Kirkpatrick & Lockhart LLP
ANTI-MONEY LAUNDERING
May 2003
Overview of CIP Regulations for Mutual Funds
and Broker-Dealers
On April 30, 2003, the Department of Treasury, jointly
with the relevant federal functional regulators,
adopted final rules requiring mutual funds and
broker-dealers, as well as banks and trust companies,
savings associations, credit unions, futures
commission merchants and futures introducing
brokers, to implement a customer identification
program (“CIP”) by October 1, 2003, as part of their
anti-money laundering programs (“AML Programs”).
This alert covers the CIP rules for mutual funds and
broker-dealers (referred to interchangeably below as
“FIs”), issued in two separate joint Securities and
Exchange Commission (“SEC”) and Treasury
Releases, which are virtually identical. The CIP rules
related to bank financial institutions will be covered
separately. Regulations relating to other non-bank
financial institutions have not yet been released,
although the Releases indicated that the effects of
the CIP rules are intended to be uniform throughout
the financial services industry.
CIP OVERVIEW
General Requirements. FIs must implement a
written CIP appropriate for their size and type of
business that contains procedures for verifying the
identity of customers, to the extent reasonable and
practicable, within a reasonable time before or after
an account is opened. The CIP must be part of the
FI’s AML Program. The Releases stated that the
addition of the CIP to a mutual fund’s AML Program
is a material change requiring approval by a mutual
fund’s board of directors.
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The procedures required, as described further below,
are substantially as originally proposed, with certain
increased flexibility. They must enable the FI to form
a “reasonable belief” that it knows the “true identity”
of each customer and must include risk-based
procedures for “verifying the identity of each
customer to the extent reasonable and practicable.”
Risk factors include:
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For mutual funds—the manner in which
accounts are opened, fund shares are
distributed, and purchases, sales and
exchanges are effected, the types of accounts
maintained by the mutual fund, the types of
identifying information available, and the
mutual fund’s customer base.
For broker-dealers—the types of accounts
maintained by the broker-dealer, the methods of
opening accounts, the types of identifying
information available, and the broker-dealer’s
size, location and customer base.
Reliance on Other Financial Institutions. Treasury
determined to permit FIs to rely on another “financial
institution” (as defined in the Bank Secrecy Act
(“BSA”)) for some or all elements of its CIP, provided
that:
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The FI’s CIP includes procedures that specify
when the FI will rely on the performance by
another financial institution to satisfy its CIP
obligations;
The customer is opening, or has opened, an
account or has established a similar business
relationship with the other financial institution
The rules as adopted cover open-end investment companies registered or required to be registered with the SEC under
Section 8 of the Investment Company Act of 1940 (to clarify that the rules exclude foreign funds not subject to SEC
registration requirements). The definition of broker-dealer was adopted as proposed and includes any person registered
or required to be registered with the SEC as a broker or dealer under the Securities Exchange Act of 1934, except persons
who register solely for the purpose of effecting transactions in securities futures products.
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to provide or engage in services, dealings, or
other financial transactions;
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n
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Such reliance is reasonable under the
circumstances;
The other financial institution is required to
maintain an AML Program under the BSA and
is regulated by a federal functional regulator;
and
The other financial institution enters into a
contract requiring it to certify annually to the
FI that it has implemented an AML Program
and it (or its agent) will perform the specific
requirements of the FI’s CIP.
According to the Releases, an FI will not be held
responsible for the failure of the other financial
institution to fulfill adequately the FI’s CIP
responsibilities, provided that the FI can establish
that its reliance was reasonable and that it obtained
the requisite contracts and certifications and
otherwise satisfied all of the conditions of the rule.
With regard to contractual delegation to nonfinancial institutions, the FI remains responsible for
assuring compliance with the rule and must actively
monitor the operation of its CIP and assess its
effectiveness.
PROGRAM SPECIFICS
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n
Excluded from the definition of customer are:
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“Financial institutions” regulated by a “federal
functional regulator” (as defined by the BSA);
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Banks regulated by a state bank regulator;
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Government agencies and instrumentalities;
Persons that have an existing account with the
FI, provided that the FI has a reasonable belief
that it knows the true identity of the person.
Look Through. The Releases clarified that it is not
necessary to verify the identity of persons whose
transactions are conducted through omnibus
accounts. For example, a mutual fund is required
only to verify the identity of the broker-dealer
maintaining a brokerage account with the mutual
fund, and the broker-dealer would be responsible for
verifying the identity of its customers. Similarly, a
qualified retirement plan investing in a mutual fund is
the customer of the FI whose identity must be
verified, and not the participants in the plan.
For purposes of the CIP, an FI is generally not
required to look through a trust, or similar account,
to verify the identities of beneficiaries, and instead is
only required to verify the identity of the named
account holder. Nevertheless, the FI is required to
take a risk-based approach in determining whether to
take additional steps to verify the identity of the
account holder, by for example verifying the identity
of persons with control over the account.
Account Defined.
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Who is a Customer and What Information
is Required
Customer Defined. The definition of “customer” in
the final rules continues to relate only to new
accounts and is narrower than as originally
proposed in that it no longer includes signatories.
Under the final rules, “customer” is defined to mean
a person that opens a new account, including an
individual who opens a new account for an
individual who lacks legal capacity (e.g., a minor) or
for an entity that is not a legal person (e.g., a civic
club).
Companies that are publicly traded, but only to
the extent of their domestic operations; and
n
For mutual funds—account means any
contractual or other business relationship
between a person and a mutual fund
established to effect transactions in securities
issued by the mutual fund, including the
purchase or sale of securities.
For broker-dealers—account means a formal
relationship with a broker-dealer established to
effect transactions in securities, including the
purchase or sale of securities and securities
loaned and borrowed activity, and to hold
securities or other assets for safekeeping or as
collateral.
Excluded from the definition of “account” for FIs are
accounts acquired through any acquisition, merger,
purchase of assets, or assumption of liabilities, and
accounts opened for the purpose of participating in
an employee benefit plan established pursuant to the
Employee Retirement Income Security Act of 1974,
although the Releases noted that the financial
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institution is expected to implement reasonable
procedures to detect money laundering in any
accounts, however acquired.
Information Required. The following information
(which is substantially as originally proposed, with
certain increased flexibility, as discussed below) must
be obtained prior to opening an account:
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Name;
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Date of birth, for an individual;
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Address (as simplified under the final rules):
– for an individual, a residential or business
street address;
– for an individual who does not have a
residential or business street address, an
Army Post Office or Fleet Post Office box
number, or the residential or business street
address of next of kin or of another contact
individual; or
– for a person other than an individual, a
principal place of business, local office or
other physical location; and
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Identification number (as simplified under the
final rules):2
– For a U.S. person, a taxpayer identification
number; or
– For a non-U.S. person, one or more of the
following types of information that permits
an FI to establish a reasonable belief that it
knows the identity of its customer: (i)
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.
Verification of a Customer’s Identity
In General. The CIP procedures must set forth
guidelines that describe when the FI will use
documents, non-documentary methods, or a
combination of both for carrying out its customer
verification obligation, depending on the type of
customer and the method of opening the account.
The Releases encouraged FIs to use a variety of
methods to verify the identity of a customer,
especially when the FI does not have the ability to
examine original documents.
Documentary Verification. The CIP must contain
procedures that set forth the documents the FI will
rely on when verifying a customer through
documents, based on its own risk-based analysis of
the types of documents it believes will enable it to
verify the customer’s identity. For individuals, such
documents may include unexpired governmentissued identification evidencing nationality or
residence and bearing a photograph or similar
safeguard (e.g., driver’s license or passport). For
persons other than individuals, documents showing
the existence of the entity (e.g., certified articles of
incorporation, government-issued business license,
partnership agreement or trust instrument). FIs are
not required to verify whether or not a document has
been validly issued and generally may rely on
government-issued identification as verification
unless the document shows obvious indications of
fraud.
Non-Documentary Verification. If relying on nondocumentary methods in addition to or instead of
documentary verification, the CIP must contain
procedures that describe the methods that will be
used. Non-documentary methods may include
contacting the customer or independently verifying
the customer’s identity through a comparison of
information provided by the customer with
information from a third-party source (e.g., verifying
information through credit bureaus, public databases
and other sources, checking references with other
financial institutions, and obtaining a financial
statement).
Non-documentary procedures must address certain
specific circumstances, including those in which an
individual is unable to present an unexpired
government-issued identification document that
bears a photograph or similar safeguard, the FI is not
familiar with the documents presented, the account is
Exceptions may be made for persons, including natural persons, who have applied for, but have not yet received, a
taxpayer identification number, as long as the FI’s CIP contains procedures to confirm that the application was filed
before the account is opened and to obtain the taxpayer identification number within a reasonable period of time
thereafter.
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ANTI-MONEY LAUNDERING
opened without obtaining documents, the customer
opens the account without appearing in person, or
other circumstances increase the risk that the FI will
be unable to verify the true identity of a customer
through documents. In any event, the Releases
encouraged FIs to use non-documentary methods to
confirm identity even when the customer has
provided documentary information.
Additional Verification. Although the requirement to
identify signatories has been removed from the final
rules in most situations, the final rules include a
requirement that the CIP address situations in which
there may be a heightened risk that the FI will not
know the customer’s true identity, such as accounts
opened in the name of a corporation, partnership or
trust that is created or conducts substantial business
in a jurisdiction designated by the United States as a
primary money laundering concern or by an
international body as non-cooperative. In those
cases, where the FI cannot otherwise adequately
verify the customer’s identity, the FI must obtain
information about individuals with authority or
control over the account, including persons
authorized to effect transactions in the account.
Lack of Verification. The CIP must include
procedures for responding to circumstances in which
the FI cannot form a reasonable belief that it knows
the true identity of a customer. In particular, the
procedures should describe:
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n
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When not to open an account;
Terms under which a customer may use an
account while its identity is being verified;
When to file a Suspicious Activity Report; and
When to close an account, after attempts to
verify a customer’s identity have failed.
Recordkeeping
The recordkeeping requirements under the final rules
are less burdensome than as originally proposed.
The CIP must include procedures for making and
maintaining a record of all information obtained under
the CIP procedures. The identifying customer
information collected (e.g., age, address) is the only
information that must be retained for five years after
the account is closed. All other required information
need only include a description, rather than a copy,
and need only be retained for five years after the
record is made.
Comparison with Government Lists
The rules do not address obligations outside of the
BSA, such as compliance with Treasury’s Office of
Foreign Assets Control, or OFAC, rules prohibiting
transactions with certain foreign countries or their
nationals. The rules do require that the CIP include
procedures for determining whether the name of the
customer appears on any list (none of which
currently exists) of known or suspected terrorists or
terrorist organizations issued by any federal
government agency, designated as such by Treasury,
and about which notice has been provided. Absent
any requirement to the contrary, the CIP procedures
must require that the determination be made within a
reasonable period of time after the account is opened
or earlier if required by law. The procedures must
also require the FI to follow all federal directives in
connection with such lists.
Customer Notice
The CIP must include procedures for providing
customers with adequate notice that certain
information is being requested from the customer by
the FI for the purpose of verifying the customer’s
identity. Notice is deemed adequate if it generally
describes the identification requirements of the final
rule and is reasonably designed to ensure that a
customer views the notice before opening an
account, such as a notice posted in the lobby, on a
website or on the account application. The rule
includes sample language.
Exemptions
The SEC, with the concurrence of Treasury, may, by
order or regulation, exempt any FI or type of account
from the CIP rules.
DIANE E. AMBLER
202.778.9886
dambler@kl.com
ANDRÁS TELEKI
202.778.9477
ateleki@kl.com
Kirkpatrick & Lockhart LLP
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ANTI-MONEY LAUNDERING
Kirkpatrick & Lockhart LLP offers diverse experience in issues relating to money laundering. We can help
banking and diversified financial services clients assess their risk, establish and review compliance practices,
investigate potential weaknesses, perform internal investigations, and respond to regulatory inquiries and
enforcement actions while being sensitive to the privacy of each client and their customers through an
effective attorney-client privilege relationship.
In addition, we have established a website dedicated to issues relating to anti-money laundering regulatory
and legislative developments. The website is located at www.kl.com/aml/amlwrc. In addition to outlining
K&L’s enterprise-wide approach to assisting clients with money laundering compliance issues, the website
contains a resource center with over 100 carefully selected links to various informational resources on money
laundering. The resource center also includes a library of prior K&L publications on money laundering.
We invite you to contact one of the members of our cross-disciplinary anti-money laundering practice team
for additional assistance. You may also send general inquiries to antimoney@kl.com.
BOSTON
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Michael S. Caccese
D. Lloyd Macdonald
Stanley V. Ragalevsky
617.261.3133
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© 2003 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.