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.
The fourth and fifth factors are the types of accounts and transactions offered by the broker/dealer.
The proposal says b/ds should assess whether there are different risks associated with the various types of accounts they provide.
In addition, the proposal says, broker/dealers should examine the transactions they execute, such as short sales, over-the-counter derivatives or block trades.
The sixth factor is customer based. Broker/dealers should assess the risks associated with different types of customers, such as those located in countries identified as locations of “primary money laundering concern.”
The seventh factor is whether the broker/dealer can rely on another b/d, with which it shares an account relationship, to undertake any of the steps required under the proposal.
As for the required information, the proposal notes that the USA Patriot Act requires name, date of birth, address and some type of documentation number, such as Social Security number, of each customer.
Beyond that, the proposal says that b/ds, in analyzing the risk factors, should determine whether other identifying information is necessary to form a reasonable belief as to the true identity of each customer.
The proposal also outlines verification procedures and recordkeeping requirements.
One potentially controversial recordkeeping requirement involves document copies. The proposal says broker/dealers must make hard copies of identification documents provided by customers, such as a drivers license, which legibly depict any identification numbers.
Treasury is seeking written comments on the proposed rule, which must be submitted no later than 45 days after it is published in the Federal Register.
In other news, life insurers are still fighting efforts to alter the tax treatment of split dollar life insurance that are arising on several fronts.
Language on split dollar appear both in S. 1971, the pension bill approved last week by the Senate Finance Committee, and H.R. 5095, a corporate accountability bill introduced recently by House Ways and Means Committee Chairman Bill Thomas, R-Cal.
Dianne Sullivan, assistant vice president for federal taxes and trade with ACLI, says she is concerned that people are not looking at the effect of the proposed IRS regulations on split dollar.
In this political climate, she adds, almost everything that gets to executive compensation is being considered “abusive.”
But split dollar is a life insurance policy, Sullivan says, and is not like executive compensation.
Split dollar life insurance, Sullivan says, is an important tool for businesses. It has genuine life insurance behind it, she adds, and is not something that should be considered abusive.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 22, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.