Anti Money Laundering

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Advanced Concepts in Anti-Money Laundering Compliance
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Learning Objectives
After completing this tutorial, you should be able to:
identify the anti-money laundering tools that have been available to broker/dealers prior to the USA PATRIOT Act. understand and implement anti-money laundering identity verification practices. understand and implement anti-money laundering due diligence applicable to account openings. be familiar with the due diligence practices applicable to monitoring accounts for possible money laundering activity. know what to do in the event of a red flag, identify the role of the Anti-Money Laundering (AML) Compliance Officer, understand the responsibilities of introducing and clearing brokers, and know the current uncertain regulatory environment.
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Introduction
Money laundering transforms cash derived from illegal activity into funds and assets that appear as if they came from legitimate sources. For many money launderers, broker/dealers play a key role in washing "dirty" money to make it clean. Funds from drug trafficking, for example, may be wired from an overseas banking account to a domestic brokerage account, and subsequently withdrawn to fund further criminal activity. Anti-money laundering programs try to identify the source of funds and monitor the use of funds for suspicious transactions.
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Although banks and their broker/dealer subsidiaries have long been required to implement anti-money laundering programs, it is only recently that nonbank broker/dealers have been required to follow suit. In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) required nonbank broker/dealers to establish and implement strict anti-money laundering programs for the first time. These programs impose new responsibilities on many broker/dealer employees. Before we examine these new responsibilities, let's review the anti-money laundering tools available to broker/dealers prior to the USA PATRIOT Act.
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Customer Identification Practices

Opening an Account The NASD (now FINRA) Rule of Conduct 3110 describes the information that a broker/dealer must maintain when an account is opened. An individual customer opening an account must provide to the broker/dealer his or her name and residence, and whether he or she is of legal age to open the account. Prior to implementing the first transaction in an account, the broker/dealer must make a reasonable effort to obtain the individual customer's Social Security number, occupation and name and address of customer's employer, and to ascertain whether the customer is associated with an FINRA-member firm.
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Opening an Account If the customer is a corporation, partnership or other legal entity, it must provide its name and address, and the names of any persons authorized to transact business on behalf of the entity. If the corporation or other legal entity has assets of less than $50 million, and is not a bank or a registered investment adviser, the broker/dealer must make a reasonable effort to obtain the customer's tax identification number (TIN), name and address, and the occupations and names and addresses of individuals authorized to transact business on the customer's behalf, and to ascertain whether the customer is associated with an FINRA-member firm prior to executing the first transaction in the account. If the account that is being opened is a discretionary account, the
broker/dealer must also obtain the signature of each person authorized to exercise discretion in the account, record the date such discretion is granted, and record the age or approximate age of the individual.
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Opening an Account
Summary
Money laundering transforms cash derived from criminal activity into funds and assets that appear as if they came from legitimate sources. Anti-money laundering programs try to identify the source of funds and monitor the use of funds in suspicious transactions. The USA PATRIOT Act requires nonbank broker/dealers to establish and implement strict anti-money laundering programs. In order to open an account, FINRA Rule of Conduct 3110 requires a broker/dealer to collect information on the name, residence and legal age of the customer. Prior to executing the first transaction, the broker/dealer must make a reasonable effort to obtain the customers Social Security or tax identification number, the customers occupation and the name and address of the customers employer. The broker/dealer must also ascertain whether the customer is associated with an FINRA-member firm.
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Section Review
According to FINRA Rule 3110, a broker/dealer should obtain a customer's Social Security or tax identification number: upon the opening of the account. upon the opening of the account, but only if of the customer is a bank, registered investment adviser or a corporation with more than $50 million in assets. prior to the first transaction in the account. never. FINRA Rule 3110 does not address the collection of customer information by broker/dealers. Your answer is correct. According to FINRA Rule 3110, a broker/dealer should obtain a customer's Social Security or tax identification number prior to the first transaction in the account.
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The Suitability Rule Similar to the FINRA Rule of Conduct 3110, the FINRA Rule of Conduct 2310(a) (commonly known as the Suitability Rule) was not created with the intent to fight money laundering. However, the information that broker/dealers collect when fulfilling their obligations under the Suitability Rule often helps to identify customers who have a likely tie to money laundering schemes. If a broker/dealer recommends securities to a customer, the broker/dealer must collect information in addition to information required under the FINRA Rule of Conduct 3110, which covers only the opening of accounts. The information to be collected pertains to the suitability of the recommendation in relation to the particular customer's financial goals and current situation.
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The Suitability Rule The FINRA Suitability Rule states: In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs. To help determine whether a particular recommendation is suitable to an individual customer (as opposed to the institutional customer), the broker/dealer must use reasonable efforts to obtain information regarding the
customer's financial and tax status and investment objectives. The broker/dealer must seek this information prior to executing a transaction made on the basis of the recommendation. The broker/dealer does not have to try to obtain this information if it is recommending a money market mutual fund.
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The Suitability Rule

Summary
FINRA's Suitability Rule, Rule of Conduct 2310(a), requires the broker/dealer to have reasonable grounds for believing that a recommendation it makes to a particular customer regarding a securities transaction is suitable to such customer upon the basis of the customer's other security holdings and financial situation. To help determine whether a particular recommendation is suitable to an individual (non-institutional) customer, the broker/dealer must use reasonable efforts to obtain information regarding the customer's financial and tax status and investment objectives. The broker/dealer must seek this information prior to executing a transaction made on the basis of the recommendation. The broker/dealer does not have to try to get this information if it is recommending a money market mutual fund.
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Section Review
According to FINRA Rule 2310(a), prior to making a recommendation to an individual regarding a securities transaction, a broker/dealer should determine: the suitability of the transaction to that particular customer. the suitability of the transaction to customers similar to that particular customer. the suitability of the transaction to that particular customer, but only if the recommended transaction is for a money market mutual fund. the suitability of the transaction to both that particular customer and to the broker/dealer. Your answer is correct. According to FINRA Rule 2310(a), prior to making a recommendation to an individual regarding a securities transaction, a broker/dealer should determine the suitability of the transaction to that particular customer.
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The Know Your Customer Rule The Know Your Customer Rule also requires the collection of information about customers that can be used in fighting money laundering crimes. The Know Your Customer Rule is outlined in FINRA Rule of Conduct 2310(b). It requires a broker/dealer to make reasonable efforts to obtain basic financial information from customers so that the broker/dealer can protect itself (and the securities markets generally) from customers who lack the ability to pay for a securities transaction.
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The Know Your Customer Rule In its Rule 405, the New York Stock Exchange (NYSE) dictates the same requirement, but in a slightly different way: Each member organization is required...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. In contrast with the other rules discussed thus far, the Know Your Customer Rule does not specify exactly what information a broker/dealer must collect,
nor when it is needed. The Know Your Customer Rule procedures must be maintained for the duration of the customer relationship, however.
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The Know Your Customer Rule

Summary
The FINRA Rule of Conduct 2310(b), the Know Your Customer Rule, requires a broker/dealer to make reasonable efforts to obtain basic financial information from customers so that the broker/dealer can protect itself (and the securities markets generally) from customers who lack the ability to pay for a securities transaction. The NYSE has a similar Know Your Customer Rule. Its Rule 405 states that "each member organization is requiredto...[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."
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Section Review
According to FINRA Rule 2310(b), a broker/dealer is specifically required to: assist the government in its anti-money laundering efforts. decline to trade a security that lacks at least a "buy and hold" recommendation. undertake an extensive credit check of each of its customers. understand the basic financial situation of a customer whether or not it makes recommendations to the customer. Your answer is correct. According to FINRA Rule 2310(b), a broker/dealer is specifically required to understand the basic financial situation of a customer whether or not it makes recommendations to the customer.
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The Impact of the USA PATRIOT Act As we have mentioned, while the rules that we've discussed thus far have come to help with anti-money laundering efforts, they were not created expressly for that purpose. The USA PATRIOT Act of 2001, however, was specifically designed to identify money launderers and to monitor suspicious account activity. Broker/dealers must now institute new compliance programs and retrain thousands of employees as a result of the Act's anti-money laundering provisions. It is estimated that literally millions of dollars will be spent to reduce the risk of liability that can result from violating the Act.
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The Impact of the USA PATRIOT Act The USA PATRIOT Act reads in part: In order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum: A. the development of internal policies, procedures, and controls; B. the designation of a compliance officer; C. an ongoing employee training program; and D. an independent audit function to test programs.
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The Impact of the USA PATRIOT Act As a result of the USA PATRIOT Act, the NYSE has created Rule 445, the Anti-Money Laundering Compliance Program, and the FINRA has created Rule of Conduct 3011, also called the Anti-Money Laundering Compliance
Program. Both of these rules indicate that broker/dealers must comply with the requirements of the Act.
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The Impact of the USA PATRIOT Act While the government and the Self-Regulatory Organizations (SROs) have laid out basic rules for what compliance programs should include, these rules are expected to change quickly. The Securities and Exchange Commission (SEC) has stated that "anti-money laundering compliance programs will evolve over time, and that improvements to these programs are inevitable as members find new ways to combat money laundering and to detect suspicious activities."* As a result, it is important for all broker/dealers to stay up-to-date with developments in this fast-changing field.
*67 Fed. Reg. 20854 (April 26, 2002)
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The Impact of the USA PATRIOT Act
Summary
The USA PATRIOT Act is specifically designed to combat money laundering. The Act requires financial institutions to establish anti-money laundering programs that include, at a minimum, (A) the development of internal policies, procedures, and controls to combat money laundering; (B) the designation of an AML Compliance Officer; (C) an ongoing anti-money laundering employee training program; and (D) an independent audit function to test anti-money laundering programs. NYSE Rule (now FINRA Rule) 445 and FINRA Rule of Conduct 3011 require broker/dealers to comply with the requirements of the Act.
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Section Review
Which of the following is required of ALL financial institutions by the USA PATRIOT Act? I. II. III. IV. the development of internal policies, procedures, and controls to combat money laundering the designation of an Anti-Money Laundering Compliance Officer an ongoing anti-money laundering employee training program an independent audit function to test anti-money laundering programs
I only I and III only III only I, II, III and IV Your answer is correct. All four options are required of ALL financial
institutions by the USA PATRIOT Act.
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Opening an Account: I.D. and Verification

Verifying a Customer's Identity We have previously discussed how FINRA Rule of Conduct 3110 requires a broker/dealer to collect information about a customer upon opening an account. Regulations implementing the USA PATRIOT Act require broker/dealers to verify, to the extent reasonable, the identity of any customer seeking to open an account. Verifying an account holder's identity is, of course, a more active undertaking than simply collecting information about the account holder's identity. When verifying an identity, the broker/dealer must seek to establish the truth regarding that identity.
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Verifying a Customer's Identity
The FINRA states that the identity information a broker/dealer could seek to verify includes the customer's name, address, date of birth and Social Security number (or other government identification number). The regulations that implement the USA PATRIOT Act also require broker/dealers to maintain records of the information used to verify a customer's identity. Regulations also require a broker/dealer to establish that a customer does not appear on the list of terrorists (or suspected terrorists) or terrorist organizations that is published by the federal Office of Foreign Assets Control (OFAC). The OFAC also maintains a list of embargoed countries and regionsthat is, places where doing business is either prohibited or otherwise restricted.
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Verifying a Customer's Identity OFAC's updated list of terrorists and terrorist organizations, as well as its list of embargoed countries and regions, can be found on OFAC's web site. Most large broker/dealers will cross-check the identity of new customers against OFAC's lists automatically, via computer software. Your firm should have a customer identification procedure that details the steps required to verify customer identity.
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Verifying a Customer's Identity OFAC's updated list of terrorists and terrorist organizations, as well as its list of embargoed countries and regions, can be found on OFAC's web site. Most large broker/dealers will cross-check the identity of new customers against OFAC's lists automatically, via computer software. Your firm should have a customer identification procedure that details the steps required to verify customer identity.
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Verifying a Customer's Identity

Summary
Regulations implementing the USA PATRIOT Act require broker/dealers to verify, to the extent reasonable, the identity of any customer seeking to open an account. These regulations also require broker/dealers to maintain records of the information used to verify a customer's identity. Furthermore, the regulations require a broker/dealer to establish that a customer does not appear on the OFAC's list of terrorists or is doing business with embargoed countries and regions.
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Section Review
The regulations implementing the USA PATRIOT Act require broker/dealers to ________ of the information used to verify a customer's identity. maintain records destroy any record provide the IRS with transcripts create a database Your answer is correct. The regulations implementing the USA PATRIOT Act require broker/dealers to maintain records of the information used to verify a customer's identity.
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Sources to Use How far must a broker/dealer go in trying to verify the identity of a customer who wants to open an account? Anti-money laundering regulations require the broker/dealer to try to verify the identity of the customer to the extent reasonable and practicable. In some instances, therefore, one may expect that, on occasion, a broker/dealer may not be able to establish the identity of a customer seeking to open an account.
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Sources to Use The FINRA has indicated that "reasonable and practicable" methods to verify the identity of an individual opening an account is to inspect certain physical documents, including a driver's license, passport, and government identification (including an alien registration card). For businesses, physical documents that are reasonable and practicable ways to verify identity include a certificate of incorporation, a business license, any partnership agreements, any corporate resolutions, and other similar documents.
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Sources to Use The FINRA has stated that a broker/dealer can also turn to a database to verify the identity of a customer. These databases include, for example, credit databases such as Equifax and Experian and information databases such as Lexis/Nexis. Other in-house or custom databases may also suffice. A broker/dealer has five business days to verify customer information from the date the customer's account is opened.
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Sources to Use
Summary
A broker/dealer must take reasonable and practicable steps to verify a new customer's identity. Such steps include the inspection of physical documents. For individuals, these documents include driver's license, passport, and government identification (including an alien registration card). For businesses, they include a certificate of incorporation, a business license, any partnership agreements, corporate resolutions, and similar documents. A broker/dealer may also turn to databases to verify the identity of a customer seeking to open an account. The broker/dealer has five business days to verify customer information from the date the customer's account is opened.
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Section Review
The regulations that implement the USA PATRIOT Act require broker/dealers to take ________ steps to verify a customer's identity. restorable and presentable reliable and traceable responsible and practical reasonable and practicable Your answer is correct. The regulations that implement the USA PATRIOT Act require broker/dealers to take reasonable and practicable steps to verify a customer's identity.
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Online Broker/Dealers We have seen how broker/dealers can use physical documents and databases such as Experian and Equifax to verify the identity of customers wishing to open accounts. In the world of online trading, however, verifying a potential customer's identity can be particularly tricky: there is no face-to-face transaction, nor may there be (nor should there be, some would argue) any other type of communication between broker/dealer and customer other than electronic communication.
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Online Broker/Dealers The FINRA anti-money laundering regulations resulting from the USA PATRIOT Act do not exempt online broker/dealers from verifying the identity of potential customers. As with a traditional type of account, the FINRA requires online broker/dealers to confirm, to the extent reasonable and practicable, customer identity no later than five business days from the time the account is opened. Although online broker/dealers may find it difficult to inspect the driver's license of a customer or other physical document, the FINRA notes that online broker/dealers certainly may research a customer through the use of databases. The FINRA suggests that online firms make maximum use of such databases. The worldwide reach of the Internet makes online broker/dealers particularly
vulnerable to criminal elements abroad. For this reason, the FINRA stresses that online broker/dealers must be especially careful to review the OFAC list of prohibited persons or entities.
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Online Broker/Dealers
Summary
The FINRA requires online broker/dealers to confirm customer identity no later than five business days from the time the account is opened. Although online broker/dealers may find it difficult to inspect the driver's license of a customer or other physical document, the FINRA notes that online broker/dealers should make maximum use of databases to verify customer identity. The FINRA also stresses that online broker/dealers must be especially careful to review the OFAC list of prohibited persons or entities, especially in regard to the international reach of the Internet.
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Section Review
Which of the following is a true statement? Online broker/dealers have the same number of days as do standard broker/dealers to verify customer identity. Online broker/dealers have fewer days than do standard broker/dealers to verify customer identity. Online broker/dealers have more days than do standard broker/dealers to verify customer identity. Unlike standard broker/dealers, online broker/dealers need not verify customer identity. Your answer is correct. Online broker/dealers have the same number of days as do standard broker/dealers to verify customer identity.
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The Unverified Account The USA PATRIOT Act regulations require broker/dealers to verify the identity of customers within a reasonable time, before or after opening an account (what constitutes a reasonable time depends on such factors as whether the customer opens the account in person and the type of identifying information available). A broker/dealer should be very cautious when authorizing activity in an unverified account, however. Even though the identity of the account is unverified, the Suitability Rules and Know Your Customer Rules still apply. These rules should give the broker/dealer some inkling as to whether account activity is suspicious, and whether to authorize the activity.
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The Unverified Account It is recommended, that if a potential customer refuses to provide any information that the broker/dealer needs to verify identity, or appears to have intentionally provided false or misleading information, the broker/dealer should not open the account. If a potential customerfails to provide the requested information, the broker/dealer, considering the known and unknown risks involved, may refuse to open the account. In the case of anexisting customer, the broker/dealer may close the account.
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The Unverified Account

Summary
The USA PATRIOT Act regulations give broker/dealers a reasonable time to verify the identity of customers, but the regulations do not prohibit activity in a customer's account during that time, and the Suitability Rules and Know Your Customer Rules still apply. A broker/dealer should not open an account if a customer refuses to provide
the requested information or the customer provides false or misleading information. Further, if an existing customer fails to provide the requested information, the broker/dealer may consider closing the account.
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Section Review
According to FINRA, what should a broker/dealer do when a customer seeking to open an account refuses to provide identifying information? Refuse to open the account. Open the account if the customer is not on OFAC's list of terrorists. Open the account but close it within five business days. Open the account but not authorize any transactions in the account. Your answer is correct. According to FINRA, a broker/dealer should refuse to open an account if a customer refuses to provide identifying information.
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Opening an Account: Due Diligence

What Is Due Diligence? A broker/dealer has an ongoing obligation to monitor account activities for suspicious transactions. This arises from the broker/dealer's anti-money laundering obligation to have in place an internal program that can detect suspicious transactions in an account, and to report suspicious transactions to law enforcement agencies.
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What Is Due Diligence? Detecting suspicious transactions that may indicate money laundering requires different tools from detecting suspicious transactions that may indicate fraud, such as forgery and check kiting (i.e., fraudulent practices involving passing of bad checks). The SEC states that while "existing antifraud systems may be important...they cannot be relied upon to do 'double duty' for anti-money laundering purposes without review and adjustment." *
*Money Laundering: Life After the PATRIOT Act. Lori Richards' speech to Securities Industry Association Conference on Anti-Money Laundering Compliance for Broker/Dealers. May 2, 2002.
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What Is Due Diligence? To monitor an account for suspicious activity, a broker/dealer must first determine what is non-suspicious activity for that particular customer. Thus, prior to monitoring an account, and in addition to verifying the customer's identity, the broker/dealer should establish a profile of the potential customer at the time the account is opened. This process is called due diligence. In this way, inconsistencies and illegalities can be detected prior to undertaking any transactions, and programs can be established to distinguish a customer's expected transactions from deviant transactions. The due diligence process should supplement, and not supplant, a broker/dealer's suitability and Know Your Customer programs, which are tailored for different purposes.
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What Is Due Diligence? The FINRA suggests that a due diligence program should collect information on an account holder's finances (including wealth, net worth and sources of income) prior to opening an account. The information collected would then be reviewed to detect and possibly deter money laundering activity. According to the FINRA, this review should be integrated in the procedures for supervising new accounts before the appropriate supervisor authorizes the opening of the
account.
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What Is Due Diligence? The FINRA stresses that the review undertaken by a New Accounts Supervisor should be fully documented and itself be periodically reviewed to ensure compliance with systems intended to detect money laundering. Finally, the FINRA suggests that firms use checklistslisting the types of information required to open an account and documenting why an account was opened if, in fact, such information was not required. In the next section, we will review specific information that the FINRA suggests should be collected in the due diligence process.
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What Is Due Diligence?

Summary
A due diligence program designed to detect and deter money laundering activity should supplement existing anti-fraud, suitability and Know Your
Customer programs. Due diligence should occur prior to an account being opened. It should include the collection of information related to the customer's finances. The due diligence program should also be integrated in the New Accounts Supervisor's existing procedures before that supervisor authorizes the opening of the account; should be fully documented and periodically reviewed; and utilize checklists and document why an account was, in fact, opened when due diligence information was not collected.
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Section Review
According to FINRA, the anti-money laundering due diligence process should ________ the anti-fraud, suitability and Know Your Customer programs of a broker/dealer. Supplement Duplicate Replace supercede Your answer is correct. According to FINRA, the anti-money laundering due diligence process should supplement the anti-fraud, suitability and Know Your Customer programs of a broker/dealer.
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Recommended Practices In its Notice to Members 02-21, the NASD (now FINRA) suggested six specific due diligence practices that broker/dealers should follow when opening an account. 1. The broker/dealer should inquire about the source of the customer's assets and income so that the broker/dealer can determine if the inflow and outflow of money and securities is consistent with the customer's financial status. 2. The broker/dealer should gain an understanding of what the customer's likely trading patterns will be, so that any deviations from the patterns can be detected later on if they occur.
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Recommended Practices 3. The broker/dealer should maintain records that identify account holders and their citizenship. 4. The broker/dealer should require customers to provide street addresses to open an account and not simply post office addresses or "mail drop" addresses. 5. The broker/dealer should contact businesses to verify the
accuracy of addresses, the place of business, the telephone, and other identifying information. The broker/dealer should do this periodically as well, after the account is opened. 6. The broker/dealer should conduct credit history and criminal background checks through available popular databases.
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Recommended Practices Broker/dealers should follow through on these practices, but only to the extent that they are reasonable and practicable for the particular customer. Practically speaking, the largest broker/dealers already have comprehensive programs in place. They have personnel dedicated solely to following up on potential customers if due diligence raises possible money laundering issues, such as an account originating in a country on the government's watch list.
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Recommended Practices
Summary
Anti-money laundering due diligence requires broker/dealers to: 1. inquire about the source of the customer's assets and income. 2. understand what the customer's likely trading patterns will be. 3. maintain records that identify the account holders and their citizenship. 4. require customers to provide street addresses to open an account. 5. contact businesses to verify the accuracy of addresses, the place of business, the telephone, and other identifying information. 6. conduct credit history and criminal background checks through available vendor databases.
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Section Review
Which of the following is the minimum information that will satisfy FINRAs anti-money laundering due diligence practices regarding a customers address? I. II. III. IV. the customer's mail drop address the customer's street address the customer's PO box the customer's e-mail address
II only II and III only
IV only I, II and III only Your answer is correct. The customer's street address is the minimum information that will satisfy FINRA's anti-money laundering due diligence practices regarding a customer's address.
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Correspondent Accounts The USA PATRIOT Act prohibits broker/dealers from doing business with correspondent accounts owned by a foreign "shell bank." For money laundering purposes, a correspondent account is an account established by a foreign bank at a U.S. broker/dealer to handle transactions for the foreign bank. Shell banks have no physical presence; as the name implies, they are empty shells. Foreign shell banks are used strictly for illegitimate purposes, such as money laundering. For example, a money launderer may set up a shell bank overseas, fund it with criminally derived money, use the bank to open a U.S.-based correspondent account, and withdraw the funds from the correspondent account in the United States. Thus, the source of the funds is obscured.
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Correspondent Accounts Doing business with a foreign shell bank's correspondent account is prohibited. Therefore, broker/dealers are under the obligation to record the identity of owners of foreign banks that maintain correspondent accounts in the United States. The broker/dealer must recheck the identity of foreign bank owners with correspondent accounts at least every two years, or when the broker/dealer has reason to believe that the bank has different owners. In this case, the foreign bank should certify that it is not a shell bank, and it should identify its owners. Broker/dealers have additional obligations with regard to the identity of owners of correspondent accounts when the owner of the account is an institution located in a country that is at high-risk for money laundering activity.
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Correspondent Accounts High-risk countries are listed on the web sites of the following organizations: the Financial Action Task Force on Money Laundering, or FATF, an international body located in Paris; the Financial Crimes Enforcement Network, or FinCEN, a division of the U.S. Department of the Treasury; the Organization for Economic Co-operation and Development, OECD, another international body located in Paris; the U.S. State Department; and the OFAC. The broker/dealer may create its own list of high risk countries, even if the countries are not on the lists of the above-listed organizations. These obligations require a broker/dealer to take reasonable steps to determine the ownership of the foreign bank; monitor the account more
carefully than usual; and identify other banks and broker/dealers where the foreign bank has opened correspondent accounts.
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Correspondent Accounts Broker/dealers have the same obligations regarding banks with correspondent accounts that operate under an offshore banking license. In general, offshore banks are based abroad but are not allowed to do business in the country in which they are based. Offshore banks are often located in Caribbean countries and include such popular banking locations as the Cayman Islands.
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Correspondent Accounts
Summary
Foreign shell banks have no physical presence; as the name implies, they are empty shells. A correspondent account transacts business on behalf of a foreign financial institution. Broker/dealers are prohibited from establishing correspondent accounts for foreign shell banks. They should require foreign
banks maintaining correspondent accounts to identify ownership and certify that they are not shell banks. For foreign banks located in a "high-risk" country (identified by the FATF, FinCEN, the OECD, the U.S. Department of the Treasury, the OFAC, or by the broker/dealer itself), or operating under an offshore banking license, broker/dealers should take reasonable steps to determine the ownership of the foreign bank; monitor the account more carefully than usual; and identify other banks and broker/dealers where the foreign bank has opened correspondent accounts.
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Section Review
A German bank has asked a broker/dealer to establish a correspondent account on its behalf. Germany is not a high-risk country for money laundering activity, and the bank is not operating under an offshore banking license. What minimum information should the broker/dealers ask from the German bank? I. II. III. IV. the identity of its owners certification that it is not a shell bank the FATF's Form C-A the name and address of other banks where the German bank has opened correspondent accounts
I and II only I and IV only I, II and III only
I, II and IV only Your answer is correct. Options I and II are the minimum information that the broker/dealers should ask from the German bank. They would want to verify the identity of its owners, and certification that it is not a shell bank.
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Private Banking Accounts In addition to the enhanced due diligence process for correspondent accounts, the USA PATRIOT Act has special due diligence for private banking accounts held for foreign citizens. For money laundering purposes, a private banking account is an account, or collection of accounts, that:
requires a deposit of more than $1 million in funds or other assets; and is established by an individual or individuals, but is managed by a representative (usually a financial institution) who acts as a liaison between the individual and the broker/dealer.
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Private Banking Accounts Broker/dealers should take reasonable steps to determine the identity of the true owners of private banking accounts being held for foreign citizens. Broker/dealers should also take reasonable steps to determine the source of funds in these accounts.
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Private Banking Accounts If the true owner of any account is directly or indirectly a senior foreign political figure, or his or her family or close associate, the broker/dealer must conduct enhanced scrutiny to detect and report transactions involving foreign official corruption. The enhanced scrutiny may include the following:
review of the account by high-ranking managers (more senior than the managers who normally review accounts) special attention to the use by the account holder of accounts at a nation's central bank or other government-owned bank special attention to the use of other government accounts as the source of funds in a transaction
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Private Banking Accounts

Summary
A private banking account is an accountor collection of accountsthat requires a deposit of more than $1 million in funds or other assets and is managed by a representative (usually a financial institution) who acts as a liaison between the individual account holder and the broker/dealer. Broker/dealers should take reasonable steps to determine the identity of the true owners of private banking accounts and take reasonable steps to determine the source of funds in these accounts. If the identity of an account holder is directly or indirectly a senior foreign political figure, his or her family or close associate, the broker/dealer must conduct enhanced scrutiny to detect and report transactions involving foreign official corruption.
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Section Review
What is the minimum amount of funds or other assets that are required for an account to be considered a private banking account? $1 million $5 million $10 million There is no minimum. A private banking account is defined by the foreign official status of the account holder.
Your answer is correct. The minimum amount of funds or other assets that are required for an account to be considered a private banking account is $1 million.
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Monitoring an Account
Suspicious Transactions We have reviewed the due diligence process for opening an account at a broker/dealer, as well as the special due diligence required for correspondent accounts and private banking accounts. Now, let's turn to the obligations of a broker/dealer to monitor an account for possible money laundering activity once the account is opened. If there is suspicious activity in an account, a broker/dealer must file with the government a Suspicious Activities Report, or SAR. Note: SAR filings are the responsibility of your Broker/Dealer firm. As such, if you feel that a transaction is suspicious enough for a SAR filing, please do not make the filing yourself, but contact your Supervisor immediately)
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Suspicious Transactions To trigger a SAR filing, a "suspicious transaction" must involve $5,000 or more. The following requirements must also be met:
The transaction involves funds derived from illegal activities or is intended to hide or disguise funds or assets derived from illegal activities. The transaction has no business or apparent lawful purpose. The transaction is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.
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Suspicious Transactions According to the SAR, a transaction can be any of the following: a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument or investment security, or any other payment, transfer, or delivery by, through, or to a financial institution. As you can see, many types of transactionsif they are above $5,000 and suspiciouscan trigger a SAR filing.
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FINRA Recommendations The FINRA suggests that broker/dealers establish automated systems to monitor trading, wire transfers and other account activity so that suspicious activity can be detected. In the event that the broker/dealer does not establish an automated system but monitors an account manually, the broker/dealer should review enough transactions in a particular account that would allow it to detect a pattern. In other words, monitoring for potential money laundering activity should be comprehensive, not sporadic. The FINRA also suggests that the Board of Directors and/or senior management of the broker/dealer be notified periodically of the filing of SARs. For cases involving significant amounts of money or high-risk activitiesto the bank or to societythe Board of Directors should be notified immediately.
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Summary To trigger a SAR filing, a "suspicious transaction" must: (1) involve $5,000 or more and involve dirty money; (2) have no business or apparent lawful purpose; or (3) be a transaction not the sort that the particular customer would normally be expected to engage in and for which there is no reasonable explanation. The FINRA suggests that broker/dealers have automated systems to monitor
accounts for suspicious activity; if monitoring is done manually, enough transactions should be reviewed so that patterns, if present, may emerge. The Board of Directors and/or senior management should be notified of the filing of SARs periodically, and notified immediately in significant cases. SAR filings are the responsibility of your Broker/Dealer firm. As such, if you feel that a transaction is suspicious enough for a SAR filing, please do not make the filing yourself, but contact your Supervisor immediately.
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Advanced Concepts in Anti-Money Laundering Compliance

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Customer Identification Practices

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The Know Your Customer Rule

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The Impact of the USA PATRIOT Act

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Opening an Account: I.D. and Verification

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Verifying a Customer's Identity

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Verifying a Customer's Identity

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