Money Laundering, Terrorism and Financial Institutions - USA Patriot Act Monitor

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7/08/2008 Allocation of Responsibilities Between Introducing and Clearing Brokers Permitted, But Domestic or Foreign Status of Introducing Broker Must Be Taken Into Account

When a clearing broker has customers introduced to it by an introducing firm, it can avoid customer identification program (CIP) responsibilities as to the introduced clients if the functions of opening and approving customer accounts and directly receiving and accepting orders from the introduced customer are allocated exclusively to the introducing firm. In recent guidance, FinCEN stated that it will take no action against such a clearing firm for not complying with the CIP rule as to such a customer. In a piggybacking arrangement, where one introducing firm introduces a customer to another introducing because the latter has a relationship with a clearing broker, the first introducing firm is said to be “piggybacking” on the second, and FinCEN also states that it will take no action against the second introducing firm under the CIP rules. If an introducing firm is, however, a foreign financial institution, FinCEN has, in separate guidance, determined that the relationship between the foreign introducing firm and the domestic clearing firm was a correspondent account relationship, The guidance applied to a “fully disclosed clearing relationship,” where FinCEN found that although the clearing firm did not have to obligate the foreign introducing firm to comply with the provisions of the CIP rules, the clearing firm must monitor transactions conducted for introduced customers “incorporating, among other information, any information the clearing firm acquires about the customers introduced by the foreign introducing firm in the ordinary course of business.” Thus, the domestic clearing firm will have to consider what information it will require from the foreign introducing firm in order to adequately monitor transactions. These two releases will be discussed in the September issue of the Monitor.

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