A registered representative at a FINRA member firm is opening a corporate brokerage accoun… — FINRA SIE (Securities Industry Essentials)

A registered representative at a FINRA member firm is opening a corporate brokerage account for a foreign legal entity. Under FinCEN's Customer Due Diligence (CDD) rule and Customer Identification Program (CIP) requirements, the firm requests identifying information for all beneficial owners who hold a 25% or greater equity interest in the entity. The corporate officer refuses to provide the required identification documents or government identification numbers for these beneficial owners, claiming foreign privacy protection. Additionally, the representative identifies red flags indicating that the proposed account activity is designed to hide illicit funds totaling $75,000. What is the broker-dealer required to do under federal Anti-Money Laundering (AML) regulations and CIP rules?

Refuse to open the account (or restrict activity if opened) due to CIP/CDD non-compliance, and file a Suspicious Activity Report (SAR) with FinCEN within 30 calendar days.Answer
B
Open the account on a conditional 30-day trial basis and file a Currency Transaction Report (CTR) with FinCEN within 15 calendar days.
C
Open the account while placing a temporary hold on all wire transfers, and submit an audit referral notice directly to the Internal Revenue Service (IRS).
D
Bypass the beneficial ownership verification provided the foreign owners sign an opt-out privacy disclosure under Regulation S-P.

Answer

The broker-dealer must refuse to open the account (or restrict account activity if opened) due to failure to meet mandatory Customer Identification Program (CIP) and Customer Due Diligence (CDD) requirements, and must file a Suspicious Activity Report (SAR) with FinCEN within 30 calendar days because the suspicious activity involves at least $5,000.

The correct response reflects the dual obligations under federal AML regulations when onboarding legal entities: broker-dealers must comply with FinCEN's CDD rule by identifying beneficial owners (25%+ equity threshold). If a customer refuses to supply CIP/CDD verification details, the firm must refuse to open the account (or freeze/restrict it). Furthermore, when red flags suggest suspicious activity involving $5,000 or more, the firm must file a Suspicious Activity Report (SAR) with FinCEN within 30 calendar days.

Step-by-Step Solution

Evaluate Customer Identification Program (CIP) and Customer Due Diligence (CDD) obligations.

FinCEN's CDD rule mandates that broker-dealers identify and verify the identity of beneficial owners holding 25% or more equity interest in a legal entity customer. Failure or refusal by the customer to provide this information requires the firm to refuse opening the account or restrict trading activity.

Firms cannot waive CIP/CDD beneficial ownership verification requirements regardless of foreign privacy claims.

Determine the appropriate Anti-Money Laundering (AML) reporting requirement for suspicious activity.

Because the representative identifies red flags of illicit funds evasion exceeding the

5,000 threshold (here,

75,000), the firm is required to file a Suspicious Activity Report (SAR) with FinCEN within 30 calendar days.

SARs are mandated under the Bank Secrecy Act for suspicious transactions of $5,000 or more conducted through or at a broker-dealer.

Distinguish SAR requirements from CTR and other regulatory frameworks.

A Currency Transaction Report (CTR) is required only for physical currency (cash) deposits or withdrawals exceeding $10,000, which is not applicable here. Regulation S-P privacy opt-outs cannot override federal AML identity verification laws.

Accurate regulatory reporting depends on recognizing trigger mechanisms: SARs for suspicious behavior (

5,000+) vs. CTRs for currency transactions (

10,000+).

Key Concept

CIP/CDD Beneficial Ownership Requirements & SAR Filing Obligations

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Step-by-Step Solution

Key Concept

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