Most introducing brokers (“IBs”) view their Anti-Money Laundering (“AML”) obligations quite minimally but this can be a monumental mistake. Generally IBs believe their AML responsibilities are limited to ensuring a compliance manual is on file and that annual AML training has been completed by necessary employees. This belief is typically the result of customer accounts being held and funded through a Futures Commission Merchant (“FCM”). Since client accounts are processed at an FCM, IBs take direction from the clearing firm regarding their Customer Identification Program (“CIP”). While this may make sense in some instances introducing brokers tend to rely on FCM’s to such an extent that they largely abdicate their AML responsibilities.
AML Policy Obligations
The aforementioned practice is potentially detrimental to the IB, the FCM, and the overall AML process itself. There are three primary components of Anti-Money Laundering procedures; prevention, detection, and reporting. Prevention is largely addressed through diligent application of an effective CIP. Reporting of suspicious activity is usually coordinated through the FCM. Detection however can be directly attributable to the “know your customer” (“KYC”) aspect of daily IB operations, including the ongoing review of cash activity in customer accounts. It is this component of the AML process in which the IB has an essential role. The reason? The introducing associated person (“AP”) likely has the closest relationship with the customer, not the FCM. It goes without saying the AP of record on the account, through conversations and correspondence, should be in the best position to note irregularities in information provided by a customer or unusual transactions. Due to this fact it is incumbent upon the IB and it’s APs to be familiar with a customer’s account opening documents so that any discrepancies in the future can be identified.
Familiarity With FCM Processes
Since the documents required to satisfy CIP may vary from FCM to FCM it is important that IBs be familiar with the CIP requirements for each FCM with whom they do business. The goal of an IB is to get an account opened in a timely and efficient manner, with little inconvenience to the customer. In order to accomplish this, AP’s should communicate the requirements to the customer and attempt to have all CIP documentation required by the FCM in order prior to submitting the account. This practice helps an IB to serve its customers well and speeds the account opening process. Being knowledgeable about an FCM’s CIP documentation allows and AP to avoid aggravating the customer by repeatedly requesting additional documentation. This is particularly applicable for those accounts that are companies, partnerships or for non-US individuals and entities.
AML Responsibility Issues
Once account opening documentation is collected, typically, introducing brokers rely on their FCM’s to complete the CIP processes. This often includes an FCM running credit reports, internet searches, and checking the customer’s name the Specially Designated Nationals (“SDN”) list with the Office of Foreign Asset Control (“OFAC”). It should be noted however that IBs must also run their customer lists against OFAC and other government lists as well. The only exception to this obligation comes if the IB has a written agreement in place with their FCM that states the FCM is performing these functions on their behalf. An executed “reliance agreement” must be on file for every FCM with whom the IB does business. The absence of executed reliance agreements is a common deficiency in audits and can lead to significant regulatory problems.
Record Keeping
Introducing brokers have recordkeeping requirements related to AML that also cannot be assumed by FCM’s. More specifically IBs should retain copies of all CIP documents sent to the FCM. These documents may not always be available on an FCM’s account form portal that IBs have access to. Similarly if an FCM has provided an AML reliance agreement each year that IB is required to obtain the FCM’s annual certifications regarding the effectiveness of its AML program, these records must also be kept on file. For Guaranteed IBs (“GIBs”) a copy of their guarantor’s most recent AML procedures must be obtained and kept on site.
Annual Audit
Just like FCM’s, IBs are required to conduct an independent audit of their AML practices on a twelve month (not annual) basis. When considering how to meet this obligation it is incredibly important for IBs to hire a qualified firm to conduct the review. A qualified firm will be abreast of changes in AML rules and regulations. They also will be familiar with regulatory auditing and industry best practices whereas internal staff or unqualified persons may not. An AML audit consist of more than a simple review of procedures and checking that AML training is current. A good auditor will inquire about firm operations and ongoing implementation of AML procedures. They will also evaluate ongoing practices and sample client accounts to try and determine if any irregularities may exist at the IB. Beyond this it is more desirable to have them note deficiencies before a regulatory body may do so. Even worse than this, would be for your regulator to determine that your audit was not conducted by a competent individual capable of such a review.
Effective AML Practices
Effective AML practices, particularly related to the “know your customer” aspect can be beneficial to the IB from both a regulatory and liability perspective. Familiarity with the documentation of corporate and partnership clients as well as paying close attention to their cash transactions is especially important. While an IB is not necessarily in the position to detect fraud, there are occasions when statements made by a customer or certain cash transactions may not fit with the information provided in the customer’s account opening documents; this should raise a red flag! It’s simply not good enough to rely on the FCM when simple ongoing diligence may detect fraud and protect an IB from being named in a fraud related regulatory or legal action.
About the Author
Susan Osmanski has been actively involved in the commodity futures industry for the last twenty-five years. She began her career working in fund management and was responsible for the administration of eighteen affiliated public and private commodity funds. In 1993 Osmanski used her extensive fund experience to enter private consulting for CFTC and NFA member firms. Recently Mrs. Osmanski was asked to serve on the Advisory Board for the Commodity Customer Coalition (“CCC”). With Osmanski’s assistance the CCC has been able to help thousands of every day commodity customers recover from the MF Global collapse, and is still advocating on behalf of Peregrine Financial Group (“PFG”) customers. She has authored a number of articles for industry publications, participated as a speaker at numerous conferences, and has sat on a variety of panels. Presently Mrs. Osmanski consults for Turnkey Trading Partners and can be reached by email via info@turnkeytradingpartners.com with any questions you may have.
