The Office of Foreign Assets Control published new guidance specific to the securities industry on 11/06/2008: Opening Securities and Futures Accounts from an OFAC Perspective.
A strong OFAC compliance program consists of procedures that are similar to those found in a brokerage firm’s Customer Identification Program (“CIP”). Firms should use risk-based measures for verifying the identity of each new customer who opens an account. In establishing procedures, firms should identify and consider their size (e.g., total assets under management), their location, their customer base, the types of accounts they maintain, the methods by which accounts can be opened (e.g., in person or non face-to-face), and the types of identifying information available for each customer. Firms should also assess risks posed by each customer and transaction, asking questions such as:
- Is the customer regulated by a Federal functional regulator, widely known, or listed on an exchange?
- Has the firm had any previous experience with the customer or does it have prior knowledge about the customer?
- Is the firm facilitating a U.S. person’s investment in a foreign issuer or other company that conducts business in a sanctioned country?
- 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?
- 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?
Prior to entering into a business relationship with a client, you should screen the new client’s identification information, as well as the customer’s proposed transaction(s), against OFAC’s Specially Designated Nationals and Blocked Persons list (“SDN list”) [which is available at
http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx], and applicable OFAC sanctions programs.
The paper highlights a few key differences between OFAC compliance and CIP requirements. OFAC requires you to look deeper into the beneficial ownership of a client. CIP is limited to the “person that opens a new account.”
The other key difference is that OFAC does not permit you to reallocate your legal liability to a third party such as an introducing firm. OFAC takes the position that you can still be “held liable for any OFAC violations that occur due to the third parties’ negligence.”