
these programs.
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C. Section 103.122(c) Required Information
The first step in verifying identity is obtaining identifying
information from customers. Paragraph (c) of the proposed rule provides
that a broker-dealer's CIP must require customers to provide, at a
minimum, certain identifying information before an account is opened
for the customer or the customer is granted trading authority over an
account. Specifically, the broker-dealer must obtain each customer's:
(1) Name; (2) date of birth, if applicable; (3) addresses; \6\ and (4)
documentary number.\7\
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\6\ With respect to the address requirement, each customer must
provide a mailing address, and, if different, the address of the
customer's residence (if a natural person) or principal place of
business (if not a natural person).
\7\ Each customer that is a U.S. person must provide a U.S.
taxpayer identification number (e.g., social security number or
employer identification number). Customers that are Non-U.S. persons
must provide either a U.S. taxpayer identification number, an alien
identification card number, or the number and country of issuance of
any other government-issued document evidencing nationality or
residence and bearing a photograph or similar safeguard. The term
``similar safeguard'' is included to permit the use of any biometric
identifiers that may be used in addition to, or instead of,
photographs.
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[[Page 48309]]
The rule requires only that the minimum identifying information be
obtained from each customer. Broker-dealers, in assessing the risk
factors in paragraph (b), should determine whether other identifying
information is necessary to form a reasonable belief as to the true
identity of each customer. There may be certain types of customers from
whom it is reasonable to obtain other identifying information in
addition to the minimum required information. There also may be
circumstances that make it appropriate to obtain additional
information. If a broker-dealer, in examining the nature of its
business and operations, determines that additional information should
be obtained in certain cases, it should set forth guidelines in its CIP
indicating the types of additional information and the circumstances
when it shall be obtained.
Treasury and the Commission recognize that a new business may need
to open a brokerage account before it has received an employer
identification number (EIN) from the Internal Revenue Service. For this
reason, the proposed rule contains a limited exception to the
requirement that a taxpayer identification number must be provided
prior to the opening of an account or the granting of trading
authority. Accordingly, a CIP may permit an account to be opened or
trading authority to be granted for a person, other than an individual
(such as a corporation, partnership or trust), that has applied for,
but has not received, an EIN. However, in such a case, the CIP must
require that the broker-dealer obtain a copy of the application for the
EIN prior to the time the account is opened or trading authority
granted. Currently, the IRS indicates that the issuance of an EIN can
take up to five weeks. This length of time, coupled with when the
person applied for the EIN, should be considered by the broker-dealer
in determining the reasonable period of time within which the person
should provide its EIN to the broker-dealer.
D. Section 103.122(d) Required Verification Procedures
After obtaining identifying information from a customer, the
broker-dealer must take steps to verify the accuracy of that
information in order to reach a point where it can form a reasonable
belief that it knows the true identity of the customer. Accordingly,
paragraph (d) of the proposed rule requires a broker-dealer's CIP to
have procedures for verifying the accuracy of the identifying
information provided by the customer. The extent of the verification
for each customer will depend on the steps necessary for a broker-
dealer to reach a reasonable belief that it knows the true identity of
the customer.
Paragraph (d) requires that the verification procedures must be
undertaken within a reasonable time before or after a customer's
account is opened or a customer is granted authority to effect
transactions with respect to an account. This flexibility must be
exercised in a reasonable manner, given that verifications too far in
advance may become stale and verifications too long after the fact may
provide opportunities to launder money while verification is pending.
The amount of time it will take a broker-dealer to verify the identity
of a customer may depend on the type of account opened, whether the
customer opens the account in person, and on the type of identifying
information available. In addition, although an account is opened, a
broker-dealer may choose to place limits on the account, such as
restricting the number of transactions or the dollar value of
transactions, until a customer's identity is verified. Therefore, the
proposed rule provides broker-dealers with the flexibility to use a
risk-based approach to determine when the identity of a customer must
be verified relative to the opening of an account or the granting of
trading authority. \8\
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\8\ We note that it is possible a broker-dealer could violate
other laws by permitting a customer to transact business prior to
verifying the customer's identity. See, e.g., 31 CFR part 500,
prohibiting transactions involving designated foreign countries or
their nationals.
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A person becomes a customer each time the person opens a new
account at a broker-dealer or is granted trading authority with respect
to an account. Therefore, upon the opening of each account or the
granting of new authority, the verification requirements of this rule
would apply. However, if a customer whose identification has been
verified previously opens a new account or is granted new authority,
the broker-dealer would not need to verify the customer's identity a
second time, provided the broker-dealer (1) previously verified the
customer's identity in accordance with procedures consistent with the
proposed rule, and (2) continues to have a reasonable belief that it
knows the true identity of the customer.
The rule provides for two methods of verifying identifying
information: verification through documents and verification through
non-documentary means. For example, using documents would include
obtaining a driver's license or passport from a natural person or
articles of incorporation from a company. Non-documentary methods would
include cross-checking the information provided by a customer against
that supplied by a credit bureau.
The proposed rule requires that a broker-dealer's CIP address both
methods of verification. Depending on the type of customer and the
method of opening an account, it may be more appropriate to use either
documentary or non-documentary methods. In some cases, it may be
appropriate to use both methods. The CIP should set forth guidelines
describing when documents, non-documentary methods, or a combination of
both will be used. These guidelines should be based on the broker-
dealer's assessment of the factors described in paragraph (b) of the
proposed rule.
The risk a broker-dealer will not know a customer's true identity
will be heightened for certain types of accounts, such as accounts
opened in the name of a corporation, partnership, or trust that is
created or conducts substantial business in a jurisdiction the
Secretary determines is a primary money laundering concern or an
international body, such as the Financial Action Task Force on Money
Laundering, designates as non-cooperative. Obtaining sufficient
information to verify a given customer's true identity can reduce the
risk a broker-dealer will be used as a conduit for money laundering and
terrorist financing. A broker-dealer's identity verification procedures
must be based on its assessments of the factors in paragraph (b).
Accordingly, when those assessments suggest a heightened risk, the
broker-dealer should prescribe additional verification measures.
1. Verification Through Documents
Paragraph (d)(1) provides that the CIP must describe when a broker-
dealer will verify identity through documents and set forth the
documents that will be used for this purpose. The rule also lists
certain documents that are suitable for verification. For natural
persons, these documents may include: unexpired government-issued
identification evidencing nationality or residence and bearing a
photograph or similar safeguard. For other persons, suitable documents
would be ones showing the existence of the entity, such as registered
articles of incorporation, a government-issued business license, a
[[Page 48310]]
partnership agreement, or a trust instrument.
2. Verification Through Non-Documentary Methods
Paragraph (d)(2) provides that the CIP must describe non-
documentary verification methods and when such methods will be employed
in addition to, or instead of, using documents. The rule allows for the
exclusive use of non-documentary methods because frequently accounts
are opened by telephone, mail, or over the Internet. However, even if
the customer presents documents, it may be appropriate to use non-
documentary methods as well. Ultimately, the broker-dealer is
responsible for employing sufficient verification methods to be able to
form a reasonable belief that it knows the true identity of the
customer.
The proposed rule sets forth certain non-documentary methods that
would be suitable for verifying identity. These methods include
contacting a customer after the account is opened; \9\ obtaining a
financial statement; comparing the identifying information provided by
the customer against fraud and bad check databases to determine whether
any of the information is associated with known incidents of fraudulent
behavior (negative verification); comparing the identifying information
with information available from a trusted third party source, such as a
credit report from a consumer reporting agency (positive verification);
and checking references with other financial institutions. The broker-
dealer also may wish to analyze whether there is logical consistency
between the identifying information provided, such as the customer's
name, street address, ZIP code, telephone number (if provided), date of
birth, and social security number (logical verification).
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\9\ The purpose of engaging in verification is to check
identifying information about a customer against an independent
source. Contacting a customer may be a useful part of the
verification process when an account is opened on-line or by mail.
However, a broker-dealer should not rely solely on this method as a
means of verification.
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Paragraph (d)(2) also provides that the CIP must require the use of
non-documentary methods in certain cases; specifically, when a natural
person is unable to present an unexpired government issued
identification document that bears a photograph or similar safeguard
and when the broker-dealer is presented with unfamiliar documents to
verify the identity of a customer, does not obtain documents to verify
the identity of a customer, does not meet face-to-face a customer who
is a natural person, or is otherwise presented with circumstances that
increase the risk the broker-dealer will be unable to verify the true
identity of a customer through documents.
Thus, non-documentary methods should be used when a broker-dealer
cannot examine original documents. In addition, Treasury and the
Commission recognize that identification documents, including those
issued by a government entity, may be obtained illegally and may be
fraudulent. In light of the recent increase in identity fraud, broker-
dealers are encouraged to use non-documentary methods, even when a
customer has provided identification documents.
E. Section 103.122(e) Government Lists
Section 326 of the Act also requires reasonable procedures for
determining whether a customer appears on any list of known or
suspected terrorists or terrorist organizations provided by any
government agency. The proposed rule implements this requirement and
clarifies that the requirement applies only with respect to lists
circulated by the Federal government. In addition, the proposed rule
states that broker-dealers must follow all Federal directives issued in
connection with such lists. This provision makes clear that a broker-
dealer must have procedures for responding to circumstances when a
customer is named on a list.
F. Section 103.122(f) Customer Notice
Section 326 provides that financial institutions must give their
customers notice of their identity verification procedures. Therefore,
a broker-dealer's CIP must include procedures for providing customers
with adequate notice that the broker-dealer is requesting information
to verify their identity. A broker-dealer may satisfy the notice
requirement by generally notifying its customers about the procedures
the broker-dealer must comply with to verify their identities. For
example, the broker-dealer may post a sign in its lobby or provide
customers with any other form of written or oral notice. If an account
is to be opened electronically, such as through an Internet website,
the broker-dealer may provide notice electronically. Notice must be
given before an account is opened or trading authority is granted.
G. Section 103.122(g) Lack of Verification
Paragraph (g) of the proposed rule states that a broker-dealer's
CIP must include procedures for responding to circumstances in which it
cannot form a reasonable belief that it knows the true identity of a
customer. Generally, a broker-dealer should maintain an account for a
customer only when it can form a reasonable belief that it knows the
customer's true identity. \10\ Thus, a broker-dealer's CIP should
specify the actions to be taken when it cannot form a reasonable
belief. There also should be guidelines for when an account will not be
opened. In addition, the CIP should address the terms under which a
customer may conduct transactions while a customer's identity is being
verified. The CIP should specify at what point, after attempts to
verify a customer's identity have failed, an account that has been
opened will be closed. Finally, the procedures should include a process
for determining whether a Suspicious Activity Report should be filed in
accordance with applicable laws and regulations.
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\10\ There are some exceptions to this basic rule. For example,
a broker-dealer may maintain an account, at the direction of law
enforcement, notwithstanding that the broker-dealer does not know
the true identity of a customer.
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H. Section 103.122(h) Recordkeeping
Section 326 of the Act requires procedures for maintaining records
of the information used to verify a person's identity, including name,
address, and other identifying information. Paragraph (h) of the
proposed rule sets forth recordkeeping procedures that must be included
in a broker-dealer's CIP. These procedures must provide for the
maintenance of all information obtained pursuant to the CIP.
Information that must be maintained includes all identifying
information provided by a customer pursuant to paragraph (c). Thus, the
broker-dealer must make a record of each customer's name, date of birth
(if applicable), addresses, and tax identification number or other
number. Broker-dealers also must maintain copies of any documents that
were relied on pursuant to paragraph (d)(1) evidencing the type of
document and any identification number it may contain. For example, if
a customer produces a driver's license, the broker-dealer must make a
copy of the driver's license that clearly indicates it is a driver's
license and legibly depicts any identification number on the license.
Broker-dealers also must make and maintain records of the methods
and results of measures undertaken to verify the identity of a customer
pursuant to paragraph (d)(2). For example, if a broker-dealer obtains a
report from a credit bureau concerning a customer, the report must be
maintained. Broker-dealers also must make and maintain records of the
resolution of any discrepancy in the identifying information obtained.
To continue with
[[Page 48311]]
the previous example, if the customer provides a residence address that
is different than the address shown on the credit report, the broker-
dealer must document how it resolves this discrepancy or, if the
discrepancy is not resolved, how it forms a reasonable belief
notwithstanding the discrepancy.
The broker-dealer must retain all of these records for five years
after the date the account is closed or the grant of authority to
effect transactions with respect to an account is revoked. In all other
respects, the records should be maintained in accordance with the
requirements of Rule 17a-4. \11\
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\11\ 17 CFR 240.17a-4.
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Nothing in this proposed regulation modifies, limits or supersedes
section 101 of the Electronic Records in Global and National Commerce
Act, Public Law 106-229, 114 Stat. 464 (15 U.S.C. 7001) (E-Sign Act).
Thus, a broker-dealer may use electronic records to satisfy the
requirements of this regulation, as long as the records are maintained
in accordance with Rule 17a-4(f), which the Commission has interpreted
as being consistent with the requirements in the E-Sign Act. \12\
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\12\ See Exchange Act Release No. 44238 (May 1, 2001), 66 FR
22916 (May 7, 2001).
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Treasury and the Commission emphasize that the collection and
retention of information about a customer, as an ancillary part of
collecting identifying information, do not relieve a broker-dealer from
its obligations to comply with anti-discrimination laws and
regulations.
I. Section 103.122(i) Approval of Program
Paragraph (i) of the proposed rule requires that the broker-
dealer's CIP be approved by the most senior level of the firm (e.g.,
the board of directors, managing partners, board of managers, or other
governing body performing similar functions) or by persons specifically
authorized by that body to approve such a program.
J. Section 103.122(j) Exemptions
Section 326 states that the Secretary and the Federal functional
regulator jointly issuing a rule under that section may by order or
regulation exempt any financial institution or type of account from the
regulation in accordance with such standards and procedures as the
Secretary may prescribe. The proposed rule provides that the
Commission, with the concurrence of the Secretary, may exempt any
broker-dealer that registers with the Commission pursuant to 15 U.S.C.
78o and 78o-4. However, it excludes from this exemptive authority
broker-dealers that register pursuant to 15 U.S.C. 78o(b)(11). These
are firms that register as broker-dealers solely because they deal in
securities futures products. The exemptive authority with respect to
these firms will be in the rule issued jointly by Treasury and the
CFTC. The proposed rule provides that the Secretary, with the
concurrence of the Commission, may exempt any broker-dealer that
registers pursuant to 15 U.S.C 78o-5 (i.e., government securities
dealers).
In issuing exemptions under the proposed rule, the Secretary and
the Commission shall consider whether the exemption is consistent with
the purposes of the BSA, and in the public interest, and may consider
other necessary and appropriate factors.
III. Conforming Amendments to 31 CFR 103.35
Current section 103.35(a) sets forth customer identification
requirements when certain brokerage accounts are opened. Generally,
sections 103.35(a)(1) and (2) require a broker-dealer, within 30 days
after an account is opened, to secure and maintain a record of the
taxpayer identification number of the customer involved. If the broker-
dealer is unable to obtain the taxpayer identification number within 30
days (or a longer time if the person has applied for a taxpayer
identification number), it need take no further action under section
103.35 concerning the account if it maintains a list of the names,
addresses, and account numbers of the persons for which it was unable
to secure taxpayer identification numbers, and provides that
information to the Secretary upon request. In the case of a non-
resident alien, the broker-dealer is required to record the person's
passport number or a description of some other government document used
to determine identification.
Section 103.35(a)(3) currently provides that a broker-dealer need
not obtain a taxpayer identification number with respect to specified
categories of persons \13\ opening accounts. The proposed rule does not
contain any exemptions from the CIP requirements. Treasury believes
that the requirements of section 103.35(a)(1) and (2) are inconsistent
with the intent and purpose of section 326 of the Act and incompatible
with the proposed rule. For these reasons, Treasury, under its own
authority, is proposing to repeal section 103.35(a).
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\13\ The exemption applies to (i) agencies and instrumentalities
of Federal, State, local, or foreign governments; (ii) aliens who
are ambassadors; ministers; career diplomatic or consular officers;
naval, military, or other attaches of foreign embassies and
legations; and members of their immediate families; (iii) aliens who
are accredited representatives of certain international
organizations, and their immediate families; (iv) aliens temporarily
residing in the United States for a period not to exceed 180 days;
(v) aliens not engaged in a trade or business in the United States
who are attending a recognized college or university, or any
training program supervised or conducted by an agency of the Federal
Government; and (vi) unincorporated subordinate units of a tax
exempt central organization that are covered by a group exemption
letter.
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In addition, Treasury and the Commission are requesting comments on
whether any of the exemptions in Section 103.35(a)(3) should apply in
the context of the proposed CIP requirements in light of the intent and
purpose of section 326 of the Act.
IV. Request for Comments
Treasury and the Commission invite comment on all aspects of the
proposed regulation, and specifically seek comment on the following
issues:
1. Whether the proposed definition of ``account'' is appropriate
and whether other examples of accounts should be added to the rule
text.
2. How broker-dealers can comply with the requirement to obtain
both the address of a person's residence, and, if different, the
person's mailing address in situations involving natural persons who
lack a permanent address.
3. Whether non-U.S. persons that are not natural persons will be
able to provide a broker-dealer with the identifying information
required in Sec. 103.122(c)(4), or whether other categories of
identifying information should be added to this section. Commenters on
this issue should suggest other means of identification that broker-
dealers currently use or should use in this circumstance that would
allow a broker-dealer to form a reasonable belief that it knows the
true identity of the entity.
4. The extent to which the verification procedures required by the
proposed rule make use of information that broker-dealers currently
obtain in the account opening process. We note that the legislative
history of section 326 indicates that Congress intended ``the
verification procedures prescribed by Treasury [to] make use of
information currently obtained by most financial institutions in the
account opening process.'' See H.R. Rep. No. 107-250, pt. 1, at 63
(2001).
5. Whether any of the exemptions from the customer identification
requirements contained in current section 103.35(a)(3) should be
continued in the proposed rule. In this regard, Treasury and the
Commission
[[Page 48312]]
request that commenters address the standards set forth in paragraph
(j) of the proposed rule (as well as any other appropriate factors).
V. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\14\ Treasury has submitted the proposed rule to
the Office of Management and Budget (OMB) for review in accordance with
44 U.S.C 3507(d). An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid control number.
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\14\ 44 U.S.C. 3502 et seq.
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A. Collection of Information Under the Proposed Rule
The proposed rule contains recordkeeping and disclosure
requirements that are subject to the Paperwork Reduction Act of 1995.
In summary, the proposed rule requires broker-dealers to implement
reasonable procedures to (1) maintain records of the information used
to verify the person's identity and (2) provide notice of the CIPs
procedures to customers. These recordkeeping and notice requirements
are required under section 326 of the Act.
B. Proposed Use of the Information
Section 326 of the Act requires Treasury and the Commission jointly
to issue a regulation setting forth minimum standards for broker-
dealers and their customers regarding the identity of the customer that
shall apply in connection with opening of an account at the broker-
dealer. Furthermore, section 326 provides that the regulations, at a
minimum, must require broker-dealers to implement reasonable procedures
for (1) verifying the identity of any person seeking to open an
account, to the extent reasonable and practicable; (2) maintaining
records of the information used to verify the person's identity,
including name, address, and other identifying information; and (3)
determining whether the person appears on any lists of known or
suspected terrorists or terrorist organizations provided to the
financial institution by any government agency.
The purpose of section 326, and the regulations promulgated
thereunder, is to make it easier to prevent, detect and prosecute money
laundering and the financing of terrorism. In issuing the proposed
rule, Treasury and the Commission are seeking to fulfill their
statutorily mandated responsibilities under section 326 and to achieve
its important purpose.
The proposed rule requires each broker-dealer to establish a
written CIP that must include recordkeeping procedures and procedures
for providing customers with notice that the broker-dealer is
requesting information to verify their identity. The proposed rule
requires a broker-dealer to maintain a record of (1) the identifying
information provided by the customer, the type of identification
document(s) reviewed, if any, the identification number of the
document(s), and a copy of the identification document(s); (2) the
means and results of any additional measures undertaken to verify the
identity of the customer; and (3) the resolution of any discrepancy in
the identifying information obtained.
The proposed rule also requires each broker-dealer to give
customers ``adequate notice'' of the identity verification procedures.
A broker-dealer may satisfy this disclosure requirement by posting a
sign in the lobby or providing customers with any other form of written
or oral notice. If the account is opened electronically, the broker-
dealer may provide the notice electronically. Accordingly, a broker-
dealer may choose among a variety of methods of providing adequate
notice and may select the least burdensome method, given the
circumstances under which customers seek to open new accounts.
C. Respondents
The proposed rule would apply to approximately 5,568 broker-
dealers, which is the approximate number of firms that conduct business
with the general public.
D. Total Annual Reporting and Recordkeeping Burden
1. Providing Notice to Customers
The requirement to provide notice to customers generally will be a
one-time burden in terms of drafting and posting or implementing the
notices. The Commission estimates that broker-dealers will take two
hours each to draft and post the required notices. There are
approximately 5,568 broker-dealers that will have to undertake this
task. Therefore, in complying with this requirement, the Commission
estimates that the industry as a whole will spend approximately 11,136
hours.
2. Recordkeeping
The requirement to make and maintain records related to the CIP
will be an annual time burden. The total burden to the industry will
depend on the number of new accounts added each year. The Commission
estimates that broker-dealers, on average, will spend two minutes per
account making and maintaining the required records.\15\ Therefore, in
complying with this requirement, the Commission estimates that the
industry as a whole will spend approximately 513,333 hours in 2002,
563,333 hours in 2003, and 620,000 hours in 2004.\16\
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\15\ The Commission estimates that the number of new accounts in
the upcoming years will be: 15,400,000 in 2002, 16,900,000 in 2003,
and 18,600,000 in 2004. The Commission arrived at this estimate by
considering: (1) the total number of accounts at the 2001 year-end
(102,700,000) as reported by broker-dealers on Form X-17a-5--
Financial and Operational Combined Uniform Single (FOCUS) Reports
they file pursuant to section 17 of the Exchange Act and rule 17a-5
(17 CFR 240.17a-5) thereunder; and (2) the annualized growth rate in
total accounts for the years 1990 through 2001 (ten percent). The
Commission also estimates that the number of accounts that are
closed each year equals five percent of the total number of
accounts. Accordingly, the Commission estimates that the total
annualized growth rate for new accounts each year is fifteen
percent. Therefore, starting with the 2001 total of 102,700,000 and
using an annualized growth rate of fifteen percent, the Commission
estimates that 15,400,000 new accounts will be added in 2002,
16,900,000 in 2003 and 18,600,000 in 2004.
\16\ The Commission derived these estimates by taking the number
of new accounts projected for each upcoming year and multiplying the
number by two minutes and then dividing that number by 60 to convert
minute totals into hour totals.
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E. Collection of Information Is Mandatory
These recordkeeping and disclosure (notice) requirements are
mandatory.
F. Confidentiality
The collection of information pursuant to the proposed rule would
be provided by customers and other sources to broker-dealers and
maintained by broker-dealers. In addition, the information may be used
by federal regulators, self-regulatory organizations, and authorities
in the course of examinations, investigations, and judicial
proceedings. No governmental agency regularly would receive any of the
information described above.
G. Record Retention Period
The proposed rule will require that the records with respect to a
given customer be retained until five years after the date the account
of a customer is closed or the grant of authority to effect
transactions with respect to an account is revoked.
[[Page 48313]]
H. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), Treasury and the Commission
solicit comments to:
(1) Evaluate whether the proposed collections of information are
necessary, and whether they would have practical utility,
(2) Evaluate the accuracy of the estimates of the burden of the
proposed collection of information,
(3) Enhance the quality, utility, and clarity of the information to
be collected, and
(4) Minimize the burden of the collection of information on those
required to respond, including through the use of automated collection
techniques or other forms of information technology.
Comments concerning the recordkeeping and disclosure requirements
in the proposed rule should be sent (preferably by fax (202-395-6974))
to Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Paperwork Reduction Project (1506), Washington, DC 20503 (or by the
Internet to jlackeyj@omb.eop.gov), with a copy to FinCEN by mail or the
Internet at the addresses previously specified.
VI. Commission's Analysis of the Costs and Benefits Associated With the
Proposed Rule
The Commission is considering the costs and benefits associated
with the proposal and requesting comment on all aspects of this cost-
benefit analysis, including identification and assessment of any other
costs and benefits not discussed in the analysis. Commenters are
encouraged to identify, discuss, analyze, and supply relevant data
concerning the costs and benefits associated with the proposed rule.
Section 326 of the Act requires Treasury and the Commission to
prescribe regulations setting forth minimum standards for broker-
dealers regarding the identities of customers that shall apply in
connection with the opening of an account. The statute also provides
that the regulations issued by Treasury and the Commission must, at a
minimum, require financial institutions to implement reasonable
procedures for: (1) Verification of customers' identities; (2)
determination of whether a customer appears on a government list; and
(3) maintenance of records related to customer verification. The
proposed rule implements this statutory mandate by requiring broker-
dealers to (1) establish a CIP; (2) obtain certain identifying
information from customers; (3) verify identifying information of
customers; (4) check customers against lists provided by federal
agencies, (5) provide notice to customers that information may be
requested in the process of verifying their identities; and (6) make
and maintain records. The Commission believes that these requirements
are reasonable and practicable, as required by the section 326 and,
therefore, that the costs associated with them are attributable to the
statute. Moreover, while the proposed rule specifies certain minimum
requirements, broker-dealers will be able to design their CIPs in a
manner most appropriate to their business models and customer bases.
This flexibility should be beneficial to broker-dealers in helping them
to tailor their CIPs appropriately, while still meeting the statutory
requirements of section 326.
Even though the Commission believes the costs associated with the
proposed rule are attributable to the statute, it nonetheless has
undertaken an analysis of the costs and benefits of the requirements.
The Commission seeks comment on all aspects of the proposed rule,
including whether the proposed rule, by setting forth minimum
requirements, creates a benefit or, conversely, imposes costs because
broker-dealers will not be able to choose for themselves the minimum
procedures they wish to use to meet the requirements of the statute.
The Commission also seeks comment on whether the costs are attributable
to the statute.
A. Benefits Associated With the Proposed Rule
The anti-money laundering provisions in the Act are intended to
make it easier to prevent, detect and prosecute money laundering and
the financing of terrorism. The proposed rule is an important part of
this effort. It fulfills the statutory mandate of section 326 by
specifying how a broker-dealer is to establish a program that will
assist it in determining the identities of customers. Verifying
identities, in turn, will reduce the risk of broker-dealers unwittingly
aiding criminals, including terrorists, in accessing U.S. financial
markets to launder money or move funds for illicit purposes.
Additionally, the implementation of such programs should make it more
difficult for persons to successfully engage in fraudulent activities
involving identity theft or the placing of fictitious orders to buy or
sell securities.
B. Costs Associated with the Proposed Rule
1. Writing Procedures
Most broker-dealers, as a matter of prudent business practices,
should already have procedures in place for verifying identities of
customers. In addition, Exchange Act Rule 17a-3(a)(9) requires broker-
dealers to obtain the name and address of each beneficial owner of a
cash or margin account.\17\ Similarly, the self-regulatory
organizations have rules requiring broker-dealers to obtain identifying
information from customers.\18\ Accordingly, firms should already have
written procedures for complying with these existing regulations.
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\17\ 17 CFR 240.17a-3(a)(9).
\18\ See, e.g., NYSE Rule 405, NASD Rule 3110.
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Nonetheless, the Commission believes that some broker-dealers will
have to update or establish a CIP. The proposed rule seeks to keep the
costs low by allowing for great flexibility in establishing a CIP. For
example, it is to be based on factors specific to each broker-dealer,
such as size, customer base and location. Thus, the analysis and detail
necessary for a CIP will depend on the complexity of the broker-dealer
and its operations. Given the considerable differences among broker-
dealers, it is difficult to quantify a cost per broker-dealer. Highly
complex firms will have more risk factors to consider, given, for
example, their size, multiple offices, variety of services and products
offered, and range of customers. However, most large firms already have
some procedures in place for verifying customer identities. Smaller and
less complex firms will not have as many risk factors.
The Commission estimates that establishing a written CIP could
result in additional costs for some broker-dealers to the extent they
do not have verification procedures that meet the minimum requirements
in the rule. This includes broker-dealers that would need to augment
their procedures to make them compliant. On average, the Commission
estimates the additional cost per broker-dealer to establish a
compliant CIP to be approximately $2,244, resulting in a one time
overall cost to the industry of approximately $12,494,592.\19\
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\19\ The Commission estimates that it will take broker-dealers
on average approximately 20 hours to establish a written CIP. This
estimate seeks to account for the fact that many firms already have
customer identification and verification procedures and that
discrepancies in size and complexity will result in differing time
burdens. The Commission believes that broker-dealers will have
senior compliance personnel draft their CIPs and that this will take
an average of 16 hours. The Commission anticipates that in-house
counsel will spend on average 4 hours reviewing the CIP. According
to the Securities Industry Association (``SIA'') Management and
Professional Earnings 2000 report (``SIA Earnings Report''), Table
051, the hourly cost of a compliance manager plus 35% overhead is
$101.25. The hourly cost for an in-house counsel plus 35% overhead
is $156.00 (SIA Earnings Report, Table 107 (Attorney)). Therefore,
the Commission estimates that the total cost per broker-dealer to
establish a CIP would be $2,244 per broker-dealer [(16 x $101.25) +
(4 x $156.00)]. As of the 2000 year-end, there were approximately
5,568 broker-dealers that engaged in some form of a public business.
Therefore, the Commission estimates that the total cost to the
industry would be $2,244 multiplied by 5,568 or $12,494,592.
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[[Page 48314]]
2. Obtaining Identifying Information
The Commission believes that broker-dealers already obtain from
customers most, if not all, of the information required under the
proposed rule.\20\ Rule 17a-3(a)(9) requires broker-dealers to obtain,
with respect to each margin and cash account, the name and address of
each beneficial owner, provided that the broker-dealer need only obtain
such information from the persons authorized to transact business for
the account if it is a joint or corporation account.\21\
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\20\ For example, the Anti-Money Laundering Committee of the SIA
recommended in its Preliminary Guidance for Deterring Money
Laundering Activity (February 2002) that broker-dealers obtain
certain identifying information from customers at the commencement
of the business relationship, including, for natural persons: name,
address, date of birth, investment experience and objectives, social
security number or taxpayer identification number, net worth, annual
income, occupation, employer's address, and the names of any persons
authorized to effect transactions in the account. For non-resident
aliens, the SIA Committee recommended that the broker-dealer obtain,
in addition to the information above, a passport number or other
valid government identification number. The SIA Committee also made
a number of recommendations with respect to customers that are not
natural persons.
\21\ 17 CFR 240.17a-3(a)(9).
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Further, broker-dealers are already required, pursuant to NASD Rule
3110, to obtain certain identifying information with respect to each
account.\22\ For example, if the customer is a natural person, the rule
requires the broker-dealer to obtain the customer's name and
address.\23\ In addition, the broker-dealer must determine whether the
customer is of legal age, and, if the customer purchases more than just
open-end investment company shares or is solicited to purchase such
shares, the broker-dealer must obtain the customer's tax identification
or social security number.\24\ If the customer is a corporation,
partnership, or other legal entity, the broker-dealer must obtain its
name, residence, and the names of any persons authorized to transact
business on behalf of the entity.\25\ If the account is a discretionary
account, the broker-dealer must obtain the signature of each person
authorized to exercise discretion over the account.\26\ Finally, the
broker-dealer must maintain all of this information as a record of the
firm.
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\22\ Section 15(b)(8) of the Exchange Act (15 U.S.C. 78o(b)(8))
requires each broker-dealer to become a member of a securities
association registered pursuant to section 15A of the Exchange Act
(15 U.S.C. 78o-3) unless the broker-dealer effects transactions
solely on a national securities exchange of which it is a member.
The NASD is the only securities association registered pursuant to
section 15A. Exchange Act Rule 15b9-1 (17 CFR 240.15b9-1) exempts
broker-dealers from this requirement to register with the NASD if
they (1) are an exchange member, (2) carry no customer accounts, and
(3) derive gross annual income from purchases and sales of
securities other than on a national securities exchange of not
greater than $1,000. Generally then, most broker-dealers that carry
customer accounts are members of the NASD and subject to Rule 3110.
\23\ NASD Rule 3110(c)(1).
\24\ NASD Rule 3110(c)(2).
\25\ NASD Rule 3110(c)(1).
\26\ NASD Rule 3110(c)(3).
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In addition, NYSE Rule 405 requires broker-dealers to ``[u]se due
diligence to learn the essential facts relative to every customer,
every order, every cash or margin account accepted or carried by such
organization and every person holding power of attorney over any
account accepted or carried by such organization.'' \27\
---------------------------------------------------------------------------
\27\ NYSE Rule 405(1).
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While broker-dealers are required currently to obtain most of this
information, the Commission estimates that there will be some new costs
for broker-dealers because some may not be obtaining all the required
information. The Commission estimates that the total cost to the
industry to obtain the minimum identifying information will be
$5,826,333 in 2002, $6,393,833 in 2003, and $7,037,000 in 2004.\28\ The
Commission also estimates that some broker-dealers will have to update
their account opening applications or account opening websites in order
to insert line items requesting customers to provide the required
information. The Commission estimates that this will result in a one-
time cost to the industry of $563,760.\29\
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\28\ The Commission estimates that obtaining the required
minimum identifying information will take broker-dealers
approximately one minute per account. This takes into consideration
the fact that approximately 97% of customer accounts are held at the
70 largest broker-dealers. These firms likely already obtain the
required identifying information from their customers. Therefore,
requiring that each piece of identifying information be obtained
should not impose a significant additional burden. The average
hourly cost of the person who would be obtaining this information is
$22.70 per hour (per the SIA Earnings Report, Table 082 (Retail
Sales Assistant, Registered) and including 35% in overhead charges).
Therefore, the costs to the industry would be: (number of new
accounts per year) x (\1/60\ of an hour) x ($22.70). As indicated
previously, the Commission estimates that the number of new accounts
in the upcoming years will be: 15,400,000 in 2002, 16,900,000 in
2003, and 18,600,000 in 2004.
\29\ The Commission estimates that it will take each broker-
dealer, on average, one hour to update account opening applications
or electronic account opening systems. The Commission believes that
broker-dealers will have a compliance manager implement the
necessary changes. The hourly cost for a compliance manager is
$101.25 (SIA Earnings Report, Table 051 (Compliance manager)).
Accordingly, the total cost to the industry would be: ($101.25) x
(the number of broker-dealers doing a public business or 5,568) or
$563,760.
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3. Verifying Identifying Information
The proposed rule provides broker-dealers with substantial
flexibility in establishing how they will independently verify the
information provided by customers. For example, customers that open
accounts on a broker-dealer's premises can simply provide a driver's
license or passport, or if the customer is not a natural person, it can
provide a copy of any documents showing its existence as a legal entity
(e.g., articles of incorporation, business licenses, partnership
agreements or trust instruments). There are also a number of options
for customers that open accounts via the telephone or Internet. In
these cases, broker-dealers may obtain a financial statement from the
customer, check the customer's name against a credit bureau or
database, or check the customer's references with other financial
institutions.
The documentary and non-documentary verification methods set forth
in the rule are not meant to be an exclusive list of the appropriate
means of verification. Other reasonable methods may be available now or
in the future. The purpose of making the rule flexible is to allow
broker-dealers to select verification methods that are, as section 326
requires, reasonable and practicable. Methods that are appropriate for
a smaller broker-dealer with a fairly localized customer base may not
be sufficient for a larger firm with customers from many different
countries. The proposed rule recognizes this fact and, therefore,
allows broker-dealers to employ such verification methods as would be
suitable to a given firm to form a reasonable belief that it knows the
true identities of its customers.
The Commission estimates that verifying the identifying information
could result in costs for broker-dealers because some firms currently
may not use verification methods. The Commission estimates that the
total cost to the industry to verify the identifying information will
be $48,628,333 in
[[Page 48315]]
2002, $53,375,833 in 2003, and $58,745,000 in 2004.\30\
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\30\ The Commission estimates that the processing costs
associated with verification methods will be approximately $1.00 per
account. The Commission further estimates that the average time
spent verifying an account will be five minutes. The hourly cost of
the person who would undertake the verification is $25.90 per hour
(per the SIA Earnings Report, Table 086 (Data Entry Clerk, Senior)
and including 35% in overhead charges). Therefore, the costs to the
industry reported above are: (number of new accounts per year) x
($1.00) + (number of new accounts per year) x (\1/12\ of an hour) x
($25.90). The Commission estimates that the number of new accounts
in the upcoming years will be: 15,400,000 in 2002, 16,900,000 in
2003, and 18,600,000 in 2004.
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4. Determining Whether Customers Appear on a Federal Government List
The Commission believes that broker-dealers who receive federal
government lists, chiefly clearing firms, already have procedures for
checking customers against them. First, there are substantive legal
requirements associated with the lists circulated by Treasury's Office
of Foreign Asset Control of the U.S. Treasury (OFAC). The failure of a
firm to comply with these requirements could result in criminal and
civil penalties. The Commission believes that, given the events of
September 11, 2001, most broker-dealers that receive lists from the
federal government have implemented procedures for checking their
customers against them.
The Commission estimates that this requirement could result in some
additional costs for broker-dealers because some may not already check
such lists. The Commission estimates that the total cost to the
industry to check such lists will be $3,323,833 in 2002, $3,647,583 in
2003, and $4,014,500 in 2004.\31\
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\31\ The Commission believes that most of the firms that receive
these lists already check their customers against them. Moreover, as
indicated previously, 97% of customer accounts are held at the 70
largest firms. The Commission understands that most of these firms
have automated processes for complying with many regulatory
requirements. Accordingly, the Commission estimates that it will
take broker-dealers on average thirty seconds to check whether a
person appears on a government list. The hourly cost of the person
who would check the list is $25.90 per hour (per the SIA Earnings
Report, Table 086 (Data Entry Clerk, Senior) and including 35% in
overhead charges). Therefore, the costs to the industry reported
above are: (number of new accounts per year) x (\1/120\ of an hour)
x ($25.90). The Commission estimates that the number of new accounts
in the upcoming years will be: 15,400,000 in 2002, 16,900,000 in
2003, and 18,600,000 in 2004.
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5. Providing Notice to Customers
A broker-dealer may satisfy the notice requirement by generally
notifying its customers about the procedures the broker-dealer must
comply with to verify their identities. For example, the broker-dealer
may post a sign in its lobby or provide customers with any other form
of written or oral notice. If an account is opened electronically, such
as through an Internet website, the broker-dealer may provide notice
electronically. The Commission estimates the total one-time cost to the
industry to provide notice to customers to be $1,432,368.\32\
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\32\ The Commission estimates that it will take each broker-
dealer, on average, two hours to create and implement the
appropriate notice. This estimate takes into consideration the fact
that many small firms will be able to provide adequate notice by
hanging signs in their premises. Larger firms will be able to
provide notice by updating account opening documentation or
electronic account opening systems. The Commission believes that
broker-dealers will have an attorney draft the appropriate notice,
and that this will take approximately one hour. The hourly cost for
an in-house counsel plus 35% overhead is $156.00 (SIA Earnings
Report, Table 107, (Attorney)). The Commission believes that broker-
dealers will have a compliance manager implement the notice, and
that implementation will take approximately one hour. The hourly
cost for a compliance manager is $101.25 (SIA Earnings Report, Table
051 (Compliance manager)). Accordingly, the total cost to the
industry would be: ($156.00 + 101.25) x (the number of broker-
dealers doing a public business or 5,568) or $1,432,368.
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6. Recordkeeping
The Commission estimates that many of the records required by the
rule are already made and maintained by broker-dealers. As discussed
above, Commission and self-regulatory organization rules already
require broker-dealers to obtain much of the minimum identifying
information specified in the proposed rule. These regulations also
require that records be made and kept of this information. The
Commission estimates that the recordkeeping requirement could result in
additional costs for some broker-dealers that currently do not maintain
certain of the records for the prescribed time period. The Commission
estimates that the total cost to the industry to make and maintain the
required records in the upcoming years will be $13,295,333 in 2002,
$14,590,333 in 2003, and $16,058,000 in 2004.\33\
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\33\ The Commission estimates that it will take approximately
two minutes per new account to make and maintain the required
records. This estimate takes into account the fact that many broker-
dealers already make and maintain many of the required records. In
addition, for many new accounts, the recordkeeping will be fairly
simple (e.g., making a photocopy of a driver's license or financial
statement, or keeping a record of the results of a public database
search or credit bureau query. The hourly cost of the person who
would undertake the verification is $25.90 per hour (per the SIA
Earnings Report, Table 086 (Data Entry Clerk, Senior) and including
35% in overhead charges). Therefore, the costs to the industry
reported above are: (number of new accounts per year) x (\1/30\ of
an hour) x ($25.90). The Commission estimates that the number of new
accounts in the upcoming years will be: 15,400,000 in 2002,
16,900,000 in 2003, and 18,600,000 in 2004.
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VII. Regulatory Flexibility Act
Treasury and the Commission are sensitive to the impact our rules
may impose on small entities. Congress enacted the Regulatory
Flexibility Act, 5 U.S.C. 601 et seq., to address concerns related to
the effects of agency rules on small entities. In this case, Treasury
and the Commission believe that the proposed rule likely would not have
a ``significant economic impact on a substantial number of small
entities.'' 5 U.S.C. 605(b). First, the economic impact on small
entities should not be significant because most small entities are
likely to have a relatively small number of accounts, and thus
compliance should not impose a significant economic impact. Second, as
discussed in Section VI (the Commission's cost benefit analysis), the
economic impact on broker-dealers, including small entities, is imposed
by the statute itself, and not by the proposed rule. Treasury and the
Commission seek comment on whether the proposed rule would have a
significant economic impact on a substantial number of small entities
and whether the costs are imposed by the statute itself, and not the
proposed rule.
While Treasury and the Commission believe that the proposed rule
likely would not have a significant economic impact on a substantial
number of small entities, Treasury and the Commission do not have
complete data at this time to make this determination. Therefore, an
Initial Regulatory Flexibility Analysis has been prepared in accordance
with 5 U.S.C. 603.
A. Reason for the Proposed Action
Section 326 of the Act requires Treasury and the Commission jointly
to issue a regulation setting forth minimum standards for broker-
dealers and their customers regarding the identity of the customer that
shall apply in connection with the opening of an account at the broker-
dealer. Furthermore, section 326 requires, at a minimum, that broker-
dealers implement reasonable procedures for (1) verifying the identity
of any person seeking to open an account, to the extent reasonable and
practicable; (2) maintaining records of the information used to verify
the person's identity, including name, address, and other identifying
information; and (3) determining whether the person appears on any
lists of known or suspected terrorists or terrorist organizations
provided to the financial institution by any government agency.
The purpose of section 326, and the regulations promulgated
thereunder, is
[[Page 48316]]
to make it easier to prevent, detect and prosecute money laundering and
the financing of terrorism. In issuing the proposed rule, Treasury and
the Commission are seeking to fulfill their statutorily mandated
responsibilities under section 326 and to achieve its important
purpose.
B. Objective
The objective of the proposed regulation is to make it easier to
prevent, detect and prosecute money laundering and the financing of
terrorism. The proposed rule seeks to achieve this goal by specifying
the information broker-dealers must obtain from or about customers that
can be used to verify the identity of the customers. This will make it
more difficult for persons to use false identities to establish
customer relationships with broker-dealers for the purposes of
laundering money or moving funds to effectuate illegal activities, such
as financing terrorism.
C. Legal Basis
The proposed rule is being promulgated pursuant to section 326 of
the Act, which mandates that Treasury and the Commission issue a
regulation setting forth minimum standards for financial institutions
and their customers regarding the identity of customers that shall
apply in connection with the opening of accounts at financial
institutions.
D. Small Entities Subject to the Rule
The proposed rule would affect broker-dealers that are small
entities. Rule 0-10 under the Exchange Act \34\ defines a broker-dealer
to be small if it (1) had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Sec. 240.17a-5(d) or, if not required to file such statements, a broker
or dealer that had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small organization as
defined in the rule.
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\34\ 17 CFR 240.0-10(c).
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As of December 31, 2000, the Commission estimates there were
approximately 873 broker-dealers that were ``small'' for purposes of
Rule 0-10 that would be subject to this rule because they conduct
business with the general public. The Commission bases its estimate on
the information provided in broker-dealer FOCUS Reports.
E. Reporting, Recordkeeping and other Compliance Requirements
The proposed rule would require broker-dealers to (1) establish a
CIP; (2) obtain certain identifying information from customers; (3)
verify identifying information of customers; (4) check customers
against lists provided by federal agencies; (5) provide notice to
customers that information may be requested in the process of verifying
their identities; and (6) make and maintain records related to the CIP.
F. Duplicative, Overlapping or Conflicting Federal Rules
As discussed throughout this preamble, there are other federal
rules that contain requirements for collecting certain information from
customers. However, these other requirements do not provide sufficient
information for broker-dealers to verify the identity of their
customers. Congress has mandated that Treasury and the Commission issue
a regulation that requires broker-dealers to undertake such
verifications.
G. Significant Alternatives
If an agency does not certify that a rule will not have a
significant economic impact on a substantial number of small entities,
the Regulatory Flexibility Act directs Treasury and the Commission to
consider significant alternatives that would accomplish the stated
objective, while minimizing any adverse impact on small entities.
In connection with the proposed amendments, we considered the
following alternatives: (1) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources of small entities; (2) the clarification, consolidation, or
simplification of compliance and reporting requirements under the rule
for small entities; (3) the use of performance rather than design
standards; and (4) an exemption from coverage of the proposed
amendments, or any part thereof, for small entities.
The proposed rule provides for substantial flexibility in how each
broker-dealer may meet its requirements. This flexibility is designed
to account for differences between broker-dealers, including size.
Nonetheless, Treasury and the Commission did consider alternatives such
as exempting certain small entities from some or all of the
requirements of the proposed rule. Treasury and the Commission do not
believe that such an exemption is appropriate, given the flexibility
built into the rule to account for, among other things, the differing
sizes and resources of broker-dealers, as well as the importance of the
statutory goals and mandate of section 326. Money laundering can occur
in small firms as well as large firms.
H. Solicitation of Comments
Treasury and the Commission encourage the submission of comments
with respect to any aspect of this Initial Regulatory Flexibility
Analysis, including comments regarding the number of small entities
that may be affected by the proposed rule. Such comments will be
considered by Treasury and the Commission in determining whether a
Final Regulatory Flexibility Analysis is required, and will be placed
in the same public file as comments on the proposed amendment itself.
Comments should be submitted to Treasury or the Commission at the
addresses previously indicated.
VIII. Executive Order 12866
The Department of the Treasury has determined that this rule is not
a significant regulatory action for purposes of Executive Order 12866.
As noted above, the proposed rule closely parallels the requirements of
section 326 of the Act. Accordingly, a regulatory impact analysis is
not required.
Lists of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Banks, banking, Brokers, Currency, Foreign
banking, Foreign currencies, Gambling, Investigations, Law enforcement,
Penalties, Reporting and recordkeeping requirements, Securities.
Authority and Issuance
For the reasons set forth in the preamble, part 103 of title 31 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as
follows:
Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31
U.S.C. 5311-5332; title III, secs. 312, 313, 314, 319, 326, 352,
Pub. L. 107-56, 115 Stat. 307.
2. Section 103.35 is amended as follows:
a. By removing paragraph (a);
b. By redesignating paragraph (b) introductory text and paragraphs
(b)(1) through (b)(4) as introductory text and paragraphs (a) through
(d), respectively; and
[[Page 48317]]
c. In newly redesignated introductory text, by removing ``, in
addition,'' in the first sentence.
3. Subpart I of part 103 is amended by adding Sec. 103.122 to read
as follows:
Sec. 103.122 Customer identification programs for broker-dealers.
(a) Definitions. For the purposes of this section:
(1) Account means any formal business relationship with a broker-
dealer established to effect financial transactions in securities,
including, but not limited to, the purchase or sale of securities,
securities loan and borrowed activity, or the holding of securities or
other assets for safekeeping or as collateral. For example, a cash
account, margin account, prime brokerage account that consolidates
trading done at a number of firms, or an account for repurchase
transactions would each constitute an account.
(2) Broker-dealer means any person registered or required to be
registered as a broker or dealer with the Commission under the
Securities Exchange Act of 1934 (15 U.S.C 77a et seq.), except persons
who register pursuant to 15 U.S.C 78o(b)(11).
(3) Commission means the United States Securities and Exchange
Commission.
(4) Customer means:
(i) Any person who opens a new account with a broker-dealer; and
(ii) Any person who is granted authority to effect transactions
with respect to an account with a broker-dealer.
(5) Person has the same meaning as that term is defined in
Sec. 103.11(z).
(6) U.S. person means:
(i) Any U.S. citizen; and
(ii) Any corporation, partnership, trust, or person (other than a
natural person) that is established or organized under the laws of a
State or the United States.
(7) Non-U.S. person means a person that is not a U.S. person.
(8) Taxpayer identification number. The provisions of section 6109
of the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the
regulations of the Internal Revenue Service promulgated thereunder
shall determine what constitutes a taxpayer identification number.
(b) Customer identification program. A broker-dealer shall
establish, document, and maintain a written Customer Identification
Program (``CIP''). A broker-dealer's CIP procedures must enable it to
form a reasonable belief that it knows the true identity of the
customer. A broker-dealer's CIP must be a part of its anti-money
laundering program required under 31 U.S.C. 5318(h). A broker-dealer's
CIP procedures shall be based on the type of identifying information
available and on an assessment of relevant risk factors including:
(1) The broker-dealer's size;
(2) The broker-dealer's location;
(3) The broker-dealer's methods for opening accounts;
(4) The types of accounts the broker-dealer maintains for
customers;
(5) The types of transactions the broker-dealer executes for
customers;
(6) The broker-dealer's customer base; and
(7) The broker-dealer's reliance on another broker-dealer with
which it shares an account relationship.
(c) Required information--(1) General. Except as permitted by
paragraph (c)(2) of this section, the CIP shall require the broker-
dealer to obtain specified identifying information about each customer
before an account is opened or a customer is granted authority to
effect transactions with respect to an account. The specified
information must include, at a minimum:
(i) Name;
(ii) Date of birth, for a natural person;
(iii) Addresses:
(A) Residence and mailing (if different) for a natural person; or
(B) Principal place of business and mailing (if different) for a
person other than a natural person; and
(iv) Documentary record:
(A) U.S. person. A taxpayer identification number from each
customer that is a U.S. person; or
(B) Non-U.S. person. A taxpayer identification number, passport
number and country of issuance, an alien identification card number, or
the number and country of issuance of any other government-issued
document evidencing nationality or residence and bearing a photograph
or similar safeguard.
(2) Limited exception. In the case of a person other than a natural
person that has applied for, but has not received, an employer
identification number, the CIP may allow the employer identification
number to be provided within a reasonable period of time after the
account is established, if the broker-dealer obtains a copy of the
application for the employer identification number prior to the opening
of an account or the granting of trading authority.
(d) Required verification procedures. The CIP shall include
procedures for verifying the identity of customers, to the extent
reasonable and practicable, using identifying information obtained.
Such verification must occur within a reasonable time before or after
the customer's account is opened or the customer is granted authority
to effect transactions with respect to an account.
(1) Verification through documents. The CIP must describe when the
broker-dealer will verify customers' identities through documents and
describe the documents that the broker-dealer will use for this
purpose. Suitable documents for verification may include:
(i) For natural persons, an unexpired government-issued
identification evidencing nationality or residence and bearing a
photograph or similar safeguard; and
(ii) For persons other than natural persons, documents showing the
existence of the entity, such as registered articles of incorporation,
a government-issued business license, a partnership agreement, or a
trust instrument.
(2) Verification through non-documentary methods. The CIP must
describe non-documentary methods the broker-dealer will use to verify
customers' identities and when these methods will be used in addition
to, or instead of, relying on documents. Non-documentary verification
methods may include contacting a customer, obtaining a financial
statement, independently verifying information through credit bureaus,
public databases, or other sources, and checking references with other
financial institutions. Non-documentary methods shall be used when a
customer who is a natural person is unable to present an unexpired
government-issued identification document that bears a photograph or
similar safeguard, or the broker-dealer is presented with unfamiliar
documents to verify the identity of a customer, the broker-dealer does
not obtain documents to verify the identity of a customer, does not
meet face-to-face a customer who is a natural person, or the broker-
dealer is otherwise presented with circumstances that increase the risk
that the broker-dealer will be unable to verify the true identity of a
customer through documents.
(e) Government lists. The CIP shall include procedures for
determining whether a customer appears on any list of known or
suspected terrorists or terrorist organizations provided to the broker-
dealer by any federal government agency. Broker-dealers shall follow
all federal directives issued in connection with such lists.
(f) Customer notice. The CIP shall include procedures for providing
customers with adequate notice that the broker-dealer is requesting
information to verify their identities.
[[Page 48318]]
(g) Lack of verification. The CIP shall include procedures for
responding to circumstances in which the broker-dealer cannot form a
reasonable belief that it knows the true identity of a customer.
(h) Recordkeeping. The CIP shall include procedures for making and
retaining a record of all information obtained pursuant to the CIP.
(1) Required records. At a minimum, the CIP shall require the
broker-dealer to make the following records:
(i) All identifying information provided by a customer pursuant to
paragraph (c) of this section, and copies of any documents that were
relied on pursuant to paragraph (d)(1) of this section that accurately
depict the types of documents and any identification numbers they may
contain;
(ii) The methods and results of any measures undertaken to verify
the identity of a customer pursuant to paragraph (d)(2) of this
section; and
(iii) The resolution of any discrepancy in the identifying
information obtained.
(2) Retention of records. The broker-dealer must retain all records
made or obtained when verifying the identity of a customer pursuant to
its CIP until five years after the date the account of the customer is
closed or the grant of authority to effect transactions with respect to
an account is revoked. In all other respects, the records shall be
maintained pursuant to the provisions of 17 CFR 240.17a-4.
(i) Approval of CIP. The CIP shall be approved by the broker-
dealer's board of directors, managing partners, board of managers or
other governing body performing similar functions or by a person or
persons specifically authorized by such bodies to approve the CIP.
(j) Exemptions. The Commission, with the concurrence of the
Secretary, may by order or regulation exempt any broker-dealer that
registers with the Commission pursuant to 15 U.S.C. 78o (except broker-
dealers that register under subsection (b)(11) of that section) or 15
U.S.C. 78o-4 or type of account from the requirements of this section.
The Secretary, with the concurrence of the Commission, may exempt any
broker-dealer that registers with the Commission pursuant to 15 U.S.C.
78o-5. In issuing such exemptions, the Commission and the Secretary
shall consider whether the exemption is consistent with the purposes of
the Bank Secrecy Act, and in the public interest, and may consider
other necessary and appropriate factors.
Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
Dated: July 12, 2002.
By the Securities and Exchange Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18192 Filed 7-22-02; 8:45 am]
BILLING CODE 8010-01-P; 4830-01-P516
[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48318-48328]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-703]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release No. IC-25657; File No. S7-26-02]
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA33
Customer Identification Programs for Mutual Funds
AGENCIES: Financial Crimes Enforcement Network, Treasury; Securities
and Exchange Commission.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), and the Securities and Exchange
Commission are jointly issuing a proposed regulation to implement
Section 326 of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001 (the Act). Section 326 requires the Secretary of
the Treasury to jointly prescribe with the Securities and Exchange
Commission a regulation that, at a minimum, requires investment
companies to adopt and implement reasonable procedures to verify the
identity of any person seeking to open an account, to the extent
reasonable and practicable; maintain records of the information used to
verify the person's identity; and determine whether the person appears
on any lists of known or suspected terrorists or terrorist
organizations provided to investment companies by any government
agency. The proposed rule would apply to investment companies that are
mutual funds.
DATES: Written comments on the proposed rule should be submitted to the
Treasury Department and the Securities and Exchange Commission on or
before September 6, 2002.
ADDRESSES: Because paper mail in the Washington area may be subject to
delay, commenters are encouraged to e-mail comments. Comments should be
sent by one method only.
Treasury: Comments may be mailed to FinCEN, Section 326 Mutual Fund
Rule Comments, P.O. Box 39, Vienna, VA 22183, or sent to Internet
address regcomments@fincen.treas.gov with the caption ``Attention:
Section 326 Mutual Fund Rule Comments'' in the body of the text.
Comments may be inspected at FinCEN between 10 a.m. and 4 p.m. in the
FinCEN Reading Room in Washington, DC. Persons wishing to inspect the
comments submitted must request an appointment by telephoning (202)
354-6400 (not a toll-free number).
Securities and Exchange Commission: Comments also should be
submitted in triplicate to Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Comments
also may be submitted electronically at the following E-mail address:
rule-comments@sec.gov. Comment letters should refer to File No. S7-26-
02; this file number should be included on the subject line if E-mail
is used. All comments received will be available for public inspection
and copying at the Commission's Public Reference Room, 450 Fifth
Street, NW., Washington, DC 20549-0102. Electronically submitted
comment letters will be posted on the Commission's Internet web site
(http://www.sec.gov). Personal, identifying information, such as names
or E-mail addresses, is not deleted from electronic submissions. Submit
only information you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Securities and Exchange Commission:
Division of Investment Management, Securities and Exchange Commission,
(202) 942-0720.
Treasury: Office of the Chief Counsel (FinCEN), (703) 905-3590;
Office of the Assistant General Counsel for Enforcement (Treasury),
(202) 622-1927; or the Office of the Assistant General Counsel for
Banking & Finance (Treasury), (202) 622-0480.
SUPPLEMENTARY INFORMATION:
I. Background
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the USA PATRIOT
Act.\1\ Title III of the Act, captioned ``International Money
Laundering Abatement and Anti-terrorist Financing Act of 2001,'' adds
several new provisions to the Bank Secrecy Act (``BSA''), 31 U.S.C.
5311 et seq. These provisions are intended to facilitate the
[[Page 48319]]
prevention, detection, and prosecution of international money
laundering and the financing of terrorism.
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\1\ Pub. L. 107-56.
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Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318
that requires the Secretary of the Treasury (``Secretary'') to
prescribe regulations setting forth minimum standards for financial
institutions and their customers that relate to the identification and
verification of any person who applies to open an account. Section 326
provides that the regulations must require, at a minimum, financial
institutions to implement reasonable procedures for: (1) Verifying the
identity of customers, to the extent reasonable and practicable, when
accounts are opened; (2) maintaining records of the information used to
verify the person's identity, including name, address, and other
identifying information; and (3) determining whether the person appears
on any lists of known or suspected terrorists or terrorist
organizations provided to the financial institution by any government
agency. In prescribing these regulations, the Secretary is directed to
take into consideration the various types of accounts maintained by
various types of financial institutions, the various methods of opening
accounts, and the various types of identifying information available.
Final regulations implementing Section 326 must be effective by October
25, 2002.
Section 326 applies to all ``financial institutions.'' This term is
defined very broadly in the BSA to encompass a variety of entities
including investment companies, banks, agencies and branches of foreign
banks in the United States, thrifts, credit unions, brokers and dealers
in securities or commodities, insurance companies, travel agents,
pawnbrokers, dealers in precious metals, check-cashers, casinos, and
telegraph companies, among many others. See 31 U.S.C. 5312(a)(2).\2\
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\2\ For any financial institution engaged in financial
activities described in section 4(k) of the Bank Holding Company Act
of 1956 (section 4(k) institutions), the Secretary is required to
prescribe the regulations issued under section 326 jointly with the
Securities and Exchange Commission (``Commission''), the Commodity
Futures Trading Commission (``CFTC''), and the banking agencies
(``banking agencies''), namely, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, and the National Credit Union Administration.
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Although the BSA includes ``an * * * investment company'' among the
entities defined as financial institutions, Treasury has not previously
defined the term for purposes of the BSA.\3\ The Investment Company Act
of 1940 (codified at 15 U.S.C. 80a-1, et seq.) (``1940 Act'') defines
investment company broadly and subjects those entities to comprehensive
regulation by the Commission.\4\ However, privately offered entities
commonly known as hedge funds, private equity funds and venture capital
funds typically rely on exclusions from the 1940 Act definition of
investment company.\5\ For purposes of the Section 326 requirement, the
scope of this proposed rule is limited to those entities that are
required to register with the Commission as investment companies and
that fall within the category of ``open-end company'' contained in
section 5(a)(1) of the 1940 Act.\6\ These entities are commonly
referred to as ``mutual funds.'' \7\
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\3\ 31 U.S.C 5312(a)(2)(I).
\4\ Section 3(a)(1) defines ``investment company'' as any issuer
which--
(A) is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing,
reinvesting, or trading in securities;
(B) is engaged or proposes to engage in the business of issuing
face-amount certificates of the installment type, or has been
engaged in such business and has any such certificate outstanding;
or
(C) is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities,
and owns or proposes to acquire investment securities having a value
exceeding 40 per centum of the value of such issuer's total assets
(exclusive of Government securities and cash items) on an
unconsolidated basis.
\5\ E.g., Sections 3(c)(1) and 3(c)(7) of the Investment Company
Act. Section 356 of the Act requires that the Secretary, the Board
of Governors of the Federal Reserve System and the Commission
jointly submit a report to Congress, not later than October 26,
2002, on recommendations for effective regulations to apply the
requirements of the BSA to investment companies as defined in
section 3 of the 1940 Act, including persons that, but for the
provisions that exclude entities commonly known as hedge funds,
private equity funds, and venture capital funds, would be investment
companies.
\6\ Other types of investment companies regulated by the
Commission include closed-end companies and unit investment trusts.
Closed-end companies typically sell a fixed number of shares in
traditional underwritten offerings. Holders of closed-end company
shares then trade their shares in secondary market transactions,
usually on a securities exchange or in the over-the-counter market.
Unit investment trusts are pooled investment entities without a
board of directors or investment adviser that offer investors
redeemable units in an unmanaged, fixed portfolio of securities. The
Secretary and the Commission will continue to consider whether a CIP
requirement would be appropriate for the issuers of these products,
or whether they are effectively covered by the CIP requirements of
other financial institutions involved in their distribution (e.g.,
broker-dealers).
\7\ By interim rule published on April 29, 2002, Treasury
required that mutual funds adopt anti-money laundering programs
pursuant to Section 352 of the Act. 67 FR 21117 (April 29, 2002).
Treasury temporarily exempted investment companies other than mutual
funds from the requirement that they establish anti-money laundering
programs and temporarily deferred determining the definition of
``investment company'' for purposes of the BSA. Id. However, it is
likely that some of the entities excluded from the definition of
``investment company'' in the 1940 Act will be required to establish
anti-money laundering programs and customer identification programs
pursuant to sections 352 and 326 of the Act.
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Regulations governing the applicability of Section 326 to other
financial institutions, such as broker-dealers and those institutions
regulated by the banking agencies, are being issued separately.
Treasury, the Commission, the CFTC and the banking agencies consulted
extensively in the development of all rules implementing Section 326 of
the Act. All of the participating agencies intend the effect of the
rules to be uniform throughout the financial services industry. \8\
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\8\ Section 314(c) of the Act provides that: ``Compliance with
the provisions of this title requiring or allowing financial
institutions and any association of financial institutions to
disclose or share information regarding individuals, entities, and
organizations engaged in or suspected of engaging in terrorist acts
or money laundering activities shall not constitute a violation of
the provisions of title V of the Gramm-Leach-Bliley Act (Public Law
106-102).''
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The Secretary has determined that the records required to be kept
by Section 326 of the Act have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, to protect against
international terrorism.
B. Codification of the Joint Proposed Rule
The substantive requirements of the joint proposed will be codified
with other Bank Secrecy Act regulations as part of Treasury's
regulations in 31 CFR part 103. To minimize potential confusion by
affected entities regarding the scope of the joint proposed rule, the
Commission is also proposing to add a provision in its own regulations
in 17 CFR part 270 that will cross-reference the regulations in 31 CFR
part 103. Although no specific text is being proposed at this time, the
cross-reference will be included in a final rule published by the
Commission concurrently with the joint final rule issued by Treasury
and the Commission implementing section 326 of the Act.
II. Section-by-Section Analysis
A. Section 103.131(a) Definitions
(1) Account. The proposed rule's definition of ``account'' is
intended to include all types of securities accounts maintained by
mutual funds. This includes each account at a mutual fund.
(2) Commission means the United States Securities and Exchange
Commission.
(3) Customer. The proposed rule defines ``customer'' as any
shareholder
[[Page 48320]]
of record who opens a new account with a mutual fund and any person
granted authority to effect transactions in the shareholder of record's
account with a mutual fund. Under this definition, a shareholder of
record prior to the effective date of the regulation would not be a
``customer.'' However, such a person becomes a ``customer'' if the
person becomes a shareholder of record or is granted trading
authorization in a different account after the effective date.
Moreover, a person becomes a ``customer'' each time they open a
different type of account. For example, after the effective date, if a
person opens a taxable account and subsequently opens an IRA account,
the person is a ``customer'' subject to the requirements of this rule
on both occasions.\9\ However, a shareholder who exchanges shares of
one fund for shares of another fund within the same account (or
initiates any other transaction that does not involve the opening of a
separate account) does not become a ``customer'' for the purpose of
this rule.
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\9\ As discussed infra, this does not necessarily mean that a
customer whose identity has been verified by a mutual fund must
always have their identity verified every time they subsequently
becomes a customer with respect to a different account.
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A person with trading authority prior to the effective date of the
regulation is not a ``customer.'' However, any person granted trading
authority after the effective date is a customer. This is true even if
the person is granted authority with respect to an account that existed
prior to the effective date or the person had been granted authority
for another account prior to the effective date.
The requirements of Section 326 apply to any person who opens a new
account or is granted trading authority for an account, but do not
apply to persons seeking information about a mutual fund such as a
request for a prospectus or profile. In addition, transfers of accounts
from one mutual fund to another that are not initiated by the customer
(e.g., as a result of a merger, acquisition, or purchase of assets)
fall outside of the scope of Section 326, and are not covered by the
proposed regulation.\10\
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\10\ However, there may be situations involving the transfer of
accounts where it would be appropriate for a mutual fund to verify
the identity of customers associated with the accounts acquired by
the mutual fund. Therefore, Treasury and the Commission expect
procedures for transfers of accounts to be part of a mutual fund's
overall anti-money laundering program required under section 352 of
the Act.
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(4) Mutual Fund means an entity that is required to register with
the Commission as an ``investment company'' (as the term is defined in
Section 3 of the 1940 Act) and that is an ``open-end company'' (as that
term is defined in Section 5 of the 1940 Act).
(5) Person. The proposed regulation defines ``person'' as having
the same meaning as that term is defined in section 103.11(z). Thus,
the term includes natural persons, corporations, partnerships, trusts
or estates, joint stock companies, associations, syndicates, joint
ventures, any unincorporated organizations or groups, Indian Tribes,
and all entities cognizable as legal entities.
(6) Taxpayer identification number. The proposed rule defines
``taxpayer identification number'' to have the same meaning as
determined under the provisions of section 6109 of the Internal Revenue
Code and the regulations of the Internal Revenue Service thereunder.
(7) U.S. person. The proposed rule defines ``U.S. person'' as a
U.S. citizen or, for persons other than natural persons, an entity
established or organized under the laws of a State or the United
States.\11\ A non-U.S. person is a person who does not satisfy these
criteria.
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\11\ The terms ``State'' and ``United States'' are defined at 31
CFR 103.11.
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B. Section 103.131(b) Customer Identification Program
Section 326 requires the Secretary and the Commission to prescribe
regulations requiring mutual funds to adopt and implement ``reasonable
procedures'' for: verifying the identity of customers ``to the extent
reasonable and practicable;'' maintaining records associated with such
verification; and consulting lists of known terrorists.
Paragraph (b) of the proposed rule sets forth the requirement that
mutual funds must develop and operate a customer identification program
(``CIP'') and sets forth relevant factors for the design of CIP
procedures.\12\ The degree to which a CIP is effective will be a
function of a mutual fund's assessment of these factors and the nature
of its response to them (as manifested in the CIP's procedures and
guidelines). In addition, as Section 326 and the proposed rule provide,
the reasonableness of the CIP also will be a function of what is
practicable for the mutual fund.
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\12\ An interim rule issued by Treasury pursuant to Section 352
of the Act requires all mutual funds to establish anti-money
laundering programs that, at a minimum, include (1) The development
of internal policies, procedures, and controls; (2) the designation
of a compliance officer; (3) an ongoing employee training program;
and (4) an independent audit function to test programs. 67 FR 21117
(April 29, 2002). The proposed rule requires that the CIP be
incorporated into a mutual fund's program established under Section
352. At the same time that it issued the interim rule under Section
352 of the Act, Treasury delegated to the Commission authority to
examine mutual funds for compliance with Bank Secrecy Act
regulations.
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In developing and updating CIPs, mutual funds should consider the
type of identifying information available for customers and the methods
available to verify that information. While certain minimum identifying
information is required in paragraph (c) of this proposed rule and
certain suitable verification methods are described in paragraph (d),
mutual funds should consider on an on-going basis whether other
information or methods are appropriate, particularly as they become
available in the future.
Mutual funds must also base their CIPs on the risks associated with
their business operations. Some relevant risk factors to be considered
are set forth in paragraph (b) and discussed below in general
terms.\13\
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\13\ This discussion of risk factors is not intended to be
comprehensive or exhaustive.
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The first risk factor to consider is the mutual fund's size. For
example, a large mutual fund that opens a substantial number of
accounts on any given day will have different risks than one that opens
a much smaller number of new accounts.
The second risk factor is the method by which customers open
accounts at the mutual fund. Accounts opened exclusively on-line
present different, and perhaps greater, risks than those opened in-
person on the firm's premises.
The third risk factor is the type of accounts offered by the mutual
fund. Mutual funds should assess whether there are different risks (and
degrees of risk) associated with the various types of accounts they
provide to customers (e.g., taxable, IRA, 401(k) and 403(b) accounts).
The fourth risk factor is the customer base. Mutual funds should
assess the risks associated with different types of customers. For
example, a mutual fund should examine whether it is opening accounts
for customers located in countries the Secretary determines to be of
``primary money laundering concern'' pursuant to Section 311 of the
Act. Verification procedures should account for the concerns raised by
such customers. In addition, certain types of customers may pose
greater risks (e.g., individuals and certain types of business
entities, such as closely held corporations, may pose a greater risk
than institutional shareholders).
Because mutual funds typically conduct their operations through
separate entities, which may or may not be affiliated, some elements of
the CIP
[[Page 48321]]
will best be performed by personnel of these separate entities. It is
permissible for a mutual fund to contractually delegate the
implementation and operation of its CIP to another affiliated or
unaffiliated service provider, such as a transfer agent. However, the
mutual fund remains responsible for assuring compliance with this rule.
Accordingly, the mutual fund must actively monitor the operation of its
CIP program and assess its effectiveness.
A mutual fund's CIP does not have to include verification of
individuals' identities whose transactions are conducted through an
omnibus account. Typically, a fund has little or no identifying
information for the individual customers represented in an omnibus
account. For example, when fund shares are sold through a broker-
dealer, the shareholders' accounts are opened at the broker-dealer. The
broker-dealer obtains the identifying information about the customers.
This rule does not require that a mutual fund obtain any additional
information regarding the identities of individual shareholders who
open their accounts through an omnibus accountholder. Of course, the
omnibus account holder is itself a customer for purposes of this
rule.\14\
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\14\ This treatment of omnibus accounts is consistent with the
legislative history of the Act which includes the following: [W]here
a mutual fund sells its shares to the public through a broker-dealer
and maintains a ``street name'' or omnibus account in the broker-
dealer's name, the individual purchasers of the fund shares are
customers of the broker-dealer, rather than the mutual fund. The
mutual fund would not be required to ``look through'' the broker-
dealer to identify and verify the identities of those customers.
Similarly, where a mutual fund sells its shares to a qualified
retirement plan, the plan, and not its participants, would be the
fund's customers. Thus, the fund would not be required to ``look
through'' the plan to identify its participants. H.R. Rep. 107-250,
pt. 1, at 62(2001).
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Finally, paragraph (b) requires that the identity verification
procedures must enable the mutual fund to form a reasonable belief that
it knows the true identity of the customer. This provision makes clear
that, while there is flexibility in establishing these procedures, the
mutual fund is responsible for exercising reasonable efforts to
ascertain the identity of each customer.
C. Section 103.131(c) Required Information
Paragraph (c) of the proposed regulation provides that a mutual
fund's CIP must require customers to provide, at a minimum, certain
identifying information before an account is opened for the customer or
the customer is granted trading authority over an account.
Specifically, the mutual fund must obtain each customer's: (1) Name,
(2) date of birth, if applicable, (3) addresses,\15\ and (4)
identification number.\16\
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\15\ With respect to addresses, each customer must provide a
mailing address and, if different, the address of the customer's
residence (if a natural person) or principal place of business (if
not a natural person).
\16\ If the customer is a U.S. person, he must provide a U.S.
taxpayer identification number (e.g., social security number or
employer identification number). If the customer is a non-U.S.
person, he must provide a U.S. taxpayer identification number, an
alien identification card number, or the number and country of
issuance of any other government-issued document evidencing
nationality or residence and bearing a photograph or similar
safeguard. The term ``similar safeguard'' is included to permit the
use of any biometric identifiers (e.g., fingerprints) that may be
used in addition to, or instead of, photographs.
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The rule only specifies the minimum identifying information that
must be obtained from each customer. Mutual funds, in assessing the
risk factors in paragraph (b), should determine whether obtaining other
identifying information is necessary to form a reasonable belief as to
the true identity of each customer. There may be circumstances when a
mutual fund should obtain additional identifying information. The CIP
should set forth guidelines regarding what those circumstances are and
what additional information should be obtained in such circumstances.
Treasury and the Commission recognize that a new business may need
to open a mutual fund account before it has received an employer
identification number (``EIN'') from the Internal Revenue Service. For
this reason, the proposed regulation contains a limited exception to
the requirement that an EIN be provided prior to establishing an
account. Accordingly, in the case of person other than an individual
(such as a corporation, partnership or trust) that has applied for, but
has not received, an EIN, the EIN may be provided within a reasonable
period of time after an account is established, provided that a copy of
the EIN application is submitted to the mutual fund prior to the time
the account is established. Currently, the IRS indicates that the
issuance of an EIN can take up to five weeks. This length of time,
coupled with when the entity applied for the EIN, should be considered
by the mutual fund in determining the reasonable period of time within
which the entity should provide its EIN to the mutual fund.
D. Section 103.131(d) Required Verification Procedures
After obtaining identifying information from a customer, the mutual
fund must take steps to verify some, or all, of that information in
order to form a reasonable belief that it knows the true identity of
the customer. Accordingly, paragraph (d) of the proposed rule requires
a mutual fund's CIP to have procedures for verifying identifying
information provided by the customer. The mutual fund need not verify
each piece of identifying information obtained pursuant to paragraph
(c), if it is able to form a reasonable belief that it knows the
customer's identity after verifying only certain of the information.
Paragraph (d) further requires that the verification procedures
must be undertaken within a reasonable time before or after a
customer's account is opened or a customer is granted authority to
effect transactions with respect to an account. This flexibility must
be exercised in a reasonable manner, given that verifications too far
in advance may become stale and verifications too long after the fact
may provide opportunities to launder money while verification is
pending. The amount of time it will take a mutual fund to verify the
identity of a customer may depend on the type of account opened,
whether the customer opens the account in-person, and on the type of
identifying information available. In addition, provided that the
appropriate disclosure is made, a mutual fund may choose to place
limits on the account, such as temporarily limiting additional
purchases in an account until the customer's identity is verified.
Therefore, the proposed rule provides mutual funds with the flexibility
to use a risk-based approach to determine when the identity of a
customer must be verified relative to the opening of an account or
granting of trading authority.
A person becomes a customer each time they open a new account with
a mutual fund. Therefore, upon the opening of each account, the
verification requirements of this rule would apply. However, if a
customer whose identification has been verified previously opens a new
account, the mutual fund would not need to verify the customer's
identity a second time, provided that the mutual fund continued to have
a reasonable belief that it knew the true identity of the customer
based on the previous verification.
The rule provides for two methods of verifying identifying
information: verification through documents and/or verification through
non-documentary means. For natural persons, suitable documents for
verification include unexpired government-issued identification
documents evidencing nationality or residence and bearing a
[[Page 48322]]
photograph or similar safeguard. For non-natural persons, suitable
documents must evidence the existence of the entity, such as registered
articles of incorporation, a government-issued business license, a
partnership agreement, or a trust instrument.
The proposed rule requires a mutual fund's CIP to address both
methods of verification. Depending on the type of customer and the
method of opening an account, it may be more appropriate to use either
documents or non-documentary methods. In some cases, it may be
appropriate to use both methods. The CIP should set forth guidelines
describing when documents, non-documentary methods, or a combination of
both will be used. These guidelines should be based on the mutual
fund's assessment of the factors described in paragraph (b) of the
proposed rule.
The risk a mutual fund will not know a customer's true identity
will be heightened for certain types of accounts, such as accounts
opened in the name of a corporation, partnership, or trust that is
created, or conducts substantial business, in jurisdictions designated
as primary money laundering concerns or designated as non-cooperative
by an international body. Obtaining sufficient information to verify a
given customer's identity can reduce the risk a mutual fund will be
used as a conduit for money laundering and terrorist financing. A
mutual fund's identity verification procedures must be based on its
assessments of the factors in paragraph (b). Accordingly, when those
assessments suggest a heightened risk, the mutual fund should utilize
additional verification measures.
1. Verification Through Documents
Paragraph (d)(1) provides that the CIP must describe when a mutual
fund will verify identity through documents and set forth the documents
that will be used for this purpose. The rule also lists certain
documents that are suitable for verification. For example, documentary
verification could include obtaining a driver's license or passport
from a natural person or articles of incorporation from a company.
2. Verification Through Non-documentary Methods
Paragraph (d)(2) provides that the CIP must describe non-
documentary verification methods and when such methods will be employed
in addition to, or instead of, verification through documents. The rule
allows for the exclusive use of non-documentary methods because some
accounts are opened by telephone, mail, or over the Internet. However,
even if the customer presents identification documents, it may be
appropriate to use non-documentary methods as well. Ultimately, the
mutual fund is responsible for employing sufficient verification
methods to be able to form a reasonable belief that it knows the true
identity of the customer.
The proposed rule sets forth certain non-documentary methods that
would be suitable for verifying identity. These methods include
contacting a customer after the account is opened; obtaining a
financial statement; comparing the identifying information provided by
the customer against fraud and bad check databases to determine whether
any of the information is associated with known incidents of fraudulent
behavior; comparing the identifying information with information
available from a trusted third-party source, such as a credit report
from a consumer reporting agency; and checking references with other
financial institutions. The mutual fund also may wish to analyze
whether there is logical consistency between the identifying
information provided, such as the customer's name, street address, ZIP
code, telephone number (if provided), date of birth, and social
security number.
Paragraph (d)(2) also provides that the CIP must require the use of
non-documentary methods in certain cases; specifically, when a natural
person is unable to present an unexpired government-issued
identification document that bears a photograph or similar safeguard
and when the mutual fund is presented with unfamiliar documents to
verify the identity of a customer, does not obtain documents to verify
the identity of a customer, does not meet face-to-face a customer who
is a natural person, or is otherwise presented with circumstances that
increase the risk the mutual fund will be unable to verify the true
identity of a customer through documents.
Treasury and the Commission recognize that identification
documents, including those issued by a government entity, may be
obtained illegally and may be fraudulent. In light of the recent
increase in identity fraud, mutual funds are encouraged to use non-
documentary methods, even when a customer has provided identification
documents.
E. Section 103.131(e) Government Lists
The proposed rule requires that a mutual fund's CIP must include
reasonable procedures for determining whether a customer's name appears
on any list of known or suspected terrorists or terrorist organizations
prepared by any federal government agency and made available to the
mutual fund. This requirement applies only with respect to lists
circulated, directly provided, or otherwise made available by the
Federal government. In addition, the proposed rule states that mutual
funds must follow all Federal directives issued in connection with such
lists. A mutual fund must have procedures for responding to
circumstances when a customer is named on such a list.
F. Section 103.131(f) Customer Notice
Section 326 provides that financial institutions must give their
customers notice of their identity verification procedures. Therefore,
a mutual fund's CIP must include procedures for providing customers
with adequate notice that the mutual fund is requesting information to
verify their identities. A mutual fund may satisfy the notice
requirement by generally notifying its customers about the procedures
the fund must comply with to verify their identities. If an account is
opened electronically, such as through an Internet website, the mutual
fund may provide notice electronically. However, notice must be
provided to the customer before the account is opened or trading
authority is granted.
G. Section 103.131(g) Lack of Verification
Paragraph (g) of the proposed rule states that a mutual fund's CIP
must include procedures for responding to circumstances in which it
cannot form a reasonable belief that it knows the true identity of a
customer. A mutual fund's CIP should specify the actions to be taken
when it cannot form a reasonable belief that it knows the customer's
true identity, which could include closing the account or placing
limitations on additional purchases. There also should be guidelines
for when an account will not be opened (e.g., when the required
information is not provided). In addition, the CIP should address the
terms under which a customer may conduct transactions while the
customer's identity is being verified. Mutual funds are also
encouraged, but not required at this time, to adopt procedures for
voluntarily filing Suspicious Activity Reports with FinCEN and for
reporting suspected terrorist activities to FinCEN using its Financial
Institutions Hotline (866-566-3974).
H. Section 103.131(h) Recordkeeping
Section 326 of the Act requires procedures for maintaining records
of the information used to verify a person's identity, including name,
address, and other identifying information. Paragraph
[[Page 48323]]
(h) of the proposed rule sets forth recordkeeping procedures that must
be included in a mutual fund's CIP. These procedures must provide for
the maintenance of all information obtained pursuant to the CIP.
Information that must be maintained includes all identifying
information provided by a customer pursuant to paragraph (c). Thus, the
mutual fund must make a record of each customer's name, date of birth
(if applicable), addresses, and identification numbers provided. Mutual
funds also must maintain copies of any documents that were relied on
pursuant to paragraph (d)(1) evidencing the type of document and any
identification number it may contain. For example, if a customer
produces a driver's license, the mutual fund must make a copy of the
driver's license that clearly indicates it is a driver's license and
legibly depicts any identification number on the license.
Mutual funds also must make and maintain records of the methods and
results of measures undertaken to verify the identity of a customer
pursuant to paragraph (d)(2). For example, if a mutual fund obtains a
report from a credit bureau concerning a customer, the report must be
maintained. Mutual funds also must make and maintain records of the
resolution of any discrepancy in the identifying information obtained.
To continue with the previous example, if the customer provides a
residence address that is different than the address shown on the
credit report, the mutual fund must document how it resolves this
discrepancy or, if the discrepancy is not resolved, how it forms a
reasonable belief that the mutual fund knows the true identity of the
customer, notwithstanding the discrepancy.
The mutual fund must retain all of these records for five years
after the date the account is closed. Nothing in this proposed
regulation modifies, limits or supersedes Section 101 of the Electronic
Records in Global and National Commerce Act, Public Law 106-229, 114
Stat. 464 (15 U.S.C. 7001) (``E-Sign Act''). Thus, a mutual fund may
use electronic records to satisfy the requirements of this regulation
in accordance with previously issued Commission guidance.\17\
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\17\ See Investment Company Act Release No. 24991 (May 24, 2001)
[66 FR 29224 (May 30, 2001)].
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Treasury and the Commission emphasize that the collection and
retention of information about a customer, as an ancillary part of
collecting identifying information, do not relieve a mutual fund from
its obligations to comply with anti-discrimination laws or regulations.
I. Section 103.131(i) Approval of Program
Paragraph (i) of the proposed rule requires that the mutual fund's
CIP be approved by its board of directors or trustees. The board should
periodically assess the effectiveness of its CIP and should receive
periodic reports regarding the CIP from the person or persons
responsible for monitoring the fund's anti-money laundering program
pursuant to 31 CFR 103.130(c)(3).
J. Section 103.131(j) Exemptions
Section 326 states that the Secretary and the Federal functional
regulator jointly issuing the rule may by order or regulation exempt
any financial institution or type of account from this regulation in
accordance with such standards and procedures as the Secretary may
prescribe. The proposed rule provides that the Commission, with the
concurrence of the Secretary, may exempt any mutual fund or type of
account from the requirements of this section. The Commission and the
Secretary shall consider whether the exemption is consistent with the
purposes of the Bank Secrecy Act, and in the public interest, and may
consider other necessary and appropriate factors.
III. Request for Comments
Treasury and the Commission invite comment on all aspects of the
proposed regulation, and specifically seek comment on the following
issues:
1. Whether the proposed definition of ``account'' is appropriate
and whether other examples of accounts should be added to the
regulatory text.
2. How mutual funds can comply with the requirement to obtain both
the address of a person's residence, and, if different, the person's
mailing address in situations involving natural persons who lack a
permanent address.
3. Whether non-U.S. persons that are not natural persons will be
able to provide a mutual fund with the identifying information required
in Sec. 103.131(c)(4), or whether other categories of identifying
information should be added to this section. Commenters on this issue
should suggest other means of identification that mutual funds
currently use or could use in this circumstance that would allow a
mutual fund to form a reasonable belief that it knew the true identity
of the entity.
4. The extent to which the verification procedures required by the
proposed regulation will use information that mutual funds currently
obtain in the account opening process. We note that the legislative
history of Section 326 indicates that Congress intended ``the
verification procedures prescribed by Treasury [to] make use of
information currently obtained by most financial institutions in the
account opening process.'' See H.R. Rep. No. 107-250, pt. 1, at 63
(2001).
IV. The Commission's Analysis of the Costs and Benefits Associated With
the Proposed Rule
The Commission is considering the costs and benefits associated
with the proposal and requesting comment on all aspects of this cost-
benefit analysis, including identification and assessment of any other
costs and benefits not discussed in the analysis. Commenters are
encouraged to identify, discuss, analyze, and supply relevant data
concerning the costs and benefits of the proposed rule's implementation
of Section 326 requirements.
Section 326 of the Act requires Treasury and the Commission to
prescribe regulations setting forth minimum standards for mutual funds
regarding the identities of customers that shall apply in connection
with the opening of an account. The statute also provides that the
regulations issued by Treasury and the Commission must, at a minimum,
require financial institutions to implement reasonable procedures for:
(1) Verification of customers' identities; (2) determination of whether
a customer appears on a government list; and (3) maintenance of records
related to customer verification. The Commission believes that the
requirements in the proposed rule are reasonable and practicable.
Accordingly, the costs to mutual funds to (1) establish a CIP; (2)
obtain certain identifying information from customers; (3) verify
identifying information of customers; (4) check customers against lists
provided by federal agencies, (5) provide notice to customers that
information may be requested in the process of verifying their
identities; and (6) make and maintain records related to the CIP are
attributable to the statute.
While the Commission believes the costs are attributable to the
statute, it nonetheless has undertaken an analysis of the costs and
benefits of the requirements. The Commission seeks comment on whether
the costs are attributable to the statute. The Commission also seeks
comment on whether the proposed rule, by setting forth minimum
requirements, creates a benefit or, conversely, imposes costs because
mutual funds will not have to establish their own minimum requirements
as required by the statute.
[[Page 48324]]
A. Benefits Associated With the Proposed Rule
The anti-money laundering provisions in the Act are intended to
prevent, detect and prosecute money laundering and the financing of
terrorism. The proposed rule is an important part of this effort. It
requires mutual funds to establish a program for verifying the true
identities of their customers, thereby reducing the risk that mutual
funds will be unwittingly aiding criminals, including terrorists, in
accessing U.S. financial markets to launder money or move funds for
illicit purposes. Additionally, the implementation of such programs
should make it more difficult for persons to successfully engage in
fraudulent activities involving identity theft or the placing of
fictitious orders to buy or sell securities. It is virtually impossible
to quantify in monetary terms those benefits.
B. Costs Associated With the Proposed Rule
Section 326 of the Act and the proposed rule allows for great
flexibility in developing CIPs. Given the considerable differences
among mutual funds regarding their distribution channels, customers,
and exposure to other relevant risk factors, it is difficult to
quantify a cost per mutual fund. Most mutual funds already have some
procedures in place for detecting fraud in the account opening process
by looking for inconsistencies in the information provided by customers
and/or checking customer names against certain databases. In those
instances, the Section 326 requirements supplement those procedures.
Section 326 requirements will impose initial, one-time costs and
ongoing costs on mutual funds. The costs associated with establishment
of CIPs and modification of account applications (both paper and web-
based applications) to require that customers provide the information
required by the CIP and to provide the required notice regarding use of
that information will primarily be initial, one-time costs.
Ongoing costs for mutual funds will be associated with the need to:
(1) Collect the information required by the CIPs, (2) verify customers'
identities, (3) determine whether customers appear on lists provided by
federal agencies, and (4) make and maintain records related to CIPs.
These ongoing costs will primarily be a function of the number of new
accounts opened at a mutual fund. From January 1, 1990 through December
31, 2001, approximately 16 million mutual fund accounts were added
annually.\18\
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\18\ This estimate is derived from information reported in the
Investment Company Institute's 2002 Mutual Fund Fact Book. It
represents the net annual increase in the number of mutual fund
accounts. The actual number of new accounts that were opened during
this period is probably higher as this estimate is reduced by the
number of accounts that were closed during the same period. No data
are available regarding the number of accounts that were closed.
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1. Establishment of a CIP
There are approximately 3,060 mutual fund companies that are
registered with the Commission (``mutual fund registrants'').\19\ For
estimating the total costs associated with Section 326 requirements,
the Commission assumes that each mutual fund registrant will be
responsible for establishing a CIP.\20\
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\19\ This estimate is based on figures compiled by the
Commission staff from Commission filings.
\20\ Using the number of mutual fund registrants to estimate the
total costs associated with development of CIPs may result in a high
estimate of those costs. A mutual fund complex (or mutual fund
family) often comprises several mutual fund registrants. The
Commission assumes that, in many instances, a single CIP will be
developed by a mutual fund complex and utilized by all of the mutual
fund registrants in that complex.
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The Commission staff believes that it will take mutual funds on
average approximately 50 hours to establish a CIP. The Commission staff
believes that the hourly personnel cost and overhead associated with
development of CIPs will be approximately $125. Therefore, the
estimated total cost per mutual fund to establish a CIP will be
approximately $6,250. Consequently, the estimated initial cost for the
3,060 mutual fund registrants will be approximately $19,125,000.
The actual development costs associated with a single CIP may be
higher than the $6,250 estimate. For mutual fund registrants that
delegate implementation of their CIP to unaffiliated service providers,
the burden per mutual fund registrant may be less because those service
providers will likely use the same or similar software and systems for
several different registrants. Similarly, the cost per registrant on
registrants that utilize a CIP developed by their fund complex may be
less. Consequently, the Commission believes this is a reasonable
estimate of the cost per mutual fund registrant of developing and
implementing the requisite CIPs.
2. Obtaining Identifying Information
Generally, mutual funds currently only require a name and mailing
address from a customer in order to open an account. While most mutual
funds request a social security number, they generally will open an
account if the customer does not provide one. Most funds currently do
not require that customers provide a residential address (if different
from the mailing address) or a date of birth.
Collecting identifying information for the majority of new accounts
should create no additional burden on mutual funds. Most of the burden
associated with this requirement will be associated with those account
applications where the customer did not provide some of the required
information, thus requiring follow-up by the mutual fund. Mutual funds
can minimize this burden with clear disclosure on account applications
that an account cannot be opened without the requisite information.
The Commission staff believes that the average time spent
collecting the requisite information will be one minute per account and
that the hourly personnel and overhead cost associated with these
requirements will be $25 per hour. Therefore, the estimated cost to the
industry from this requirement is: (16 million new accounts per year *
\1/60\ of an hour * $25). Thus, the estimated annual, industry-wide
cost will be approximately $6,666,667.
3. Providing Notice to Customers
A mutual fund may satisfy the notice requirement by generally
notifying its customers about the procedures the mutual fund must
comply with to verify their identities. If an account is opened
electronically, such as through an Internet website, the mutual fund
may provide notice electronically. The Commission expects that mutual
funds will provide the required notice to customers by modifying their
paper and electronic account applications.
The Commission staff believes that it will take mutual funds on
average approximately two hours to modify account applications to
provide the adequate notice. The Commission staff estimates that the
hourly personnel cost and overhead associated with this modification
will be approximately $125. Therefore, the estimated total cost per
mutual fund to modify its account applications will be approximately
$250. Consequently, the estimated initial cost associated with
modifying account applications to provide the requisite notice to
customers for the 3,060 mutual fund registrants will be approximately
$765,000.
4. Verifying Customers' Identities
The proposed rule provides mutual funds with substantial
flexibility in establishing how they will independently verify the
information provided by customers. For example, customers that open
accounts on a
[[Page 48325]]
mutual fund's premises can simply provide a driver's license or
passport, or if the customer is not a natural person, it can provide a
copy of any documents showing its existence as a legal entity (e.g.,
articles of incorporation, business licenses, partnership agreements or
trust instruments). There are also a number of options for customers
that open accounts via the telephone or Internet. In these cases,
mutual funds may obtain a financial statement from the customer, check
the customer's name against a credit bureau or database, or check the
customer's references with other financial institutions.
The documentary and non-documentary verification methods set forth
in the rule are not meant to be an exclusive list of the appropriate
means of verification. Other reasonable methods may be available now or
in the future. The purpose of making the rule flexible is to allow
mutual funds to select verification methods that are, as section 326
requires, reasonable and practicable. The proposed rule allows mutual
funds to employ such verification methods as would be suitable to a
given firm to form a reasonable belief that it knows the true
identities of its customers.
The Commission believes that verifying the identifying information
could result in costs for mutual funds because some firms currently may
not use verification methods. The estimated total annual cost to the
industry to verify the identifying information will be $49,333,333.\21\
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\21\ The Commission staff believes that the processing costs
associated with verification methods will be approximately $1.00 per
account. The Commission staff further estimates that the average
time spent verifying an account will be five minutes. The hourly
cost of the person who would undertake the verification is estimated
to be $25 per hour including overhead. Therefore, the estimated
costs to the industry reported above are: (16 million new accounts
per year) * ($1.00) + (number of new accounts per year) * (\1/12\ of
an hour) * ($25).
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5. Determining Whether Customers Appear on Government Lists
Mutual funds should already have procedures for checking customers
against government lists. There are substantive legal requirements
associated with the lists circulated by Treasury's Office of Foreign
Asset Control of the U.S. Treasury (OFAC). The failure of a firm to
comply with these requirements could result in criminal and civil
penalties. The Commission believes that, given the events of September
11, 2001, most mutual funds that receive lists from the federal
government have implemented procedures for checking their customers
against them. The Commission believes that this requirement could
result in some additional costs for mutual funds because some may not
already check such lists. The estimated annual cost to the industry to
check such lists is $3,333,333.\22\
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\22\ The Commission staff believes that it will take mutual
funds on average thirty seconds to check whether a customer appears
on a government list and that the cost (including overhead) of this
process will be $25 per hour. Therefore, the costs to the industry
reported above are: (16 million new accounts per year) * (\1/120\ of
an hour) * ($25).
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6. Recordkeeping
The Commission believes that the recordkeeping requirement could
result in additional costs for some mutual funds that currently do not
maintain certain of the records for the prescribed time period. The
estimated total annual cost to the industry to make and maintain the
required records is $13,333,333.\23\
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\23\ The Commission staff believes that it will take
approximately two minutes per new account to make and maintain the
required records. This estimate takes into account the fact that,
for many new accounts, the recordkeeping will be fairly simple
(e.g., making a photocopy of a driver's license or financial
statement, or keeping a record of the results of a public database
search or credit bureau query. The estimated cost associated with
the recordkeeping is $25 per hour (including overhead). The
estimated cost to the industry is: (16 million new accounts per
year) * (\1/30\ of an hour) * ($25).
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V. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\24\ Treasury has submitted the proposed rule to
the Office of Management and Budget (``OMB'') for review in accordance
with 44 U.S.C 3507(d). An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
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\24\ 44 U.S.C. 3501 et seq.
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A. Collection of Information Under the Proposed Rule
The proposed rule contains recordkeeping and disclosure
requirements that are subject to the Paperwork Reduction Act of 1995.
In summary, the proposed rule requires mutual funds to (1) maintain
records of the information used to verify customers' identities and (2)
provide notice to customers that information they supply may be used to
verify their identities. These recordkeeping and disclosure
requirements are required under Section 326 of the Act.
B. Proposed Use of the Information
Section 326 of the Act requires Treasury and the Commission jointly
to issue a regulation setting forth minimum standards for mutual funds
to verify the identities of their customers. Furthermore, Section 326
provides that the regulations must require, at a minimum, mutual funds
to implement reasonable procedures for (1) verifying the identity of
any person seeking to open an account, to the extent reasonable and
practicable; (2) maintaining records of the information used to verify
the person's identity, including name, address, and other identifying
information; and (3) determining whether the person appears on any
lists of known or suspected terrorists or terrorist organizations
provided to the financial institution by any government agency.
The purpose of Section 326, and the proposed rule, is to make it
easier to prevent, detect and prosecute money laundering and the
financing of terrorism. In issuing the proposed rule, Treasury and the
Commission are seeking to fulfill their statutorily mandated
responsibilities under Section 326 and to achieve its important
purpose.
C. Respondents
If adopted, the proposed rule would apply to approximately 3,060
mutual fund companies that are registered with the Commission.\25\
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\25\ This estimate is based on figures compiled by the
Commission staff from Commission filings.
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D. Total Annual Reporting and Recordkeeping Burden
1. Recordkeeping
The requirement to make and maintain records related to the CIP
will be an ongoing burden. The total burden will depend on the number
of new accounts added each year. From January 1, 1990 through December
31, 2001, approximately 16 million mutual fund accounts were added
annually.\26\ The Commission estimates that mutual funds, on average,
will spend two minutes per account making and maintaining the required
records. Therefore, in complying with this requirement, the Commission
estimates an annual, industry-wide burden of
[[Page 48326]]
533,333 hours will be associated with the record-keeping requirements
of the proposed rule.
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\26\ This estimate is derived from information reported in the
Investment Company Institue's 2002 Mutual Fund Fact Book. It
represents the net annual increase in the number of mutual fund
accounts. The actual number of new accounts that were opened during
this period is probably higher as this estimate is reduced by the
number of accounts that were closed during the same period. No data
available regarding the number of accounts that were closed.
---------------------------------------------------------------------------
2. Notice to Customers
The requirement for mutual funds to provide the required notice to
customers regarding use of customers' information will necessitate the
amendment of mutual funds' account applications, both paper and web-
based applications. The Commission estimates that the approximately
3,060 mutual fund registrants will each spend approximately two hours
modifying their account applications to satisfy the notice requirement.
Thus, the Commission estimates an initial, industry-wide burden of
6,120 hours to modify fund applications.
E. Collection of Information Is Mandatory
This collection of information is mandatory.
F. Confidentiality
The collection of information pursuant to the proposed rule would
be provided by customers and other sources to mutual funds and
maintained by mutual funds. In addition, the information may be used by
federal regulators, self-regulatory organizations, and authorities in
the course of examinations, investigations, and judicial proceedings.
No governmental agency regularly would receive any of the information
described above.
G. Record Retention Period
The proposed rule will require that the records with respect to a
given customer be retained until five years after the date the account
of a customer is closed or the grant of authority to effect
transactions with respect to an account is revoked.
H. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), Treasury and the Commission
solicit comments to:
(1) Evaluate whether the proposed collection of information is
necessary, and whether it would have practical utility;
(2) Evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
required to respond, including through the use of automated collection
techniques or other forms on information technology.
Comments concerning the recordkeeping and disclosure requirements
in the proposed rule should be sent (preferably by fax (202-395-6974))
to Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Paperwork Reduction Project (1506), Washington, DC 20503 (or by the
Internet to jlackeyj@omb.eop.gov), with a copy to FinCEN by mail or the
Internet at the addresses previously specified.
VI. Regulatory Flexibility Act
Treasury and the Commission are sensitive to the impact our rules
may impose on small entities. Congress enacted the Regulatory
Flexibility Act, 5 U.S.C. 601 et seq. (RFA), to address concerns
related to the effects of agency rules on small entities. In this case,
we believe that the proposed rule likely would not have a ``significant
economic impact on a substantial number of small entities.'' 5 U.S.C.
605(b). As discussed in Section IV (The Commission's Analysis of the
Costs and Benefits of the Section 326 Requirements), we believe that
the impact on mutual funds, including small entities, is imposed by the
statute itself, and not by the proposed rule. Moreover, the economic
impact on small entities should not be significant because we believe
that most small entities are likely to have a relatively small number
of accounts, and thus compliance should not impose a significant
economic impact. Treasury and the Commission seek comment on whether
the proposed rule would have a significant economic impact on a
substantial number of small entities and whether the costs are imposed
by the statute itself, and not the proposed rule.
While we believe that the proposed rule likely would not have a
significant economic impact on a substantial number of small entities,
we do not have complete data at this time to make this determination.
We have therefore prepared this Initial Regulatory Flexibility Analysis
in accordance with 5 U.S.C. 603.
A. Reason for the Proposed Action
Section 326 of the Act requires Treasury and the Commission jointly
to issue a regulation setting forth minimum standards for mutual funds
and their customers regarding the identity of the customer that shall
apply in connection with opening of an account at the mutual fund.
Furthermore, Section 326 provides that the regulations must require, at
a minimum, mutual funds to implement reasonable procedures for (1)
verifying the identity of any person seeking to open an account, to the
extent reasonable and practicable; (2) maintaining records of the
information used to verify the person's identity, including name,
address, and other identifying information; and (3) determining whether
the person appears on any lists of known or suspected terrorists or
terrorist organizations provided to the financial institution by any
government agency.
The purpose of Section 326, and this proposed rule, is to prevent,
detect and prosecute money laundering and the financing of terrorism.
In issuing the proposed rule, Treasury and the Commission are seeking
to fulfill their statutorily mandated responsibilities under Section
326 and to achieve its important purpose.
B. Objective
The objective of the proposed regulation is to make it easier to
prevent, detect and prosecute money laundering and the financing of
terrorism. The rule seeks to achieve this goal by requiring mutual
funds to obtain identifying information from customers that can be used
to verify the identity of the customers. This will make it more
difficult for persons to use false identities to establish customer
relationships with mutual funds for the purposes of laundering money or
moving funds to effectuate illegal activities, such as financing
terrorism.
C. Legal Basis
The proposed rule is being promulgated pursuant to Section 326 of
the Act, which mandates that Treasury and the Commission issue a
regulation setting forth minimum standards for financial institutions
and their customers regarding the identity of the customer that shall
apply in connection with opening of an account at the financial
institution.
D. Small Entities Subject to the Rule
The proposed rule would affect mutual funds that are small
entities. For purposes of the Regulatory Flexibility Act, the
Commission has determined that an investment company is a small entity
if it, together with other investment companies in the same group of
related investment companies, has net assets of $50 million or less as
of the end of its most recent fiscal year.\27\ Approximately 156 mutual
funds meet this definition.\28\
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\27\ 17 CFR 270.0-10.
\28\ This estimate is based on figures compiled by the
Commission staff from outside databases.
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[[Page 48327]]
E. Reporting, Recordkeeping and Other Compliance Requirements
Section 326 requires mutual funds to adopt reasonable procedures
to: (1) Verify the identities of their customers; (2) check customers
against lists provided by federal agencies, (3) provide notice to
customers that information the customers provide may be used to verify
customers' identities; and (4) make and maintain records related to the
CIP.
F. Duplicative, Overlapping or Conflicting Federal Rules
We have not identified any federal rules that duplicate, overlap or
conflict with the proposed rule. Congress has mandated that Treasury
and the Commission issue a regulation that requires mutual funds to
verify their customers' identities. This congressional directive cannot
be followed absent the issuance of a new rule.
G. Significant Alternatives
If an agency does not certify that a rule will not have a
significant economic impact on a substantial number of small entities,
the Regulatory Flexibility Act directs Treasury and the Commission to
consider significant alternatives that would accomplish the stated
objective, while minimizing any adverse impact on small entities.
In connection with the proposed amendments, we considered the
following alternatives: (1) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources of small entities; (2) the clarification, consolidation, or
simplification of compliance and reporting requirements under the rule
for small entities; (3) the use of performance rather than design
standards; and (4) an exemption from coverage of the proposed
amendments, or any part thereof, for small entities.
The proposed rule provides for substantial flexibility in how each
mutual fund may meet its requirements. This flexibility is designed to
account for differences between mutual funds, including size.
Nonetheless, Treasury and the Commission did consider alternatives such
as exempting certain small entities from some or all of the
requirements of the proposed rule. Treasury and the Commission do not
believe that such an exemption is appropriate, given the flexibility
built into the rule to account for, among other things, the differing
sizes and resources of mutual funds, as well as the importance of the
statutory goals and mandate of section 326. Money laundering can occur
in small firms as well as large firms.
H. Solicitation of Comments
Treasury and the Commission encourage the submission of comments
with respect to any aspect of this Initial Regulatory Flexibility
Analysis, including comments regarding the number of small entities
that may be affected by the proposed rule. Such comments will be
considered by Treasury and the Commission in determining whether a
Final Regulatory Flexibility Analysis is required, and will be placed
in the same public file as comments on the proposed amendment itself.
Comments should be submitted to Treasury or the Commission at the
addresses previously indicated.
VII. Executive Order 12866
The Department of the Treasury has determined that this rule is not
a significant regulatory action for purposes of Executive Order 12866.
As noted above, the proposed rule closely parallels the requirements of
section 326 of the Act. Accordingly, a regulatory impact analysis is
not required.
Lists of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Banks, banking, Brokers, Currency, Foreign
banking, Foreign currencies, Gambling, Investigations, Law enforcement,
Penalties, Reporting and recordkeeping requirements, Securities.
Authority and Issuance
For the reasons set forth in the preamble, part 103 of title 31 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as
follows:
Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31
U.S.C. 5311-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub
L. 107-56, 115 Stat. 307.
2. Subpart I of part 103 is amended by adding Sec. 103.131 to read
as follows:
Sec. 103.131 Customer identification programs for mutual funds.
(a) Definitions. For the purposes of this section:
(1) Account means any contractual or other business relationship
between a customer and a mutual fund established to effect financial
transactions in securities, including the purchase or sale of
securities.
(2) Commission means the United States Securities and Exchange
Commission.
(3) Customer means:
(i) Any mutual fund shareholder of record who opens a new account
with a mutual fund; and
(ii) Any person authorized to effect transactions in the
shareholder of record's account with a mutual fund.
(4) Mutual Fund means an entity that is required to register with
the Commission as an ``investment company'' (as the term is defined in
Section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3)
(``Investment Company Act'')) and is an ``open-end company'' (as that
term is defined in Section 5 of the Investment Company Act, 15 U.S.C.
80a-5).
(5) Person has the same meaning as that term is defined in
Sec. 103.11(z).
(6) Taxpayer identification number. The provisions of Section 6109
of the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the
regulations of the Internal Revenue Service promulgated thereunder
shall determine what constitutes a taxpayer identification number.
(7) U.S. person means:
(i) Any U.S. citizen; and
(ii) Any corporation, partnership, trust, or person (other than a
natural person) that is established or organized under the laws of a
State or the United States.
(8) Non-U.S. person means a person that is not a U.S. person.
(b) Customer identification program. A mutual fund shall establish,
document, and maintain a written Customer Identification Program
(``CIP''). A mutual fund's CIP procedures must enable it to form a
reasonable belief that it knows the true identity of the customer. A
mutual fund's CIP must be a part of its anti-money laundering program
required under 31 U.S.C. 5318(h). A mutual fund's CIP procedures shall
be based on the type of identifying information available and on an
assessment of relevant risk factors including:
(1) The mutual fund's size;
(2) The manner in which accounts are opened, fund shares are
distributed, and purchases, sales and exchanges are effected;
(3) The mutual fund's types of accounts; and
(4) The mutual fund's customer base.
(c) Required information. (1) General. Except as permitted by
paragraph (c)(2) of this section, the CIP shall require the mutual fund
to obtain specified identifying information about each
[[Page 48328]]
customer before an account is opened or a customer is granted authority
to effect transactions with respect to an account. The specified
information must include, at a minimum:
(i) Name;
(ii) Date of birth, for a natural person;
(iii) Addresses:
(A) Residence and mailing (if different) for a natural person; or
(B) Principal place of business and mailing (if different) for a
person other than a natural person; and
(iv) Identification numbers:
(A) A taxpayer identification number from each customer that is a
U.S. person; or
(B) A taxpayer identification number, passport number and country
of issuance, alien identification card number, or number and country of
issuance of any other government-issued document evidencing nationality
or residence and bearing a photograph or similar safeguard from each
customer that is not a U.S. person.
(2) Limited exception. In the case of a person other than a natural
person that has applied for, but has not received, an employer
identification number, the CIP may allow such information to be
provided within a reasonable period of time after the account is
established, if the mutual fund obtains a copy of the application for
the employer identification number prior to such time.
(d) Required verification procedures. The CIP shall include
procedures for verifying the identity of customers, to the extent
reasonable and practicable, using information obtained pursuant to
paragraph (c) of this section. Such verification must occur within a
reasonable time before or after the customer's account is opened or the
customer is granted authority to effect transactions with respect to an
account:
(1) Verification through documents. The CIP must describe when the
mutual fund will verify customers' identities through documents and
describe the documents that the mutual fund will use for this purpose.
Suitable documents for verification may include:
(i) For natural persons, unexpired government-issued identification
evidencing nationality or residence and bearing a photograph or similar
safeguard; and
(ii) For persons other than natural persons, documents showing the
existence of the entity, such as registered articles of incorporation,
a government-issued business license, partnership agreement, or trust
instrument.
(2) Verification through non-documentary methods. The CIP must
describe non-documentary methods a mutual fund will use to verify
customers' identities and when these methods will be used in addition
to, or instead of, relying on documents. Non-documentary verification
methods may include contacting a customer; independently verifying
information through credit bureaus, public databases, or other sources;
and checking references with other financial institutions. Non-
documentary methods shall be used when a customer who is a natural
person is unable to present an unexpired, government-issued
identification document that bears a photograph or similar safeguard;
the mutual fund is presented with unfamiliar documents to verify the
identity of a customer; or the mutual fund does not obtain documents to
verify the identity of a customer, does not meet face-to-face a
customer who is a natural person, or is otherwise presented with
circumstances that increase the risk the mutual fund will be unable to
verify the true identity of a customer through documents.
(e) Government lists. The CIP shall include procedures for
determining whether a customer's name appears on any list of known or
suspected terrorists or terrorist organizations prepared by any federal
government agency and made available to the mutual fund. Mutual funds
shall follow all federal directives issued in connection with such
lists.
(f) Customer notice. The CIP shall include procedures for providing
customers with adequate notice that the mutual fund is requesting
information to verify the customer's identity.
(g) Lack of verification. The CIP shall include procedures for
responding to circumstances in which the mutual fund cannot form a
reasonable belief that it knows the true identity of a customer.
(h) Recordkeeping. The CIP shall include procedures for maintaining
a record of all information obtained pursuant to the CIP. A mutual fund
must retain all records made or obtained when verifying the identity of
a customer pursuant to its CIP until five years after the date the
account of the customer is closed. Records subject to the requirements
in this paragraph (h) include:
(1) All identifying information provided by a customer pursuant to
paragraph (c) of this section, and copies of any documents that were
relied on pursuant to paragraph (d)(1) of this section evidencing the
type of document and any identification number it may contain;
(2) The methods and results of any measures undertaken to verify
the identity of a customer pursuant to paragraph (d)(2) of this
section; and
(3) The resolution of any discrepancy in the identifying
information obtained.
(i) Approval by the board. The CIP shall be approved by the mutual
fund's board of directors or trustees.
(j) Exemptions. The Commission, with the concurrence of the
Secretary, may by order or regulation exempt any mutual fund or type of
account from the requirements of this section. The Commission and the
Secretary shall consider whether the exemption is consistent with the
purposes of the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and in the
public interest, and may consider other necessary and appropriate
factors.
Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
Dated: July 12, 2002.
By the Securities and Exchange Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18194 Filed 7-22-02; 8:45 am]
BILLING CODE 4810-02-P
[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48299-48306]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-701]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA31
Financial Crimes Enforcement Network; Customer Identification
Programs for Certain Banks (Credit Unions, Private Banks and Trust
Companies) That Do Not Have a Federal Functional Regulator
AGENCIES: The Financial Crimes Enforcement Network, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: FinCEN is issuing a proposed regulation to implement section
326 of the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of
2001(the Act) for credit unions and trust companies that do not have a
federal functional regulator. The proposed rule provides the same rules
for these financial institutions as are provided in a companion notice
of proposed rulemaking being issued jointly by FinCEN and the Federal
bank regulators published elsewhere in this separate part of this issue
of the Federal Register.
DATES: Written comments on the proposed rule may be submitted on or
before September 6, 2002.
ADDRESSES: Because paper mail in the Washington area may be subject to
[[Page 48300]]
delay, commenters are encouraged to e-mail comments. Comments should be
sent by one method only. Comments may be mailed to FinCEN, Section 326
Certain Credit Union and Trust Company Rule Comments, P.O. Box 39,
Vienna, VA 22183 or sent by e-mail to regcomments@fincen.treas.gov with
the caption ``Attention: Section 326 Certain Credit Union and Trust
Company Rule Comments'' in the body of the text. Comments may be
inspected at FinCEN between 10 a.m. and 4 p.m. in the FinCEN Reading
Room in Washington, D.C. Persons wishing to inspect the comments
submitted must request an appointment by telephoning (202) 354-6400
(not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of the Chief Counsel (FinCEN),
(703) 905-3590.
SUPPLEMENTARY INFORMATION:
I. Background
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the USA PATRIOT
Act, Public Law 107-56. Title III of the Act, captioned ``International
Money Laundering Abatement and Anti-terrorist Financing Act of 2001,''
adds several new provisions to the Bank Secrecy Act (BSA), 31 U.S.C.
5311 et seq. These provisions are intended to facilitate the
prevention, detection, and prosecution of international money
laundering and the financing of terrorism.
Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318
that requires the Secretary to prescribe regulations setting forth
minimum standards for financial institutions that relate to the
identification and verification of any person who applies to open an
account. Final regulations implementing section 326 must be effective
by October 25, 2002.
Section 326 applies to all ``financial institutions.'' This term is
defined very broadly in the BSA to encompass a variety of entities
including banks, agencies and branches of foreign banks in the United
States, thrifts, credit unions, brokers and dealers in securities or
commodities, insurance companies, travel agents, pawnbrokers, dealers
in precious metals, check-cashers, casinos, and telegraph companies,
among many others. See 31 U.S.C. 5312(a)(2).
For any financial institution engaged in financial activities
described in section 4(k) of the Bank Holding Company Act of 1956
(section 4(k) institutions), the Secretary is required to prescribe the
regulations issued under section 326 jointly with each of the Federal
bank regulators (the Agencies), the SEC, and the CFTC (the Federal
functional regulators). FinCEN and the Federal bank regulators are
today jointly issuing a proposed rule that applies to banks within the
meaning of 31 CFR 103.11(c) that are subject to a Federal banking
regulator. Under its own authority, FinCEN is issuing this proposed
rule to extend rules identical \1\ to those in the joint proposal to
all banks lacking a Federal functional regulator, namely private banks
and State chartered credit unions that are not federally insured, and
trust companies. The text of the joint rule is published elsewhere in
this separate part of this issue of the Federal Register.
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\1\ The references in the joint rule to a bank's anti-money
laundering program requirement (proposed Sec. 103.121 (b)(1)) and to
the procedures for exemptions granted by the Federal functional
regulator (with Treasury concurrence) (proposed Sec. 103.121(c))
will be modified appropriately at the final rule stage.
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Section 326 of the Act provides that the regulations must contain
certain requirements. At a minimum, the regulations must require
financial institutions to implement reasonable procedures for (1)
verifying the identity of any person seeking to open an account, to the
extent reasonable and practicable; (2) maintaining records of the
information used to verify the person's identity, including name,
address, and other identifying information; and (3) determining whether
the person appears on any lists of known or suspected terrorists or
terrorist organizations provided to the financial institution by any
government agency.
In prescribing these regulations, the Secretary is directed to take
into consideration the various types of accounts maintained by various
types of financial institutions, the various methods of opening
accounts, and the various types of identifying information available.
The Secretary has determined that the records required to be kept
by section 326 of the Act have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, to protect against
international terrorism.
B. Codification of the Proposed Rule
The substantive requirements of the proposed rule will be codified
with other Bank Secrecy Act regulations as part of Treasury's
regulations in 31 CFR part 103. FinCEN anticipates that, at that time,
it will publish a final rule that implements section 326 in a single
section that will apply to all banks.
II. Detailed Analysis
A. Regulations Implementing Section 326
Definitions. Account. The proposed rule's definition of ``account''
is based on the statutory definition of ``account'' that is used in
section 311 of the Act. ``Account'' means each formal banking or
business relationship established to provide ongoing services,
dealings, or other financial transactions. For example, a deposit
account, transaction or asset account, and a credit account or other
extension of credit would each constitute an account.
Section 311 of the Act does not require that this definition be
used for regulations implementing section 326 of the Act. However, to
the extent possible, Treasury proposes to apply consistent definitions
for each of the regulations implementing the Act to reduce confusion.
``Deposit accounts'' and ``transaction accounts,'' which as previously
noted, are considered ``accounts'' for purposes of this rulemaking, are
themselves defined terms. In addition, the term ``account'' is limited
to banking and business relationships established to provide
``ongoing'' services, dealings, or other financial transactions to make
clear that this term is not intended to cover infrequent transactions
such as the occasional purchase of a money order or a wire transfer.
Bank. For purposes of this proposed rule, the ``bank'' includes
only those banks within the meaning of 31 CFR 103.11(c) that lack a
Federal functional regulator. These are private banks and certain State
chartered credit unions that are not federally insured, and trust
companies.
Customer. The proposed rule defines ``customer'' to mean any person
seeking to open a new account. Accordingly, the term ``customer''
includes a person applying to open an account, but would not cover a
person seeking information about an account, such as rates charged or
interest paid on an account, if the person does not actually open an
account. ``Customer'' includes both individuals and other persons such
as corporations, partnerships, and trusts. In addition, any person
seeking to open an account at a bank, on or after the effective date of
the final rule, will be a ``customer,'' regardless of whether that
person already has an account at the bank.
The proposed rule also defines a ``customer'' to include any
signatory on an account. Thus, for example, an individual with signing
authority over a corporate account is a ``customer'' within the meaning
of the proposed
[[Page 48301]]
rule. A signatory can become a ``customer'' when the account is opened
or when the signatory is added to an existing account.
The requirements of section 326 of the Act apply to any person
``seeking to open a new account.'' Accordingly, transfers of accounts
from one bank to another, that are not initiated by the customer, for
example, as a result of a merger, acquisition, or purchase of assets or
assumption of liabilities, fall outside of the scope of section 326,
and are not covered by the proposed regulation.
Person. The proposed rule defines ``person'' by reference to
Sec. 103.11(z). This definition includes individuals, corporations,
partnerships, trusts, estates, joint stock companies, associations,
syndicates, joint ventures, other unincorporated organizations or
groups, certain Indian Tribes, and all entities cognizable as legal
personalities.
U.S. Person. Under the proposed rule, for an individual, ``U.S.
person'' means a U.S. citizen. For persons other than an individual,
``U.S. person'' means an entity established or organized under the laws
of a State or the United States. A non-U.S. person is defined as a
person who does not satisfy these criteria.
Taxpayer identification number. The proposed rule continues the
provision in current Sec. 103.34(a)(4), which provides that the
provisions of section 6109 of the Internal Revenue Code and the
regulations of the Internal Revenue Service thereunder determine what
constitutes a taxpayer identification number.
Customer Identification Program: Minimum Requirements.
General Rule. Section 326 of the Act requires Treasury to issue a
regulation that establishes minimum standards regarding the identity of
any customer who applies to open an account. Section 326 then
prescribes three procedures that Treasury must require institutions to
implement as part of this process: (1) Identification and verification
of persons seeking to open an account; (2) recordkeeping; and (3)
comparison with government lists.
Rather than imposing the same list of specific requirements on
every bank, regardless of its circumstances, the proposed regulation
requires all banks to implement a Customer Identification Program (CIP)
that is appropriate given the bank's size, location, and type of
business. The proposed regulation requires a bank's CIP to contain the
statutorily prescribed procedures, describes these procedures, and
details certain minimum elements that each of the procedures must
contain.
In addition, the proposed rule requires that the CIP be written and
that it be approved by the bank's board of directors or a committee of
the board. This latter requirement highlights the responsibility of a
bank's board of directors to approve and exercise general oversight
over the bank's CIP.
Under the proposed joint regulation for federally regulated banks,
the CIP must be incorporated into the bank's anti-money laundering
(BSA) program. FinCEN has not yet issued an anti-money laundering
program regulation for the banks subject to this proposed rule, but
anticipates doing so in the near future, at which time they would be
required to incorporate the CIP into that program. A bank's BSA program
must include (1) internal policies, procedures, and controls to ensure
ongoing compliance; (2) designation of a compliance officer; (3) an
ongoing employee training program; and (4) an independent audit
function to test programs. Each of these requirements also applies to a
bank's CIP.
Identity Verification Procedures. Under section 326 of the Act, the
regulations issued by Treasury must require banks to implement and
comply with reasonable procedures for verifying the identity of any
person seeking to open an account, to the extent reasonable and
practicable. The proposed regulation implements this requirement by
providing that each bank must have risk-based procedures for verifying
the identity of a customer that take into consideration the types of
accounts that banks maintain, the different methods of opening
accounts, and the types of identifying information available. These
procedures must enable the bank to form a reasonable belief that it
knows the true identity of the customer.
Under the proposed regulation, a bank must first have procedures
that specify the identifying information that the bank must obtain from
any customer. The proposed regulation also sets forth certain, minimal
identifying information that a bank must obtain prior to opening an
account or adding a signatory to an account. Second, the bank must have
procedures describing how the bank will verify the identifying
information provided. The bank must have procedures that describe when
it will use documents for this purpose and when it will use other
methods, either in addition or as an alternative to using documents for
the purpose of verifying the identity of a customer.
While a bank's CIP must contain the identity verification
procedures set forth above, these procedures are to be risk-based. For
example, a bank need not verify the identifying information of an
existing customer seeking to open a new account, or who becomes a
signatory on an account, if the bank (1) previously verified the
customer's identity in accordance with procedures consistent with this
regulation, and (2) continues to have a reasonable belief that it knows
the true identity of the customer. The proposal requires a bank to
exercise reasonable efforts to ascertain the identity of each customer.
Although the main purpose of the Act is to prevent and detect money
laundering and the financing of terrorism, Treasury anticipates that
the proposed regulation will ultimately benefit consumers. In addition
to deterring money laundering and terrorist financing, requiring every
bank to establish comprehensive procedures for verifying the identity
of customers should reduce the growing incidence of fraud and identity
theft involving new accounts.\2\
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\2\ Last year, over 86,000 complaints were logged into the
Identity Theft Complaint database established by the Federal Trade
Commission (FTC). Forms of identity theft commonly reported included
(1) credit card fraud, where one or more new credit cards were
opened in the victim's name; (2) bank fraud, where a new bank
account was opened in the victim's name; and (3) fraudulent loans,
where a loan had been obtained in the victim's name. See Statement
of J. Howard Beales, Director, Bureau of Consumer Protection, FTC,
to the Senate Committee on the Judiciary, Subcommittee on
Technology, March 20, 2002.
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Information Required. The proposed regulation provides that a
bank's CIP must contain procedures that specify the identifying
information the bank must obtain from a customer. At a minimum, a bank
must obtain from each customer the following information prior to
opening an account or adding a signatory to an account: name; address;
for individuals, date of birth; and an identification number, described
in greater detail below. To satisfy the requirement that a bank obtain
the address of a customer, Treasury expects a bank to obtain both the
address of an individual's residence and, if different, the
individual's mailing address. For customers who are not individuals,
the bank should obtain an address showing the customer's principal
place of business and, if different, the customer's mailing address.
For U.S. persons a bank must obtain a U.S. taxpayer identification
number (e.g., social security number, individual taxpayer
identification number, or employer identification number). For non-U.S.
persons a bank must obtain one or more of the following: a taxpayer
identification number; passport number and country of issuance; alien
identification card number; or number
[[Page 48302]]
and country of issuance of any other government-issued document
evidencing nationality or residence and bearing a photograph or similar
safeguard. The basic information that banks would be required to obtain
under this proposed regulation reflects the type of information that
financial institutions currently obtain in the account-opening process
and is similar to the identifying information currently required for
each deposit or share account opened (see 31 CFR 103.34(a)(1)). The
proposed regulation uses the term ``similar safeguard'' to permit the
use of any biometric identifiers that may be used in addition to, or
instead of, photographs.
Treasury recognizes that a new business may need access to banking
services, particularly a bank account or an extension of credit, before
it has received an employer identification number from the Internal
Revenue Service. For this reason, the proposed regulation contains a
limited exception to the requirement that a taxpayer identification
number must be provided prior to establishing or adding a signatory to
an account. Accordingly, a CIP may permit a bank to open or add a
signatory to an account for a person other than an individual (such as
a corporation, partnership, or trust) that has applied for, but has not
received, an employer identification number. However, in such a case,
the CIP must require that the bank obtain a copy of the application
before it opens or adds a signatory to the account and obtain the
employee identification number within a reasonable period of time after
an account is established or a signatory is added to an account.
Currently, the IRS indicates that the issuance of an employer
identification number can take up to five weeks. This length of time,
coupled with when the person applied for the employer identification
number, should be considered by the bank in determining the reasonable
period of time within which the person should provide its employer
identification number to the bank.
Verification. The proposed regulation provides that the CIP must
contain risk-based procedures for verifying the information that the
bank obtains in accordance with the proposed rule, within a reasonable
period of time after the account is opened. Treasury considered
proposing that a customer's identity be verified before an account is
opened or within a specific time period after the account is opened.
However, Treasury recognizes that such a position would be unduly
burdensome for both banks and customers and therefore contrary to the
plain language of the statute, which states that the procedures must be
both reasonable and practicable. The amount of time it will take an
institution to verify identity may depend upon the type of account
opened, whether the customer is physically present when the account is
opened, and the type of identifying information available. In addition,
although an account may be opened, it is common practice among banks to
place limits on the account, such as by restricting the number of
transactions or the dollar value of transactions, until a customer's
identity is verified. Therefore, the proposed regulation provides a
bank with the flexibility to use a risk-based approach to determine how
soon identity must be verified.\3\
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\3\ It is possible that a bank would, however, violate other
laws by permitting a customer to transact business prior to
verifying the customer's identity. See, e.g., 31 CFR 500,
prohibiting transactions involving designated foreign countries or
their nationals.
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Verification Through Documents. The CIP must contain procedures
describing when the bank will verify identity through documents and
setting forth the documents that the bank will use for this purpose.
For individuals, these documents may include: unexpired government-
issued identification evidencing nationality or residence and bearing a
photograph or similar safeguard. For corporations, partnerships,
trusts, and other persons that are not individuals, these may be
documents showing the existence of the entity, such as registered
articles of incorporation, a government-issued business license,
partnership agreement, or trust instrument.
Non-Documentary Verification. The proposed regulation provides that
a bank's CIP also must contain procedures describing non-documentary
methods the bank will use to verify identity and when these methods
will be used in addition to, or instead of, relying on documents. For
example, the procedures must address situations where an individual is
unable to present an unexpired government-issued identification
document that bears a photograph or similar safeguard; the bank is not
familiar with the documents presented; the account is opened without
obtaining documents; the account is not opened in a face-to-face
transaction; and the type of account increases the risk that the bank
will not be able to verify the true identity of the customer through
documents.
Treasury believes that banks typically require documents to be
presented when an account is opened face-to-face. Although customers
usually satisfy these requirements by presenting government-issued
identification documents bearing a photograph, such as a driver's
license or passport, Treasury recognizes that some customers
legitimately may be unable to present those customary forms of
identification when opening an account. For example, an elderly person
may not have a valid driver's license or passport. Under these
circumstances, Treasury expects that banks will provide products and
services to those customers and verify their identities through other
methods. Similarly, a bank may be unable to obtain original documents
to verify a customer's identity when an account is opened by telephone,
by mail, and over the Internet. Thus, when an account is opened for a
customer who is not physically present, a bank will be permitted to use
other methods of verification, to the extent set forth in the CIP.
While other verification methods must be used when a bank cannot
examine original documents, Treasury also recognizes that original
identification documents, including those issued by a government
entity, may be obtained illegally and may be fraudulent. In light of
the recent increase in identity fraud, banks are encouraged to use
other verification methods, even when a customer has provided original
documents.
Obtaining sufficient information to verify a customer's identity
can reduce the risk that a bank will be used as a conduit for money
laundering and terrorist financing. The risk that the bank will not
know the customer's true identity will be heightened for certain types
of accounts, such as accounts opened in the name of a corporation,
partnership, or trust that is created or conducts substantial business
in jurisdictions that have been designated by the United States as a
primary money laundering concern or have been designated as non-
cooperative by an international body. As a bank's identity verification
procedures should be risk-based, they should identify types of accounts
that pose a heightened risk, and prescribe additional measures to
verify the identity of any person seeking to open an account and the
signatory for such accounts.
The proposed regulation gives examples of other non-documentary
verification methods that a bank may use in the situations described
above. These methods could include contacting a customer after the
account is opened; obtaining a financial statement; comparing the
identifying information provided by the customer against fraud and bad
check databases to determine
[[Page 48303]]
whether any of the information is associated with known incidents of
fraudulent behavior (negative verification); comparing the identifying
information with information available from a trusted third party
source, such as a credit report from a consumer reporting agency
(positive verification); and checking references with other financial
institutions. The bank also may wish to analyze whether there is
logical consistency between the identifying information provided, such
as the customer's name, street address, ZIP code, telephone number,
date of birth, and social security number (logical verification).\4\
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\4\ Treasury understands that most banks currently make use of
technology that permits instantaneous negative, positive, and
logical verification of identity.
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Lack of Verification. The proposed regulation also states that a
bank's CIP must include procedures for responding to circumstances in
which the bank cannot form a reasonable belief that it knows the true
identity of a customer.
Generally, a bank should only maintain an account for a customer
when it can form a reasonable belief that it knows the customer's true
identity.\5\ Thus, a bank should have procedures that specify the
actions that it will take when it cannot form a reasonable belief that
it knows the true identity of a customer, including when an account
should not be opened. In addition, a bank's CIP should have procedures
that address the terms under which a customer may conduct transactions
while a customer's identity is being verified. The procedures also
should specify at what point, after attempts to verify a customer's
identity have failed, a customer's account that has been opened should
be closed. Finally, if a bank cannot form a reasonable belief that it
knows the identity of a customer, the procedures should also include
determining whether a Suspicious Activity Report should be filed in
accordance with applicable law and regulation.
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\5\ There are some exceptions to this basic rule. For example, a
bank may maintain an account, at the direction of a law enforcement
or intelligence agency, although the bank does not know the true
identity of a customer.
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Recordkeeping. Section 326 of the Act requires reasonable
procedures for maintaining records of the information used to verify a
person's name, address, and other identifying information. The proposed
regulation sets forth recordkeeping procedures that must be included in
a bank's CIP. Under the proposal, a bank is required to maintain a
record of the identifying information provided by the customer. Where a
bank relies upon a document to verify identity, the bank must maintain
a copy of the document that the bank relied on that clearly evidences
the type of document and any identifying information it may contain.\6\
The bank also must record the methods and result of any additional
measures undertaken to verify the identity of the customer. Last, the
bank must record the resolution of any discrepancy in the identifying
information obtained. The bank must retain all of these records for
five years after the date the account is closed.
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\6\ The bank need not keep a separate record of the identifying
information provided by the customer if this information clearly
appears on the copy of the document maintained by the bank.
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Treasury emphasizes that the collection and retention of
information about a customer, such as an individual's race or sex, as
an ancillary part of collecting identifying information do not relieve
a bank from its obligations to comply with anti-discrimination laws or
regulations, such as the prohibition in the Equal Credit Opportunity
Act against discrimination in any aspect of a credit transaction on the
basis of race, color, religion, national origin, sex or marital status,
age, or other prohibited classifications.
Nothing in this proposed regulation modifies, limits or supersedes
section 101 of the Electronic Signatures in Global and National
Commerce Act, Pub. L. 106-229, 114 Stat. 464 (15 U.S.C. 7001) (E-Sign
Act). Thus, a bank may use electronic records to satisfy the
requirements of this regulation, as long as the records are accurate
and remain accessible in accordance with 31 CFR 103.38(d).
Comparison with Government Lists. Section 326 of the Act also
requires reasonable procedures for determining whether the customer
appears on any list of known or suspected terrorists or terrorist
organizations provided to the bank by any government agency. The
proposed rule implements this requirement and clarifies that the
requirement applies only with respect to lists circulated by the
Federal government.
In addition, the proposed rule requires that the procedures must
ensure that the bank follows all Federal directives issued in
connection with such lists. This provision makes clear that a bank must
have procedures for responding to circumstances when the bank
determines that a customer is named on a list.
Customer Notice. Section 326 of the Act contemplates that financial
institutions will provide their customers with ``adequate notice'' of
the customer identification procedures. Therefore, a bank's CIP must
include procedures for providing bank customers with adequate notice
that the bank is requesting information to verify their identity. A
bank may satisfy the notice requirement by generally notifying its
customers about the procedures the bank must comply with to verify
their identities. For example, the bank may post a sign in its lobby or
provide customers with any other form of written or oral notice. If an
account is opened electronically, such as through an Internet website,
the bank may also provide notice electronically.
Exemptions. Section 326 states that the Secretary (and, in the case
of section 4(k) institutions, the appropriate Federal functional
regulator) may by regulation or order, exempt any financial institution
or type of account from the requirements of this regulation in
accordance with such standards and procedures as the Secretary may
prescribe.
Under the proposed rule, Treasury, may by order or regulation
exempt any bank lacking a federal functional regulator or type of
account at such a bank from the requirements of this section. In
issuing such exemptions, Treasury shall consider whether the exemption
is consistent with the purposes of the Bank Secrecy Act, consistent
with safe and sound banking, and in the public interest. Treasury also
may consider other necessary and appropriate factors.
Other Information Requirements Unaffected. Nothing in the proposal
shall be construed to relieve a bank of its obligations to obtain,
verify, or maintain information in connection with an account or
transaction that is required by another provision in part 103. For
example, if an account is opened with a deposit of more than $10,000 in
cash, the bank opening the account must comply with the customer
identification requirements in the proposal, as well as with the
provisions of section 103.22, which require that certain information
concerning the transaction be reported by filing a Cash Transaction
Report (CTR).
B. Conforming Amendments to 31 CFR 103.34
Current section 103.34(a) sets forth customer identification
requirements when certain types of deposit accounts are opened.
Generally, sections 103.34(a)(1) and (2) require a bank, within 30 days
after certain deposit accounts are opened, to secure and maintain a
record of the taxpayer identification number of the customer
[[Page 48304]]
involved. If the bank is unable to obtain the taxpayer identification
number within 30 days (or a longer time if the person has applied for a
taxpayer identification number), it need take no further action under
section 103.34 concerning the account if it maintains a list of the
names, addresses, and account numbers of the persons for which it was
unable to secure taxpayer identification numbers, and provides that
information to the Secretary upon request. In the case of a non-
resident alien, the bank is required to record the person's passport
number or a description of some other government document used to
determine identification. Treasury believes that the requirements of
section 103.34(a)(1) and (2) are inconsistent with the intent and
purpose of section 326 of the Act and incompatible with the proposal.
Section 103.34(a)(3) currently provides that a bank need not obtain
a taxpayer identification number with respect to specified categories
of persons \7\ opening certain deposit accounts. This proposed rule
does not contain any exemptions from the CIP requirements.
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\7\ The exemption applies to (i) agencies and instrumentalities
of Federal, State, local, or foreign governments; (ii) judges,
public officials, or clerks of courts of record as custodians of
funds in controversy or under the control of the court; (iii) aliens
who are ambassadors; ministers; career diplomatic or consular
officers; naval, military, or other attaches of foreign embassies
and legations; and members of their immediate families; (iv) aliens
who are accredited representatives of certain international
organizations, and their immediate families; (v) aliens temporarily
residing in the United States for a period not to exceed 180 days;
(vi) aliens not engaged in a trade or business in the United States
who are attending a recognized college or university, or any
training program supervised or conducted by an agency of the Federal
Government; (vii) unincorporated subordinate units of a tax exempt
central organization that are covered by a group exemption letter;
(viii) a person under 18 years of age, with respect to an account
opened as part of a school thrift savings program, provided the
annual interest is less than $10; (ix) a person opening a Christmas
club, vacation club, or similar installment savings program,
provided the annual interest is less than $10; and (x) non-resident
aliens who are not engaged in a trade or business in the United
States.
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Treasury is requesting comments on whether any of these exemptions
should apply in the context of the proposed CIP requirements in light
of the intent and purpose of section 326 of the Act.
Section 103.34(a)(4) provides that section 6109 of the Internal
Revenue Code and the rules and regulations of the Internal Revenue
Service (IRS) promulgated thereunder shall determine what constitutes a
taxpayer identification number. This provision is continued in the
proposal. Section 103.34(a)(4) also provides that IRS rules shall
determine whose number shall be obtained in the case of multiple
account holders. Treasury believes that this provision is inconsistent
with section 326 of the Act, which requires that banks verify the
identity of ``any'' person seeking to open an account. For these
reasons, Treasury is proposing to repeal section 103.34(a).
Section 103.34(b) sets forth certain recordkeeping requirements for
banks. Among other things, section 103.34(b)(1) requires a bank to keep
``any notations, if such are normally made, of specific identifying
information verifying the identity of [a person with signature
authority over an account] (such as a driver's license number or credit
card number).'' Treasury believes that the quoted language in section
103.34(b)(1) is inconsistent with the requirements of the proposal. For
this reason, Treasury is proposing to delete the quoted language.
III. Request for Comments
Treasury invites comment on all aspects of this rulemaking, and
specifically seek comment on the following issues:
1. Whether the proposed definition of ``account'' is appropriate
and whether other examples of accounts should be added to the
regulatory text.
2. How the proposed regulation should apply to various types of
accounts that are designed to allow a customer to transact business
immediately.
3. Ways that banks can comply with the requirement that a bank
obtain both the address of an individual's residence, and, if
different, the individual's mailing address in situations involving
individuals who lack a permanent address.
4. Whether non-U.S. persons that are not individuals will be able
to provide a bank with the identifying information required in the
proposal, or whether other categories of identifying information should
be added to this proposal to permit non-U.S. persons that are not
individuals to open accounts. Commenters on this issue should suggest
other means of identification that banks currently use or should use.
5. Whether the proposed regulation will subject banks to
conflicting State laws. Treasury requests that commenters cite and
describe any potentially conflicting State laws.
6. The extent to which the verification procedures required by the
proposed regulation make use of information that banks currently obtain
in the account opening process. Treasury notes that the legislative
history of section 326 indicates that Congress intended ``the
verification procedures prescribed by Treasury [to] make use of
information currently obtained by most financial institutions in the
account opening process.'' See H.R. Rep. No. 107-250, pt. 1, at 63
(2001).
7. Whether any of the exemptions from the customer identification
requirements contained in current section 103.34(a)(3) should be
continued in the proposal. In this regard, Treasury requests that
commenters address the standards set forth in the proposal (as well as
any other appropriate factors).
IV. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (RFA) requires the agency to ``prepare and make
available for public comment an initial regulatory flexibility
analysis' unless the agency certifies that the rule will not have a
``significant economic impact on a substantial number of small
entities.'' 5 U.S.C. 603, 605(b).\8\
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\8\ The RFA defines the term ``small entity'' in 5 U.S.C. 601 by
reference to the definitions published by the Small Business
Administration (SBA). The SBA has defined a ``small entity'' for
banking purposes as a bank or savings institution with less than
$150 million in assets. See 13 CFR 121.201. The NCUA defines ``small
credit union'' as those under $1 million in assets. Interpretive
Ruling and Policy Statement No. 87-2, Developing and Reviewing
Government Regulations (52 FR 35231, September 18, 1987).
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Treasury certifies that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
The requirements of the proposed rule closely parallel the requirements
for customer identification programs mandated by section 326 of the
Act.
Moreover, Treasury believes that banks already have implemented
prudential business practices and anti-money laundering programs that
involve the key controls that would be required in a customer
identification program in accordance with the proposed regulation.
First, all banks already undertake extensive measures to verify the
identity of their customers as a matter of good business practice.
Second, banks already should have compliance programs in place to
check lists provided by the Federal government of known and suspected
terrorists and terrorist organizations. Currently, banks are prohibited
from engaging in transactions involving certain foreign countries or
their nationals under rules issued by Treasury's Office of Foreign
Assets Control (OFAC). See 31 CFR part 500. Banks should already have
compliance programs in place to ensure that they do
[[Page 48305]]
not violate OFAC rules. Treasury understands that many banks, including
small banks, have instituted programs to check other lists provided to
them by the Federal government following the events of September 11,
2001. Treasury believes that all banks have access to a variety of
resources, such as computer software packages, that enable them to
check lists provided by the Federal government.
Third, Treasury believes the provision in the proposed rule that
requires a bank to provide adequate notice to its customers that it is
requesting information to verify their identity will impose minimal
costs on banks. Banks may elect to satisfy that requirement through a
variety of low-cost measures, such as by posting a sign in the bank's
lobby or providing any other form of written or oral notice.
The recordkeeping requirements similarly may impose some costs on
banks, if, for example, some of the information that must be maintained
as a consequence of implementing customer identification programs is
not already retained. Treasury believes that the compliance burden, if
any, is minimized for banks, including small banks, because the
proposed regulation vests a bank with the discretion to design and
implement appropriate recordkeeping procedures, including allowing
banks to maintain electronic records in lieu of (or in combination
with) paper records.
Finally, Treasury believes that the flexibility incorporated into
the proposed rule will permit each bank to tailor its CIP to fit its
own size and needs. In this regard, Treasury believes that expenditures
associated with establishing and implementing a CIP will be
commensurate with the size of a bank. If a bank is small, the burden to
comply with the proposed rule should be de minimis.
V. Paperwork Reduction Act
The proposed rule contains recordkeeping and disclosure
requirements that are subject to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.). In summary, the proposed rule requires banks
to implement reasonable procedures to (1) maintain records of the
information used to verify the person's identity and (2) provide notice
of these procedures to customers. These recordkeeping and disclosure
requirements are required under section 326 of the Act.
The proposed rule applies only to a financial institution that is a
``bank'' as defined in 31 CFR 103.11(c) lacking a Federal functional
regulator. The proposed rule requires each bank to establish a written
CIP that must include recordkeeping procedures and procedures for
providing customers with notice that the bank is requesting information
to verify their identity.
The proposed rule requires a bank to maintain a record of (1) the
identifying information provided by the customer, the type of
identification document(s) reviewed, if any, the identification number
of the document(s), and a copy of the identification document(s); (2)
the means and results of any additional measures undertaken to verify
the identity of the customer; and (3) the resolution of any discrepancy
in the identifying information obtained. These records must be
maintained at the bank for five years after the date the account is
closed. Treasury believes that little burden is associated with the
recordkeeping requirements of the proposal, because such recordkeeping
is a usual and customary business practice. In addition, banks already
must keep similar records to comply with existing regulations in 31 CFR
Part 103 (see, e.g., 31 CFR 103.34, requiring certain records for each
deposit or share account opened).
The proposed rule also requires banks to give customers ``adequate
notice'' of the identity verification procedures. A bank may satisfy
the notice requirement by posting a sign in the lobby or providing
customers with any other form of written or oral notice. If the account
is opened electronically, the bank may provide the notice
electronically. Treasury believes that nominal burden is associated
with the disclosure requirement of the proposal. This section requires
a bank to notify its customers about the procedures the bank has
implemented to verify their identities. However, a bank may choose
among a variety of methods of providing adequate notice and may select
the least burdensome method, given the circumstances under which
customers seek to open new accounts.
A person is not required to respond to a collection of information
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The collection of information requirements
contained in the proposed rule have been submitted to the OMB by
Treasury in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507).
The institutions subject to these requirements include private
banks, credit unions, and trust companies that do not have a Federal
functional regulator.
Estimated number of financial institutions: 2,460.
Estimated average annual burden for the recordkeeping requirements
of the proposed rule per each financial institution respondent: 10
hours.
Estimated average annual burden for the disclosure requirements of
the proposed rule per each financial institution respondent: 1 hour.
Estimated total annual recordkeeping and disclosure burden: 27,060
hours.
Treasury requests public comment on all aspects of the
recordkeeping and disclosure requirements contained in this proposed
rule, including how burdensome it would be for banks to comply with
these requirements. Also, Treasury requests comment on whether the
banks are currently maintaining the records requested by the proposal.
Treasury also invites comment on:
(1) Whether the collections of information contained in the notice
of proposed rulemaking are necessary for the proper performance of
FinCEN's functions, including whether the information has practical
utility;
(2) The accuracy of the estimated burden of the proposed
information collections;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collections on
respondents, including the use of automated collection techniques or
other forms of information technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information.
Comments concerning the recordkeeping and disclosure requirements
in the proposed rule should be sent (preferably by fax (202-395-6974))
to Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Paperwork Reduction Project (1506), Washington, DC 20503 (or by the
Internet to jlackeyj@omb.eop.gov), with a copy to FinCEN by mail or the
Internet at the addresses previously specified.
VI. Executive Order 12866
Treasury has determined that this proposal is not a ``significant
regulatory action'' under Executive Order 12866. The rule follows
closely the requirements of section 326 of the Act.
Treasury believes banks already have procedures in place that
fulfill most of the requirements of the proposed regulation. First, the
procedures are a matter of good business practice. Second, banks should
already have compliance programs in place to ensure
[[Page 48306]]
they comply with OFAC rules prohibiting transactions with certain
foreign countries or their nationals.
Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 02-18193 Filed 7-22-02; 8:45 am]
BILLING CODE 4810-02-P
[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Rules and Regulations]
[Page 48347-48352]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy02-680]
[[Page 48347]]
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Part VI
Department of the Treasury
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31 CFR Part 103
Financial Crimes Enforcement Network; Anti-Money Laundering Programs;
Special Due Diligence Programs for Certain Foreign Accounts; Final Rule
[[Page 48348]]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA29
Financial Crimes Enforcement Network; Anti-Money Laundering
Programs; Special Due Diligence Programs for Certain Foreign Accounts
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Interim final rule.
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SUMMARY: Treasury and FinCEN are issuing an interim final rule
temporarily deferring for certain financial institutions (as defined in
the Bank Secrecy Act) the application of the requirements contained in
section 5318(i) of title 31, United States Code, added by section 312
of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of
2001 (the Act). Section 5318(i) requires U.S. financial institutions to
establish due diligence policies, procedures, and controls reasonably
designed to detect and report money laundering through correspondent
accounts and private banking accounts that U.S. financial institutions
establish or maintain for non-U.S. persons. Section 312 takes effect on
July 23, 2002, whether or not Treasury has issued a final rule
implementing that provision. Additionally, this interim final rule
provides guidance, pending issuance of a final rule, to those financial
institutions for which compliance with section 5318(i) has not been
deferred.
DATES: This interim final rule is effective July 23, 2002. Written
comments may be submitted on or before August 22, 2002.
ADDRESSES: Submit comments (preferably an original and four copies) to
FinCEN, P.O. Box 39, Vienna, VA 22183, Attn: Section 312 Interim
Regulations. Comments may also be submitted by electronic mail to
regcomments@fincen.treas.gov with the caption in the body of the text,
``Attention: Section 312 Interim Regulations.'' Comments may be
inspected at FinCEN between 10 a.m. and 4 p.m. in the FinCEN Reading
Room in Washington, DC. Persons wishing to inspect the comments
submitted must request an appointment by telephoning (202) 354-6400
(not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of the Assistant General
Counsel for Banking & Finance (Treasury), (202) 622-0480; the Office of
the Assistant General Counsel for Enforcement (Treasury), (202) 622-
1927; or the Office of the Chief Counsel (FinCEN), (703) 905-3590 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION: Treasury and FinCEN are exercising the
authority under 31 U.S.C. 5318(a)(6) to temporarily defer the
application of 31 U.S.C. 5318(i) to certain financial institutions
pending issuance by Treasury and FinCEN of a final rule outlining the
scope of coverage, duties, and obligations under that provision.
Additionally, for those financial institutions for which compliance
with section 5318(i) has not been deferred entirely, interim guidance
is provided for compliance with the statute pending issuance of a final
rule. Although this interim final rule and the guidance contained
herein may be relied upon by financial institutions until superseded by
a final regulation or subsequent guidance, no inference may be drawn
from this rule concerning the scope and substance of the final
regulation that Treasury will issue concerning section 5318(i).
I. Background
Section 312 of the Act adds new subsection (i) to 31 U.S.C. 5318,
the Bank Secrecy Act (BSA). This provision requires each U.S. financial
institution that establishes, maintains, administers, or manages a
private banking account or a correspondent account in the United States
for a non-U.S. person to take certain anti-money laundering measures
with respect to such accounts. In particular, financial institutions
must establish appropriate, specific, and, where necessary, enhanced,
due diligence policies, procedures and controls that are reasonably
designed to enable the financial institution to detect and report
instances of money laundering through those accounts.
In addition to this general requirement, which applies to all
correspondent and private banking accounts for non-U.S. persons,
section 312 of the Act specifies additional standards for correspondent
accounts maintained for certain foreign banks. For a correspondent
account maintained for a foreign bank operating under an offshore
license or a license granted by a jurisdiction designated as being of
concern for money laundering, a financial institution must take
reasonable steps to identify the owners of the foreign bank, to conduct
enhanced scrutiny of the correspondent account to guard against money
laundering, and to ascertain whether the foreign bank provides
correspondent accounts to other foreign banks and, if so, to conduct
appropriate related due diligence.
Section 312 also sets forth minimum standards for the due diligence
requirements for a private banking account for a non-U.S. person.
Specifically, a financial institution must take reasonable steps to
ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, the private banking account, as
necessary to guard against money laundering. The institution must also
conduct enhanced scrutiny of private banking accounts requested or
maintained by or on behalf of senior foreign political figures (or
their family members or close associates). Enhanced scrutiny must be
reasonably designed to detect and report transactions that may involve
the proceeds of foreign corruption.
Section 312(b)(2) provides that subsection 5318(i) takes effect on
July 23, 2002, regardless of whether Treasury has issued a final rule
by that date. Furthermore, it indicates that subsection 5318(i) applies
to all accounts, regardless of when they were opened.
1. The Proposed Rule
On May 30, 2002, Treasury and FinCEN published in the Federal
Register a proposed rule implementing section 312. See 67 FR 37,736
(May 30, 2002). In that proposed rule, Treasury sought to take the
broad statutory mandate of section 312 and translate it into specific
regulatory directives for financial institutions to apply. Like the
statute itself, the rule proposed by Treasury is far reaching, seeking
to require a wide range of U.S. financial institutions \1\ to apply due
diligence and enhanced due diligence procedures to a diverse array of
foreign financial institutions \2\ that maintain ``correspondent
accounts'' or ``private
[[Page 48349]]
banking accounts'' in the U.S. The proposed rule sets forth a series of
due diligence procedures that financial institutions covered by the
rule may, and in many cases must, apply to correspondent accounts and
private banking accounts. Because section 5318(i) takes effect on July
23, 2002, regardless of whether Treasury has issued a final
implementing regulation, Treasury imposed a 30-day period in which
public comments on the proposed rule would be accepted.
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\1\ Treasury proposed that the following financial institutions
would be covered by the regulation: An insured bank (as defined in
section 3(h) of the Federal Deposit Insurance Act (12 U.S.C.
1813(h))); a commercial bank; an agency or branch of a foreign bank
in the United States; a federally insured credit union; a thrift
institution; a corporation acting under section 25A of the Federal
Reserve Act (12 U.S.C. 611 et seq.); a broker or dealer registered,
or required to register, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); a
futures commission merchant registered, or required to register,
under, and an introducing broker as defined in Sec. 1a23 of, the
Commodity Exchange Act (7 U.S.C. 1 et seq.); a casino (as defined in
Sec. 103.11(n)(5)); a mutual fund (as defined in Sec. 103.130); a
money services business (as defined in Sec. 103.11(uu)); and an
operator of a credit card system (as defined in Sec. 103.135).
\2\ Foreign financial institutions include foreign banks and any
other foreign person that, if organized in the United States, would
be required to establish an anti-money laundering program pursuant
to Secs. 103.120 through 103.169 of this part.
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2. The Final Rule
A final rule implementing section 312 cannot reasonably be
completed by the statutory effective date of July 23, 2002. Without
question, the proposed rule implementing section 312 is the furthest
reaching proposed regulation issued under Title III of the Act thus
far. The requirements placed on financial institutions under this
provision are significant, and commenters have raised substantial and
important concerns about the scope of the regulation as well as the
major definitions applicable to this section. For example, commenters
consistently noted that the definitions of ``correspondent account,''
``covered financial institution,'' and ``foreign financial
institution,'' were overly broad and difficult to implement. Likewise,
commenters expressed concerns regarding the definition of ``senior
foreign political figure.'' Moreover, the statute does not define many
important terms with respect to financial institutions other than
banks, leaving the task for Treasury and FinCEN. Additional time is
necessary to consider carefully these definitions and the text of the
proposed rule in light of comments received to determine whether these
terms should be further defined with respect to each financial
institution.
Treasury anticipates issuing a final rule no later than October 25,
2002.
3. Deferral of Application to Certain Financial Institutions
Although section 312 is self-executing, in the absence of a final
rule, many classes of financial institutions, in particular, non-bank
financial institutions, would not have clear notice of, or guidance
regarding, their compliance obligations. More pointedly, without
regulations defining key terms for financial institutions other than
banks, these financial institutions would not have sufficient guidance
to comply with all facets of section 312. This situation necessarily
stems from the fact that the statute seeks to cover a diverse universe
of financial institutions and seeks to address a multitude of issues
arising from the panoply of financial relationships that can exist with
various foreign financial institutions. Treasury's role in this process
is to draft a regulation, after obtaining public comment, that provides
clear and unequivocal direction to financial institutions covered by
the provision. Without clarifying appropriate terms for the various
industries, enforcement of section 5318(i) against the full range of
financial institutions proposed to be covered by section 312 will be
difficult. Therefore, deferral is necessary and appropriate.
Nor would it be appropriate for Treasury to insist on compliance
with the terms of the proposed rule pending the completion of a final
rule. We are still reviewing and analyzing the comments received and
formulating the terms and scope of the final rule. Were Treasury to
require strict compliance with the proposed rule, not only would it
undermine the administrative process, but also it might require
financial institutions to incur substantial costs to comply with
provisions of the proposed rule that may be altered or eliminated.\3\
Without suggesting that such changes will be made, such a result is
untenable.
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\3\ Cf. CFTC v. Schor, 478 U.S. 833, 845 (1986) (noting the
important distinction between a proposed rule and a final rule
drafted based on a review of public comment).
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Accordingly, invoking the authority under section 5318(a)(6) of the
BSA, this interim final rule defers the application of all provisions
of section 5318(i) to financial institutions other than banks,
securities brokers and dealers, futures commission merchants, and
introducing brokers.\4\ Banks must comply with all provisions of
section 5318(i). Securities brokers and dealers, futures commission
merchants, and introducing brokers must comply with the provisions of
section 5318(i) relating to due diligence and enhanced due diligence
for ``private banking accounts,'' but they are exempted from provisions
related to correspondent accounts. The reason for this distinction is a
practical one-the Act does not define a ``correspondent account'' for
financial institutions other than banks, and Treasury needs time to
consider whether the definition in the proposed rule is appropriate. In
contrast, the definition of a private banking account in section
5318(i) is not limited to banks and is both applicable and commonly
understood with the securities and futures industries. Moreover, to the
extent these financial institutions offer this type of account, the
risks of money laundering are similar to the risks posed by banks
offering such accounts. As a result, they will be required to comply
with the provisions of section 5318(i) regarding private banking
accounts pending Treasury's issuance of a final rule, consistent with
the guidance set forth below.
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\4\ ``Introducing brokers'' refers to those registered, or
required to register, with the Commodity Futures Trading Commission.
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In summary:
Banks must comply with section 5318(i) pending Treasury's
issuance of a final rule. For the purposes of this interim final rule,
these include: An insured bank (as defined in section 3(h) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(h))); \5\ a commercial
bank; an agency or branch of a foreign bank in the United States; a
federally insured credit union; a thrift institution; and a corporation
acting under section 25A of the Federal Reserve Act (12 U.S.C. 611 et
seq.).\6\
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\5\ This group of covered entities was drawn from the list of
``covered financial institutions'' in the proposed rule. Treasury is
evaluating whether to add uninsured national trust banks to this
list at the final rule stage as these entities are currently
required to have anti-money laundering programs. See 12 CFR 21.21.
Treasury also will consider whether non-federally regulated, state
chartered, uninsured trust companies and trust banks, and non-
federally insured credit unions should be added to the list to the
extent that they maintain correspondent or private banking accounts
for non-U.S. persons.
\6\ For purposes of complying with section 5318(i) pending
Treasury's issuance of a final rule, foreign branches of insured
banks are deemed to be foreign banks rather than covered financial
institutions.
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Securities brokers and dealers registered, or required to
register, with the Securities and Exchange Commission (SEC), and
futures commission merchants and introducing brokers registered, or
required to register, with the Commodity Futures Trading Commission
(CFTC) must comply with provisions relating to private banking
accounts, but their compliance with the remaining provisions of section
5318(i) is deferred.
Financial institutions subject to deferment of all
obligations under section 5318(i) include: Casinos; money services
businesses; mutual funds; operators of credit card systems; and all
remaining financial institutions defined in the BSA that are not banks,
securities brokers and dealers, futures commission merchants, or
introducing brokers.\7\
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\7\ The remaining financial institutions include: dealers in
precious metals, stones, or jewels; pawnbrokers; loan or finance
companies; private bankers; trust companies; state chartered credit
unions that are not federally regulated; insurance companies; travel
agencies; telegraph companies; sellers of vehicles, including
automobiles, airplanes, and boats; persons engaged in real estate
closings and settlements; investment companies; commodity pool
operators; and commodity trading advisors.
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[[Page 48350]]
II. Compliance Obligations Pending Publication of the Final Rule
Under the Act, Treasury is authorized to interpret and administer
section 312. This interim final rule provides guidance to those
financial institutions for which the application of section 5318(i) has
not been deferred. Pending issuance of a final rule, Treasury expects
compliance with section 5318(i) as set forth below. Treasury does not
expect compliance with the terms and conditions of the proposed rule
except to the extent they coincide with the express requirements of the
statute. However, the interim compliance measures set forth in this
guidance should not be construed as an indication of the obligations
that will be imposed by the final rule.
1. Due Diligence for Correspondent Accounts--Banks Only
With respect to correspondent accounts, section 5318(i)(1) requires
U.S. financial institutions to establish due diligence policies,
procedures, and controls reasonably designed to detect and report money
laundering through correspondent accounts established, maintained,
administered, or managed in the United States for a foreign financial
institution. In the interim period before the issuance of a final rule,
a due diligence program under section 5318(i)(1) will be reasonable in
Treasury's view if it focuses compliance efforts on the correspondent
accounts that pose a high risk of money laundering based on an overall
assessment of the money laundering risks posed by the foreign
correspondent institution. It is the expectation of Treasury that a
bank will accord priority to conducting due diligence on high-risk
foreign banks for which it maintains correspondent deposit accounts or
their equivalents, and will focus foremost on correspondent accounts
used to provide services to third parties. Treasury also expects banks
to give priority to conducting due diligence on high-risk correspondent
accounts maintained for foreign financial institutions other than
foreign banks, such as money transmitters. In all cases, Treasury
expects that a bank will accord priority in applying due diligence to
accounts opened on or after July 23, 2002.
Treasury acknowledges that, as a practical matter, banks will be
unable to craft and implement final comprehensive due diligence
policies and procedures pursuant to the dictates of section 5318(i)(1)
until Treasury issues a final rule. However, in the interim, a
reasonable due diligence policy, in Treasury's view, is one that
comports with existing best practices standards for banks that maintain
correspondent accounts for foreign banks,\8\ and evidences good faith
efforts to incorporate due diligence procedures for correspondent
accounts maintained for foreign financial institutions posing an
increased risk of money laundering.
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\8\ See, e.g., New York Clearing House Association, L.L.C.,
``Guidelines for Counter Money Laundering Policies and Procedures in
Correspondent Banking,'' (March 2002) at www.nych.org; Basel
Committee on Banking Supervision, ``Customer Due Diligence for
Banks'' (October 2001) at www.bis.org. A due diligence program that
does not adopt all of the best practices and standards described in
industry and other available guidance also could be considered
reasonable if there is a justifiable basis for not adopting a
particular best practice or standard, based on the particular type
of accounts held by the institution.
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2. Enhanced Due Diligence for High Risk Foreign Banks--Banks Only
Section 5318(i)(2) requires U.S. financial institutions to
establish enhanced due diligence policies and procedures applicable
when opening or maintaining a correspondent account in the United
States for certain foreign banks designated as high risk. Sections
5318(i)(2)(B)(i) through (iii) further specify requirements that must
be incorporated into a financial institution's enhanced due diligence
policies and procedures.
An enhanced due diligence program will be reasonable under section
5318(i)(2)(B), in Treasury's view, if first, it comports with existing
best practice standards for banks that maintain correspondent accounts
for foreign banks.\9\ Second, the program must also focus enhanced due
diligence measures on those correspondent accounts that are maintained
by a foreign correspondent bank deemed high risk by section
5318(i)(2)(A) posing a particularly high risk of money laundering based
on the bank's overall assessment of the risk posed by the foreign
correspondent bank. As with the previous provision, it is the
expectation of Treasury that a bank will accord priority in applying
enhanced due diligence to accounts opened on or after July 23, 2002.
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\9\ See supra note 7.
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Within these priorities, as required by the statute, banks must
take reasonable steps to comply with directives described in sections
5318(i)(2)(B)(i) through (iii). For purposes of section
5318(i)(2)(B)(i), an owner is deemed to be any person who directly or
indirectly owns, controls, or has voting power over 5 percent or more
of any class of securities of a foreign bank, the shares of which are
not publicly traded.
3. Due Diligence for Private Banking Accounts--Banks, Securities
Brokers and Dealers, Futures Commission Merchants, and Introducing
Brokers
Sections 5318(i)(1) and (3) set forth due diligence requirements
for U.S. financial institutions that maintain private banking accounts
in the United States for non-U.S. persons.\10\ Under the Act, a private
banking account is an account (or any combination of accounts) that
requires minimum aggregate deposits of at least $1 million, that is
established for one or more individuals, and that is assigned to or
administered or managed by, in whole or in part, an officer, employee,
or agent of a financial institution acting as liaison between the
financial institution and the direct or beneficial owner of the
account. Section 5318(i)(3)(A) requires financial institutions, as
needed to guard against money laundering, to take reasonable steps to
ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, the account. Additionally, the statute
requires enhanced scrutiny of private banking accounts maintained by or
on behalf of senior foreign political figures, an immediate family
member, or close associate, to guard against laundering the proceeds of
foreign corruption.
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\10\ For purposes of this interim final rule, a non-U.S. person
means an individual who is neither a United States citizen nor a
lawful permanent resident as defined in 26 U.S.C. 7701(b)(6).
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As with the requirements for correspondent accounts, a private
banking due diligence program under sections 5318(i)(1) and (3) must be
reasonably designed to detect and report money laundering and the
existence of the proceeds of foreign corruption. Treasury believes that
a due diligence private banking program would be reasonable, pending
adoption of final regulations to implement section 5318(i), if the
program is focused on those private banking accounts that present a
high risk of money laundering. A program that is consistent with
applicable government guidance on private banking accounts, such as the
guidance on sound practices for private banking issued by the Federal
Reserve (SR 97-19 (SUP) ``Private Banking Activities'' (June 30, 1997)
at www.federalreserve.gov) and the guidance on enhanced scrutiny for
transactions that may involve the proceeds of foreign corruption issued
jointly by Treasury, the bank regulators, and the State Department in
January 2001 (at http://www.treas.gov/press/releases/docs/guidance.htm)
would be reasonable, so long as it incorporates the
[[Page 48351]]
requirements of section 5318(i)(3).\11\ Treasury expects that an
institution will accord priority in applying enhanced due diligence to
accounts opened on or after July 23, 2002.
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\11\ See also, Wolfsberg Group, ``Global Anti-Money-Laundering
Guidelines for Private Banking: Wolfsberg AML Principles'' (1st
Revision May 2002) at www.wolfsberg-principles.com. A program that
does not follow all of the best practices outlined in this
government guidance would be reasonable if there is a justifiable
basis, based on the particular circumstances of the institution
involved, for not following these practices.
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III. Analysis of the Interim Final Rule
A. Banks, Savings Associations, and Credit Unions--Section 103.181
The following financial institutions are not subject to the
deferral contained in this interim final rule and must take steps, in
light of the guidance provided above, to comply with the requirements
of section 5318(i) pending issuance of a final implementing regulation:
An insured bank (as defined in section 3(h) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(h))); a commercial bank; an agency or
branch of a foreign bank in the United States; a federally insured
credit union; a thrift institution; and a corporation acting under
section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.).
B. Securities Brokers and Dealers, Futures Commission Merchants, and
Introducing Brokers--Section 103.182
Securities brokers and dealers registered, or required to register,
with the SEC, and futures commission merchants and introducing brokers
registered, or required to register, with the CFTC under the Commodity
Exchange Act (7 U.S.C. 1 et seq.) are subject to the requirements of
section 5318(i) relating to due diligence and enhanced due diligence
relating to private banking accounts. They must take steps, in light of
the guidance provided above, to comply with the requirements of section
5318(i) relating to private banking accounts pending issuance of a
final implementing regulation. Treasury and FinCEN are exercising the
authority under BSA section 5318(a)(6) to temporarily defer the
application of all other requirements contained in section 5318(i) for
securities brokers and dealers, futures commission merchants, and
introducing brokers.
C. All Other BSA Financial Institutions--Section 103.183
Treasury and FinCEN are exercising the authority under BSA section
5318(a)(6) to temporarily defer the application of all requirements
contained in section 5318(i) for all other financial institutions. This
temporary deferment applies to casinos; money services businesses;
mutual funds; operators of credit card systems; dealers in precious
metals, stones, or jewels; pawnbrokers; loan or finance companies;
private bankers; \12\ trust companies; state chartered credit unions
that are not federally insured; insurance companies; travel agencies;
telegraph companies; sellers of vehicles, including automobiles,
airplanes, and boats; persons engaged in real estate closings and
settlements; investment companies; commodity pool operators; and
commodity trading advisors.
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\12\ A private banker under the BSA refers to state chartered
banking entities that are not organized as a corporation. Generally,
such entities are organized as partnerships. A private banker does
not refer to those who offer private banking accounts.
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This temporary deferral does not in any way relieve any financial
institution from compliance with the existing anti-money laundering and
anti-terrorism requirements imposed by law, regulation, or rule of a
self-regulatory organization. Quite to the contrary, the obligations
contemplated by section 312 will serve to augment and improve the
existing anti-money laundering activities of financial institutions. To
that end, Treasury and FinCEN expect financial institutions proposed to
be subject to the regulation implementing section 312 to begin
immediately the process of evaluating their due diligence procedures
when correspondent accounts or private banking accounts are opened or
maintained on behalf of non-U.S. persons.
IV. Administrative Procedure Act
The provisions of 31 U.S.C. 5318(i), requiring due diligence
programs for certain foreign accounts, become effective July 23, 2002.
This interim rule exempts certain financial institutions from these
requirements and provides interim compliance guidance for those
financial institutions not exempted. Accordingly, good cause is found
to dispense with notice and public procedure as unnecessary and
contrary to the public interest, pursuant to 5 U.S.C. 553(b)(B), and to
make the provisions of the interim rule effective in less than 30 days
pursuant to 5 U.S.C. 553(d)(1) and (3).
V. Regulatory Flexibility Act
Because no notice of proposed rulemaking is required for this
interim final rule, the provisions of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.) do not apply.
VI. Executive Order 12866
This interim final rule is not a ``significant regulatory action''
as defined in Executive Order 12866. Accordingly, a regulatory
assessment is not required.
List of Subjects in 31 CFR Part 103
Banks, Banking, Brokers, Counter money laundering, Counter-
terrorism, Currency, Foreign banking, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth in the preamble, 31 CFR part 103 is
amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as
follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5332;
title III, secs. 312, 314, 352, Pub. L. 107-56, 115 Stat. 307.
2. Add new undesignated centerheading ``Anti-Money Laundering
Programs'' to subpart I immediately before Sec. 103.120.
3. Add new undesignated centerheading and Secs. 103.181 through
103.183 to subpart I to read as follows:
Special Due Diligence for Correspondent Accounts and Private Banking
Accounts
Sec.
103.181 Special due diligence programs for banks, savings
associations, and credit unions.
103.182 Special due diligence programs for securities brokers and
dealers, futures commission merchants, and introducing brokers.
103.183 Deferred due diligence programs for other financial
institutions.
Special Due Diligence for Correspondent Accounts and Private Banking
Accounts
Sec. 103.181 Special due diligence programs for banks, savings
associations, and credit unions.
The requirements of 31 U.S.C. 5318(i) shall apply, effective July
23, 2002, to a financial institution that is:
(a) An insured bank (as defined in section 3(h) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(h)));
(b) A commercial bank;
(c) An agency or branch of a foreign bank in the United States;
(d) A federally insured credit union;
(e) A thrift institution; or
(f) A corporation acting under section 25A of the Federal Reserve
Act (12 U.S.C. 611 et seq.).
[[Page 48352]]
Sec. 103.182 Special due diligence programs for securities brokers and
dealers, futures commission merchants, and introducing brokers.
(a) Private banking accounts. The requirements of 31 U.S.C. 5318(i)
relating to due diligence and enhanced due diligence for private
banking accounts shall apply, effective July 23, 2002, to a financial
institution that is:
(1) A broker or dealer registered, or required to register, with
the Securities and Exchange Commission under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.); or
(2) A futures commission merchant or introducing broker registered,
or required to register, with the Commodity Futures Trading Commission
under the Commodity Exchange Act (7 U.S.C. 1 et seq.).
(b) Correspondent accounts. A financial institution described in
paragraph (a) of this section is exempt from the requirements of 31
U.S.C. 5318(i) relating to due diligence and enhanced due diligence for
certain correspondent accounts.
(c) Other compliance obligations of financial institutions
unaffected. Nothing in this section shall be construed to relieve a
financial institution from its responsibility to comply with any other
applicable requirement of law or regulation, including title 31 of the
United States Code and this part.
Sec. 103.183 Deferred due diligence programs for other financial
institutions.
(a) Exempt financial institutions. Except as provided in
Sec. 103.181 and Sec. 103.182, a financial institution defined in 31
U.S.C. 5312(a)(2) and (c)(1) or Sec. 103.11(n) is exempt from the
requirements of 31 U.S.C. 5318(i).
(b) Other compliance obligations of financial institutions
unaffected. Nothing in this section shall be construed to relieve a
financial institution from its responsibility to comply with any other
applicable requirement of law or regulation, including title 31 of the
United States Code and this part.
Dated: July 19, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 02-19743 Filed 7-22-02; 8:45 am]
BILLING CODE 4810-02-P