December 9, 2008
On November 5, 2008, the Department of the Treasury, Office of Foreign Assets Control ("OFAC") issued guidance, Opening Securities and Futures Accounts from an OFAC Perspective, to make it clear that guidance or actions by its sister Treasury bureau, the Financial Crimes Enforcement Network ("FinCEN"), under the Bank Secrecy Act ("BSA") do not affect the responsibilities of the securities and futures industry to comply with the economic and trade sanctions administered and enforced by OFAC.
This OFAC issuance follows the announcement by FinCEN on October 30, 2008, that FinCEN was withdrawing proposed rulemakings issued in 2002 and 2003 which would have required anti-money laundering ("AML") programs for unregistered investment companies, investment advisers, and commodity trading advisers. The guidance reminds these persons that they remain subject to the OFAC requirements, even if they are not subject to AML program requirements under the BSA. The OFAC guidance also discusses past FinCEN guidance on the application of the BSA Customer Identification Program ("CIP") requirements to introducing and clearing brokers and the application of CIP and certain BSA due diligence requirements relating to omnibus accounts.
In its guidance, OFAC reinforces that securities and futures firms, such as investment advisers, broker-dealers, futures commission merchants, introducing brokers in commodities, commodity pool operators, and commodity trading advisers, like all U.S. persons, are subject to OFAC requirements and recommends that they establish and maintain effective risk-based OFAC compliance programs. According to OFAC, at account opening, firms should screen the new client’s "identification information" and proposed transactions against the OFAC list of Specially Designated Nationals and Blocked Persons ("SDN List") and applicable OFAC sanctions programs. The SDN List is available from the Department of Treasury website. OFAC adds that periodic OFAC checks on non-accountholders, e.g., "beneficiaries, guarantors, or principals" also may be necessary. OFAC states that a strong OFAC compliance program includes procedures similar to a brokerage firm’s customer identification and risk-based customer due diligence programs required under the BSA.
The OFAC guidance describes how OFAC’s views on compliance with the OFAC requirements with respect to omnibus accounts and introducing/clearing relationships differ from FinCEN’s views on BSA obligations. With respect to omnibus accounts maintained for foreign financial institutions, FinCEN’s position has been that a U.S. broker dealer or futures commission merchant generally does not need to "look through" an omnibus account to perform CIP or due diligence on the underlying accountholders, i.e., the customers of the foreign financial institution or intermediary that maintains the omnibus account. See Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Entities Industry, FIN-2006-G009 (May 10, 2006).
OFAC emphasizes, however, that OFAC requirements apply to all property or interests of a sanctions target within the possession or control of a U.S. person, including shares held in an omnibus account. While OFAC stops short of saying that information must be obtained on all customers whose transactions pass through every omnibus account and their names screened against the SDN List, it states that, in some cases, such as where an omnibus account is opened by a non-U.S. person or in a high risk jurisdiction, "it may be prudent for a firm to obtain beneficial ownership information for certain types of accounts." In addition, based on the risk, OFAC advises that, if a foreign financial institution is seeking to establish a new omnibus account, the foreign financial institution may warrant additional OFAC due diligence, including conducting a risk-based assessment of the foreign financial institution’s business, the markets it serves, and the nature of its customer base.
With respect to introducing and clearing brokers, FinCEN issued guidance earlier this year that provided that when there is an introducing and clearing broker relationship, generally only the introducing broker must comply with the CIP rule with respect to its customers introduced to the clearing broker on a fully disclosed basis. No Action Position Respecting Broker-Dealers Operating Under Fully Disclosed Clearing Agreements According to Certain Functional Allocations, FIN-2008-G002 (March 4, 2008). OFAC reminds introducing and clearing brokers that OFAC generally does not allow reallocation of legal liability to a third party, and that there is strict liability for OFAC violations. In other words, however an introducing broker and a clearing broker allocate OFAC screening responsibilities, both would remain liable for any OFAC violations caused by one broker conducting the OFAC screening (often the clearing broker).
The guidance ends on a somewhat softer note suggesting that, notwithstanding the strict liability nature of the OFAC regulations, the existence of a robust OFAC compliance program with risk-based policies and procedures that properly monitor and mitigate sanction risk is a factor in determining OFAC’s enforcement response to an OFAC apparent violation.
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