Broker/dealers should evaluate at least seven “risk factors” in determining how to set up the customer identification program mandated by the USA Patriot Act, according to a proposed rule released by the Treasury Department.
The proposed rule is intended to provide guidance to b/ds as to what constitutes “reasonable procedures” under the USA Patriot Act, which was enacted in the aftermath of the Sept. 11 terrorist attack.
The act requires financial institutions to implement “reasonable procedures” to identify customers and determine whether they might appear on lists of known or suspected terrorists.
In addition to the proposed rule covering b/ds that was just released, the Treasury will shortly release another proposed rule covering the insurance industry.
However, the American Council of Life Insurers says the b/d proposal will have a significant impact on variable product distributors.
“For example, they will be involved in detail verifications of their customers identities, ensuring customers have government-issued identification,” says Carl Wilkerson, ACLIs chief counsel for securities.
“In effect, variable product distributors will have to ensure their customers are the people they say they are,” he says.
Wilkerson says ACLI is now reviewing the proposed rule on broker/dealers.
David Winston, vice president of government affairs for the National Association of Insurance and Financial Advisors, says NAIFA is assessing the proposal to determine the degree to which it meets the test of “reasonable and practical” contained in the Act.
NAIFA will then determine whether to file comments, he says.
Specifically, the proposed rule says that in setting up a customer identification program, broker/dealers should consider several risk factors. The proposal notes, however, that the listing of risk factors is for guidance only, and is not meant to be exhaustive.
The first factor, the proposal says, is the broker/dealers size.
A large firm that opens a substantial number of accounts on a given day will have different risks than one that only opens one or two a month, the proposal says.
The same is true with respect to the number of branches, the proposal adds.
The second risk factor is location. The proposal says firms should assess whether they are located in areas where money laundering activities are known to exist or where risks of money laundering are high.
The third factor is the method by which the account is opened. The proposal says accounts opened exclusively online present different, and perhaps greater, risks than those opened in person.