Customer Identification Program (CIP)

16.2.2 Customer Identification Program (CIP)

The Customer Identification Program (CIP) is a critical component of the financial industry’s efforts to prevent money laundering and terrorist financing. Mandated by the USA PATRIOT Act, the CIP requires financial institutions, including securities firms, to implement procedures to verify the identity of individuals opening accounts. This section will provide a comprehensive overview of the CIP requirements, including identity verification, record maintenance, and the process of checking names against terrorist lists. We will also explore practical examples and scenarios to illustrate these concepts.

Understanding the USA PATRIOT Act

The USA PATRIOT Act, an acronym for “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,” was enacted in response to the September 11, 2001, terrorist attacks. This legislation aims to enhance the ability of U.S. law enforcement to combat terrorism and other financial crimes. A key provision of the Act is the requirement for financial institutions to establish a Customer Identification Program.

The Purpose of the Customer Identification Program

The primary objective of the CIP is to ensure that financial institutions know who their customers are and can verify their identities. This is crucial in preventing criminals from using the financial system for illicit purposes, such as money laundering or financing terrorism. By verifying customer identities, financial institutions can better detect and report suspicious activities.

Key Requirements of the CIP

The CIP requirements are designed to provide a framework for financial institutions to identify and verify their customers effectively. The main components include:

1. Identity Verification

Financial institutions must verify the identity of any person seeking to open an account. This involves obtaining certain identifying information and verifying that information through reliable means.

• Required Information:

  • Name
  • Date of birth (for individuals)
  • Address (residential or business)
  • Identification number (such as a Social Security Number for U.S. citizens or a taxpayer identification number for non-U.S. citizens)

• Verification Methods:

  • Documentary Verification: This involves reviewing government-issued identification documents, such as a driver’s license, passport, or military ID. The document must be current and contain a photograph or similar safeguard.
  • Non-Documentary Verification: This may include contacting the customer, checking references with other financial institutions, or using credit reports.

2. Record Maintenance

Financial institutions are required to maintain records of the information used to verify a customer’s identity. These records must be retained for a minimum of five years after the account is closed. The records should include:

• A description of the documents used to verify identity.
• The methods and results of any non-documentary verification.
• The resolution of any discrepancies in the identifying information.

3. Checking Against Terrorist Lists

Financial institutions must check the names of new customers against government-provided lists of known or suspected terrorists. This ensures that individuals associated with terrorism are not able to access the financial system.

• OFAC List: The Office of Foreign Assets Control (OFAC) maintains a list of individuals and entities subject to economic and trade sanctions. Checking against this list is a critical component of the CIP.
• Other Government Lists: Additional lists may be provided by the Department of Homeland Security or other government agencies.

Practical Examples of Acceptable Identification

To comply with the CIP, financial institutions must be familiar with acceptable forms of identification. Here are some examples:

• U.S. Citizens:

  • Driver’s License: Issued by a state, this document is commonly used for identity verification. It must be current and include a photograph.
  • Passport: A U.S. passport is a reliable form of identification, providing both a photograph and a unique identification number.
  • Military ID: This is another acceptable form of identification, particularly for active-duty military personnel.

• Non-U.S. Citizens:

  • Foreign Passport: A foreign passport can be used to verify identity, provided it is current and includes a photograph.
  • Alien Registration Card: Also known as a “green card,” this document is issued by the U.S. Citizenship and Immigration Services and serves as proof of lawful permanent residency.

Case Study: Implementing CIP in a Securities Firm

Let’s consider a scenario where a securities firm is implementing its Customer Identification Program. The firm has developed a comprehensive policy that includes both documentary and non-documentary methods of verification.

Scenario:

• New Account Opening: A prospective customer, John Doe, wishes to open a brokerage account. John provides his driver’s license and Social Security Number as identification.
• Verification Process: The firm’s compliance officer reviews the driver’s license to ensure it is current and matches the information provided. The officer also uses a credit report to verify John’s address and identity.
• Record Keeping: The compliance officer documents the verification process, noting the driver’s license number and the results of the credit report check. This information is stored securely in the firm’s records.
• Terrorist List Check: Before finalizing the account opening, the firm checks John’s name against the OFAC list and other relevant government lists. No matches are found, and the account is approved.

Best Practices for CIP Compliance

To ensure compliance with the CIP requirements, financial institutions should adopt the following best practices:

• Regular Training: Employees should receive regular training on CIP procedures and updates to relevant laws and regulations.
• Robust Record-Keeping: Maintain detailed records of the verification process and ensure they are easily accessible for audits.
• Technology Utilization: Use technology solutions to automate the verification process and cross-check customer information against government lists.
• Periodic Reviews: Conduct periodic reviews of the CIP to identify areas for improvement and ensure ongoing compliance.

Common Pitfalls and Challenges

Despite the clear guidelines, financial institutions may encounter challenges in implementing the CIP:

• Inconsistent Documentation: Customers may provide incomplete or inconsistent documentation, complicating the verification process. Firms should have procedures in place to resolve discrepancies.
• Evolving Threats: The landscape of financial crimes is constantly evolving, requiring firms to stay updated on new threats and adjust their CIP accordingly.
• Balancing Customer Experience: While compliance is critical, firms must also ensure that the CIP process does not unduly burden customers or deter them from opening accounts.

Regulatory Oversight and Enforcement

Regulatory agencies, such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), oversee compliance with CIP requirements. These agencies conduct examinations and audits to ensure that financial institutions are adhering to the law.

• Examinations: Regulators may conduct routine examinations to assess a firm’s compliance with CIP requirements. This includes reviewing policies, procedures, and records.
• Penalties: Non-compliance with CIP requirements can result in significant penalties, including fines and sanctions. Firms must take compliance seriously to avoid these consequences.

Conclusion

The Customer Identification Program is a vital tool in the fight against money laundering and terrorist financing. By understanding and implementing the CIP requirements, financial institutions can protect themselves and the financial system from illicit activities. As a securities professional, mastering the CIP is essential for ensuring compliance and maintaining the integrity of the financial markets.

Additional Resources

For further study and resources on the Customer Identification Program and related regulations, consider exploring the following:

• USA PATRIOT Act Text: Review the full text of the USA PATRIOT Act to understand its provisions and implications.
• OFAC Website: Visit the Office of Foreign Assets Control website for the latest updates on sanctions and lists.
• FINRA CIP Guidance: Access FINRA’s guidance on implementing effective CIP procedures.
• SEC Compliance Resources: Utilize the SEC’s resources for compliance with anti-money laundering regulations.

Series 7 Exam Practice Questions: Customer Identification Program (CIP)