Have you updated your AML Program to comply with the FinCEN changes going into effect on May 11, 2018? Most Futures Commission Merchants (“FCMs”) have implemented changes to their Anti-Money Laundering Programs (“AML Programs”) in accordance with the Financial Crimes Enforcement Network’s (FinCEN) final rules issued on July 11, 2016. These FinCEN final rules must be incorporated into all FCM and Introducing Broker (“IB”) AML Programs by May 11, 2018. Introducing Brokers will need to fulfill this obligation within their own AML Programs even if they rely on their FCMs for certain aspects of the program. Specifically, these firms will need to alter two main components of their customer due diligence requirements: the identification of beneficial owners of legal entity customers and ongoing risk-based customer due diligence. However, in addressing these two main components, FCMs and IBs may need to amend other portions of their AML Program.
All AML Programs should already address the identification and verification of customers. The first significant change to the FinCEN final rules expands on which customers need to be identified. Prior to the change, firms were only required to identify and verify the identities of the account controllers for legal entity clients. Under the new rule, all beneficial owners of new legal entity customers must be identified. Beneficial owners are those who 1) own, directly or indirectly, twenty-five percent or more of the legal entity customer’s equity interest and 2) have significant authority to control, manage, or direct the legal entity customer. FinCEN does exempt certain legal entity customers from these requirements, including certain entities registered with the CFTC or SEC.
FinCEN has provided a two options as to how firms may identify and verify beneficial owners. One option is to use a standard certification form. The second is that firms may obtain the identities by any means they deem necessary which comply with the substantive requirements. Turnkey Trading Partners has extensive experience in writing, amending, and auditing AML Programs and includes this requirement in such written programs. Turnkey views the identification of beneficial owners in much the same manner as firms identify individual account holders, albeit updated with a risk-based approach. A firm’s Customer Identification Program, when adjusted appropriately to apply to beneficial owners and account controllers, is both standardized and allows for firms to use any other methods they think necessary.
The second significant change to the FinCEN final rules is the explicit requirement of a risk-based ongoing Customer Due Diligence Program (CDDP) within a firm’s AML Program. At a minimum, the CDDP must address the development of a customer risk profile and conduct ongoing monitoring on a risk basis. When developing a customer risk profile, it must “understand the nature and purpose of customer relationships”. This risk profile can then be used as a baseline to assess the type of monitoring that must be done on that profile and what would be considered suspicious activity by that particular person. In doing so, this rule allows for a more personalized approach to monitoring accounts as what may be suspicious for one customer, may be standard practice for another. Likewise, as accounts grow and change, so can their monitoring requirements.
So what does this mean to you? While some FCMs and IBs may have many of the final rule requirements in their existing AML Programs, all firms must make the new customer due diligence requirements explicit in their programs. If you haven’t already done so, you will need to update your current written program. Some firms may prefer the approach of a complete change to their AML Program to better focus on customer risk profiles. Turnkey has worked with many firms to seamlessly implement these new requirements into the firm’s current operations by customizing practices to meet the obligations while causing the least disruption. We find that the beneficial owners and controllers requirement integrates well with a current, quality CIP. The methodology may vary from one firm to another, and we discuss best practices with our IB clients. At Turnkey, we've found that the most challenging aspect of the AML changes for IBs tends to be implementing risk-based CDDP on an ongoing basis. They need a practical risk assessment that fits their client base, and guidance in regards to initial and ongoing documentation which many IBs are unsure how to address. Whatever your firm decides as the best approach to applying these mandated changes, the updated AML Program will need to be implemented and prior to May 11, 2018.
Charlene Osmanski is a senior consultant with the compliance group of Turnkey Trading Partners, an award winning firm specializing in supporting CFTC registrants’ operational, compliance, and accounting needs. Charlene is a member of the State of Illinois Bar, and holds a Juris Doctor from Chicago-Kent College of Law. Charlene can be reached via email at charlene@turnkeytradingpartners.com.
