- FinCEN Issues Administrative Ruling Regarding Obligations of U.S. Clearing Brokers and Foreign Introducing Firms
- July 11, 2008 | Authors: W. Hardy Callcott; Roger P. Joseph; Neal E. Sullivan
- Law Firms: Bingham McCutchen LLP - San Francisco Office; Bingham McCutchen LLP - Boston Office; Bingham McCutchen LLP - Washington Office; Bingham McCutchen LLP - Boston Office
On June 3, 2008, the Financial Crimes Enforcement Network (“FinCEN”) issued an administrative ruling (“Ruling”) regarding the Bank Secrecy Act (“BSA”) obligations of a U.S. clearing broker establishing a fully disclosed clearing arrangement with a foreign financial institution.1 In the Ruling, FinCEN clarified that:
- A fully-disclosed clearing agreement between a U.S. clearing firm and a foreign introducing firm is a “correspondent account” for purposes of regulations under section 312 of the USA PATRIOT Act (“Correspondent Account Rule”);
- A U.S. clearing firm is not required to view the fully disclosed accounts of foreign introducing firms as its own accounts for compliance with the customer identification program rules under section 326 of the USA PATRIOT Act (“CIP Rule”); and
- A U.S. clearing firm is not required to obligate a foreign introducing firm to comply with the CIP Rule, the Correspondent Account Rule or other U.S. anti-money laundering regulations with respect to accounts introduced on a fully disclosed basis.
FinCEN issued the Ruling in response to a foreign introducing firm’s request for guidance on its obligations with respect to a fully disclosed clearing arrangement with a U.S. clearing firm. Specifically, the foreign introducing firm sought guidance on whether it was required, with respect to customers it introduced to the U.S. clearing firm, to “implement customer identification and verification procedures and conduct other due diligence as it if were operating as a broker-dealer in the United States.”2
In addition to addressing the specific request for guidance, FinCEN clarified the application of the Correspondent Account Rule and CIP Rule to a fully disclosed clearing arrangement between a U.S. clearing firm and a foreign introducing firm. FinCEN noted that a U.S. clearing firm is obligated under the Correspondent Account Rule, to “establish a due diligence program . . . reasonably designed to . . . detect and report, on an ongoing basis, any known or suspected money laundering conducted through or involving any correspondent account established, maintained, administered, or managed . . . for a foreign financial institution.”3 It then noted that the existence of a “correspondent account” with a foreign financial institution under the Correspondent Account Rule depends on “whether the clearing firm has established a ‘formal relationship’ with the foreign financial institution.”4
FinCEN restated its prior guidance that the relationship between a clearing broker and customers introduced to the broker by an introducing firm, pursuant to a fully disclosed clearing agreement, is not a “formal relationship” for purposes of the correspondent account rule.5 However, it further noted that it does consider the relationship between a clearing firm and a foreign introducing firm to be a “formal relationship,” and as a result, a “correspondent account,” “thus obligating the clearing firm to conduct due diligence on the foreign introducing firm itself.”6
In addition, FinCEN noted that it considers the relationship between a clearing firm and a foreign introducing firm to be an “account” for purposes of the CIP Rule. As a result, the U.S. clearing firm must verify the identity of the foreign introducing firm under the CIP Rule, but is not required to view the fully disclosed accounts of the foreign introducing firm as its own for these purposes.
Finally, FinCEN clarified that while a clearing firm is not obligated to look through the introducing firm in a fully disclosed clearing relationship and perform due diligence on the underlying clients, it is similarly not required to “obligate a foreign introducing firm to comply with the provisions of the CIP rule, the correspondent account rule or any other U.S. anti-money-laundering regulations” with respect to any accounts introduced on a fully disclosed basis to the clearing firm.7 FinCEN indicated that because the majority of foreign introducing firms are already subject to anti-money laundering regulations in their own jurisdictions, a U.S. clearing firm is expected to consider these regulatory regimes when evaluating the money laundering risk of a particular foreign introducing firm. FinCEN emphasized that with respect to its correspondent accounts, a clearing firm must rely on “risk-based policies, procedures, and controls . . . designed to detect and report known or suspected money laundering activity.”8 In this regard, the clearing firm should monitor transactions of customers introduced by the foreign introducing firm and incorporate any information it receives regarding the customers in “the ordinary course of its business.”9
1 See Bank Secrecy Act Obligations of U.S. Clearing Broker-Dealer Establishing a Fully Disclosed Clearing Relationship with a Foreign Financial Institution, Financial Crimes Enforcement Network Administrative Ruling FIN-2008-R008 (June 3, 2008).
3 See 31 C.F.R. 103.176(a) (2006).
4 Supra note 1.
5 See http://www.bingham.com/Media.aspx?MediaID=6649
6 Supra note 1.