June 2003 Susan Galli

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Customer Identification Program Implementing
Section 326 of the USA Patriot Act Union League
Club New York City
June 2003 Susan Galli
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Items of Interest

• Proper Risk Assessment as the Foundation for
  your CIP
• Global Risk Models
• Elements of the Risk-Based Approach
• Factors to Consider
• Developing a Risk Model
• Creating a Scoring Model

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Section 326 Verification of Identification

• Customer Identification Program (CIP)
• Implement Risk-Based Procedures for verifying the
  Identity of each Customer to the extent
  Reasonable and Practicable
• Must have a CIP that enables the Broker-Dealer to
  establish a Reasonable Belief that it knows the
  True Identity of each Customer
• CIP needs to be Written and must be Appropriate
  for the Size of the Broker-Dealer and the Type of
  the Business the Broker-Dealer Conducts
• CIP needs to be Part of the Broker-Dealers AML
  Compliance Program as required under 31 U.S.C.
  5318(h).

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Section 326 Verification of Identification

• Identity verification procedures
• Risk-Based Procedures to verify the Identity of
  each Customer
• CIP Procedures to be based on the Type of
  Identifying Information available and on an
  Assessment of Relevant Risk Factors including
• those presented by the various Types of Accounts
  maintained by the Broker-Dealer
• the various Methods of opening Accounts provided
  by the Broker-Dealer
• the various Types of Identifying Information
  Available and
• the Broker-Dealers Size, Location and Customer
  Base

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Section 326 Verification of Identification

• Additional Verification for Certain Customers
• The CIP must address Situations where, based on
  the Broker-Dealers Risk Assessment of a new
  Account opened by a Customer who is not an
  Individual, the Broker-Dealer will obtain
  Information about Individuals with Authority or
  Control over an Account in order to verify the
  Customers Identity
• This Verification Method applies only when the
  Broker-Dealer cannot verify the Customers True
  Identity using Verification through Documents or
  through Non-Documentary Methods

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Global Risk Models
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Elements of the Risk-Based Approach

• Identifying Vulnerabilities to Money Laundering
  and Terrorist Financing
• Understanding
• Geography and Country Risk
• Business and Entity Risk
• Product and Transaction Risk
• Applying Risk Models to
• Customer Acquisition Due Diligence at Account
  Opening
• Know your Customer, Enhanced Due Diligence
• and the Transaction Monitoring Process

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Factors to Consider

• 
  
• When tailoring Customer Identification/Verificatio
  n Practices and
• Procedures, take into Account the following
• The Different Categories of Customers, including
  whether the Organizations Customers conduct
  Financial Transactions for their own Customers
• The Size of the Customer
• The Types of Accounts maintained by the Customer

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Why Take a Risk-Based Approach?

• Identify as early as Possible Accounts that may
  pose a Heightened Risk of Money Laundering and
  Terrorist Financing so that Additional Due
  Diligence can be Conducted at Account Opening and
  Enhanced Scrutiny can be applied to such Accounts
  on an on-going Basis
• Prioritize Accounts for Periodic Updating of
  Customer Information
• Ensure that Resources are deployed Commensurate
  with Perceived Risks, and to
• Establish a Corporate Baseline to Ensure that
  Money Laundering and Terror Financing Risk are
  given Appropriate Weight and addressed in a
  Consistent Manner across the Organization.

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 When you Know Where your Risks are
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You Know Where to Focus your Resources and
Country Risk
Product Risk
Business Entity Risk
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Obtain the Following Results

• Tailor Customer Acquisition and Due Diligence
  Practices to Specific Countries/Types of Accounts
  where Products will be offered or Customers may
  be Located
• Adjust Early Alert and Transaction Monitoring
  Systems currently in use as Risks change
• Know where to deploy Resources going forward by
  focusing on Transactions or Customers that are
  associated with High Risk Locations, Businesses
  or Behaviors both for on-going Due Diligence
  Purposes as well as Monitoring

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Developing a Risk Model

• Key Considerations
• Objective
• Verifiable
• Previously Published Material
• Where Possible, International Sources

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Creating a Scoring Methodology

• Principal Factors
• Factors that when considered on their own are so
  Significant that they will result in a High Risk
  Score
• Scoring Factors
• Factors that may increase or decrease a Risk
  Score on the Margin
• Are not Prime Determinants of the Risk Score

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Scoring Methodology

• Principal Factors
• Financial Action Task Force (FATF)
  Non-cooperative or Patriot Act Section 311
  Designated Countries
• Drug Source or Transit Country
• High Terror Finance Risk Country
• OECD Tax Problem Country
• INCSR Offshore Banking Location
• Firms Internal Country Risk Management Rating

• Scoring Factors
• INCSR Primary Money Laundering Concern
• INCSR Money Laundering Concern
• INCSR/CIA Factbook Precursor Chemical
• Transparency International Corruption Index
• INCSR Money Laundering Crime Laws/Drug Crime
  Laws
• Heritage Foundation Economic Freedom Index

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Risk Distribution Using Scoring Model
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Risk Distribution by Score
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Understanding Business Entity Risk

• FACTORS TO CONSIDER TO UNDERSTAND BUSINESS ENTITY
  
• RISK
• Specifically on U.S. Regulator List
• Recent Authoritative Advisories
• Derived from Items Listed by Regulators
• Cash Intensive/Placement Risk
• Layering/Integration Risk

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High Risk Businesses

• Non-Bank Financial Entities such as Currency
  Exchange Houses also known as Giros or Casas de
  Cambio, Money Transmitters, Check Cashing
  Facilities
• Banks located in Areas designated as High
  Intensity Drug Trafficking Areas by the U.S.
  Office of National Drug Control Policy (Houston,
  Los Angeles, New York, Miami, Southwest Border,
  Washington/Baltimore, and Puerto Rico/U.S. Virgin
  Islands)
• Casinos/Gaming Establishments/Card Clubs
• Off-Shore Subsidiaries of Corporations and Banks
  located in Tax and/or Secrecy Havens
• Leather Goods Stores
• Car/Boat and Plane Dealerships
• Used Automobile/Truck/Machine Parts Manufacturers
  
• Travel Agencies
• Broker Dealers
• Import/Export and Trading Companies

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High Risk Businesses

• Jewel, Gem and Precious Metal Dealers
• Cash-Intensive Businesses (Restaurants,
  Convenience Stores, Parking Garages, etc.)
• Telemarketers
• Wholesalers and Retailers of Consumer Electronics
  (Particularly in Free Trade Zones)
• Textile Businesses
• Sole Practitioner or (Small, Little-Known Law
  Firms, Accountants or Investment Brokers)
• Art Antique Dealers
• Real Estate Brokers/Agents
  
• Costume Jewelry Exporters
• Pawn Brokers
  
• Auctioneers
• Ship, Bus and Plane Operators
• Charitable Organizations

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High Risk Products and Services

• Any Product which allows a Customer to readily
  convert Cash to a Monetary Instrument.
  
• Any Product or Service which allows a Customer to
  readily move Value from one Jurisdiction to
  Another and which conceals the Source of those
  Funds.
• Ask whether the Products or Services the Client
  is asking for make sense given the Nature of
  their Account or Business.

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Understanding Product Risk

• FACTORS TO CONSIDER
• Evaluated as High-Risk by the Business/Regulators
• Favors Anonymity/involves Third Parties
• Involves Cash or Cash-Based Instruments
• Involves Cross-Border Transactions that may
  involve a High-Risk Geography
• May support high-speed movement of funds/high
  volume

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High Risk Product Lines and Services

• Some Product Lines or Services and Customers that
  
• Pose a Heightened Risk or Concern
• Private Banking or High Net Worth Clients
• NRA Accounts
• PICs and Trusts
• On-Line Brokerage
• Electronic Banking that permits Customers Direct,
  On-Line Access to Transact
• Onshore vs. Offshore Client
• International Correspondent Banking Activity
• Services to Foreign Political Figures or
  Politically Exposed Persons and Related
  Individuals
• Frequent or Excessive Use of Funds Transfers (in
  and out or Frequent Deposit of Bank Drafts under
  Reporting Limits)
• Annuities
• Payable-Through Accounts
• Transactions Involving a Financial Intermediary,
  where the Primary Beneficiary or Counterparty is
  Undisclosed (e.g., Hedge Funds)
• Trade Financing with Unusual (Overvalued or
  Undervalued Pricing/Invoicing)

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• Low Risk
• Low Aggregate Valances (need to consider
  Velocity)
• Low Volume of Activity
• Household Accounts
• Retail/Passbook Savings/Checking accounts
• Accounts for Minors
• Other similar Accounts

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