by Larry Schneider, Exchange Analytics, Inc. (www.xanalytics.com)
(this article originally appeared at www.kyc360.com on June 4, 2013)
Regulatory Background and Industry Structure
In 2001 the USA Patriot Act was signed into law, which, among other things, imposed new regulations aimed at detecting and deterring money laundering and the financing of terrorism. The USA Patriot Act requires that all entities defined as financial institutions under the Bank Secrecy Act, establish written AML programs. This includes institutions regulated by the Commodity Futures Trading Commission (CFTC), such as brokerage firms which offer trading in commodity futures contracts.
The CFTC is the federal regulatory agency with jurisdiction over futures trading. The legislation that created the CFTC also allowed the U.S. futures industry to create a nationwide self-regulatory organization (SRO), and as result the National Futures Association (NFA) was created. The NFA is therefore the independent regulatory organization for the U.S. futures industry. Membership in the NFA is mandatory, which assures that everyone conducting business with the public on the U.S. futures exchanges adheres to high standards of professional conduct. At present, there are more than 4,200 firms and 55,000 individuals registered with the NFA.
While the NFA has about a dozen different types of registration categories, an AML program is required for the category of registrants commonly known as commodity futures brokerage firms. From a regulatory standpoint, these firms are registered with the NFA as either a Futures Commission Merchant (FCM) or Introducing Broker (IB). Since April, 2002, all NFA member firm FCMs and IBs have been required to have an AML program in place.
The AML Requirements
AML requirements for FCMs and IBs are required specifically by NFA Rule 2-9(c), which states:
Each FCM and IB Member shall develop and implement a written anti-money laundering program approved in writing by senior management reasonably designed to achieve and monitor the Member’s compliance with the applicable requirements of the Bank Secrecy Act (31 U.S.C. 5311, et. seq.), and the implementing regulations promulgated thereunder by the Department of the Treasury and, as applicable, the Commodity Futures Trading Commission. (1)
NFA Rule 2-9(c) requires an AML program include:
· Putting in place policies, procedures, and internal controls to meet compliance with the applicable provisions of the Bank Secrecy Act. This must include a written Customer Identification Program (CIP).
· Independent testing for AML compliance.
· A designated AML compliance officer, whose duties include implementing and monitoring the AML program established by the FCM or IB.
· Ongoing training for appropriate personnel.
· Adherence to all FinCEN regulations requiring Suspicious Activity Report (SAR) filings, Cash Transaction Report (CTR) filings and Special Information Sharing Procedures (known as Sections 314 (a) and (b) of the USA Patriot Act, is also a requirement.
In this brief article, let’s expand just a little on the CIP and independent testing.
CIP means that an FCM and IB knows who it is doing business with. At a minimum this incorporates obtaining and verifying, customer identification information and maintaining customer identification records. Additional verification is also required for “Politically Exposed Persons.” High-Risk accounts must also be a part of the CIP. While each firm must make its own determination as to what qualifies as “high risk,” certainly the CIP should include checking to see if a customer appears on the OFAC’s list of Specially Designated Nationals and Blocked Persons.
Independent Testing (and how the Futures Industry differs from the Securities Industry)
While AML requirements for the Futures Industry are almost identical with the Securities Industry, the chief difference pertains to the Independent Testing requirement. Both industries require that an individual or group of people who are independent from the compliance department and general flow of money should be chosen to evaluate whether the AML program complies with applicable rules, regulations and functions as it was designed. This evaluative audit can also be conducted by a qualified third-party. Both industries require that the firm’s AML program be tested “annually”.
The way the different Self-Regulatory Organizations view the term “annually” is significantly different, however. The Securities Industry’s chief Self-Regulatory Organization is the Financial Industry Regulatory Association (FINRA), which views “annually” to mean on a calendar year basis. The NFA, on the other hand, views “annually” to mean at least every 12 months, with the exception of FCMs and IBs whose sole business is proprietary trading and are permitted to have their audit conducted every two years. All NFA-member firms, however, “are required to test the adequacy of their AML program more frequently than the minimum requirements if circumstances warrant. ” (2)
1. National Futures Association manual; http://www.nfa.futures.org/nfamanual/NFAManual.aspx
2. NFA Interpretive Notice 9045
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