The NIBA conference held in Chicago last month offered a wide variety of informational sessions applicable to Introducing Brokers’ business. My compliments to Melinda Schramm and the NIBA board for assembling a conference schedule that covered topics of importance to the IB community, many of which were very timely, and provided an essential understanding of certain issues that currently impact IB business.
I participated on the panel discussion on Anti-Money Laundering (“AML”) with attorney Neal Stevens, who provided a comprehensive overview of AML requirements, and NFA Associate Director, Valerie O’Malley, who discussed common deficiencies found in NFA reviews and their consequences. My focus was on the operational aspects of effective AML procedures and relevant practices.
The AML Policies an Introducing Broker must maintain pursuant to regulation should not only address the required points, but should be specific to the actual practices of the IB. In a regulatory examination, a firm’s policies and procedures, including AML, are examined to ensure they contain compulsory elements. The procedures are tested to ensure a firm’s current practices conform to written procedures.
This latter part of the examination is the reason that generic procedures are not usually adequate. While AML procedures are the most standard of the various policies and procedures required of an IB, they must still reflect the operations of the firm. All of the policies and procedures that we write for clients are tailored specifically to the firm’s actual practices and updated periodically to encompass changes in regulations or firm operations.
During the AML panel discussion, I was asked what the most important component of an AML program was for an Introducing Broker. In my opinion, the “know your customer” processes of the AML program are the most significant aspect for an IB. The broker is the one with the relationship with the customer, so is better positioned to know whether transactions are unusual or suspicious. Cash activity that may be unusual for one customer may be common practice for another. Communication with customers provides context for unusual transactions. Customer interaction, or the absence of it, may provide the broker insight as to whether atypical activity has a valid purpose or is suspicious.
Strong “know your customer” rules and practices have benefits to an IB beyond AML compliance. I think that it is more likely for an IB to have a customer committing fraud via an unregistered commodity pool than an IB to have a customer that is a terrorist or drug dealer. Customer identification procedures for entity clients, and Bylaw 1101 adherence procedures can help detect such fraud. Training staff to be perceptive is wise, and ongoing diligence is necessary. There are occasions when a customer may make a statement that contradicts information previously provided. Likewise, a customer may make a large deposit into his account that doesn’t correlate with the financial information provided at account opening. Sound “know your customer” practices may detect fraud and benefit the Introducing Broker by avoiding being named in a fraud related action.
If you have any questions regarding your AML obligations or other policy and procedure requirements, please feel free to contact me directly via my email address susan@turnkeytradingpartners.com. Turnkey Trading Partners ("TTP") offers a wide range of consulting solutions to CFTC registered, NFA member firms of all types. We provide a focus on operational support for IBs and would welcome the opportunity to learn more about your business.
Susan Osmanski has been actively involved in the commodity futures industry for the last twenty-five years, primarily as a compliance consultant. She has worked also with exchanges and regulatory bodies in developing materials and reporting systems. Mrs. Osmanski serves on the Advisory Board of the Commodity Customer Coalition (“CCC”), a non-profit organization that was formed to advocate on behalf of commodity customers and brokers following the MF Global collapse.
