OFAC Issues Guidance to Securities and Futures Firms Concerning Account Opening, OFAC Requirements Are Applicable to Everyone
The Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions against targeted foreign countries and designated persons. OFAC issued guidance dated November 5, 2008, to assist securities and futures firms in fulfilling their OFAC obligations when accepting new clients and evaluating client transactions. OFAC’s guidance applies to investment advisers (IAs), securities broker-dealers (BDs), futures commission merchants (FCMs), introducing brokers in commodity interests, commodity pool operators (CPOs) and commodity trading advisors (CTAs). OFAC’s guidance is important in three areas:
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Although another arm of the Treasury Department, the Financial Crimes Enforcement Network (FinCEN), recently withdrew as outdated proposals published in 2002 and 2003 that would have required IAs, CPOs, CTAs and hedge funds to establish anti-money laundering (AML) programs under the Bank Secrecy Act (BSA), OFAC’s guidance notes that all U.S. persons, including securities and futures firms, are subject to the requirements of OFAC.
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OFAC, unlike FinCEN’s approach under the BSA, requires that a BD or an FCM look through the intermediary to the underlying beneficial owners of an omnibus account for purposes of complying with OFAC requirements.
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Although FinCEN permits clearing firms and introducing or executing firms to rely upon each other for performing certain AML functions, OFAC’s guidance states that it does not permit businesses to reallocate their legal liability to a third party with regard to statutes that OFAC administers – thus, if a securities or futures firm delegates OFAC compliance functions to others, the securities or futures firm, as well as the third party, could be held liable for any OFAC violations caused by the third party’s negligence.
OFAC’s guidance, which was issued almost immediately after FinCEN withdrew its outdated AML proposals, appears designed to remind all financial intermediaries of their obligations under OFAC, which is certainly a less well-known regulatory program compared to the AML programs administered by FinCEN. The OFAC guidance also makes clear that OFAC has less concern than FinCEN about duplicative regulation, and OFAC, unlike FinCEN, does not accept the concept that different intermediaries perform certain roles in financial market transactions that should permit delegation of responsibility. Despite OFAC’s statement that “[a] strong OFAC compliance program [will be] similar to . . . a brokerage firm’s Customer Identification Program,” in fact OFAC expects more of BDs and FCMs where omnibus accounts and certain other intermediaries are involved than does FinCEN.
OFAC Account Opening Requirements
A new customer’s identity should be verified before an account is opened or within a reasonable time period after account opening. Securities and futures firms should screen the new customer against OFAC’s Specially Designated Nationals and Blocked Persons list, known as the SDN list and accessible at www.treas.gov/offices/enforcement/ofac/sdn/index.shtml, and applicable OFAC sanctions programs. OFAC advises that firms should use risk-based factors to assess risks posed by each customer and transaction, asking questions such as:
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Is the customer regulated by a federal functional regulator, widely known, or listed on an exchange?
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Has the firm had any previous experience with the customer or does it have prior knowledge about the customer?
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Is the firm facilitating a U.S. person’s investment in a foreign issuer or other company that conducts business in a sanctioned country?
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Is the customer located in a high-risk foreign jurisdiction that is considered to be poorly regulated or in a known offshore banking or secrecy haven?
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Is the customer located or does it maintain accounts in countries where local privacy laws, regulations, or provisions prevent or limit the collection of client identification or beneficial ownership information?
Periodic checks of “non-accountholders,” such as beneficiaries, guarantors or principals, may also be necessary, depending upon each firm’s specific risk profile.
Documenting OFAC Compliance
Securities and futures firms should maintain adequate documentation of the results of their screening against the SDN list and applicable OFAC sanctions programs. In the event of a potential OFAC violation, both the adequacy of a company’s transaction processing system and its overall OFAC compliance program are taken into consideration when determining the severity of possible enforcement action.
FinCEN Withdrawal of Proposed AML Rules for IAs, CPOs, CTAs and Hedge Funds
As noted above, in late October FinCEN withdrew rules proposed over five years ago that would have required IAs, CPOs, CTAs and hedge funds to adopt AML programs. In issuing these withdrawal notices, FinCEN noted that it would not adopt such rules in the future without providing interested parties an additional opportunity to comment upon proposals. FinCEN’s withdrawal appears to be based on the principle that AML programs for IAs, CPOs, CTAs and hedge funds are not necessary because their customer accounts are carried by and their transactions are executed through other financial institutions, BDs and FCMs that do have AML programs. FinCEN noted that it has concluded major rulemakings concerning BSA compliance by BDs and FCMs since it proposed the now-withdrawn proposals related to IAs, CPOs, CTAs and hedge funds that have confirmed the adequacy of their AML protections. OFAC’s guidance also focuses more upon the responsibility of BDs and FCMs and does not permit those entities to avoid liability under OFAC programs by pointing to introducing firms or firms engaged only in the transaction-execution process.
