FINRA's KYC Obligation: A Comprehensive Guide for Compliance

Introduction

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees the securities industry in the United States. FINRA's KYC obligation requires broker-dealers to implement policies and procedures to identify and verify the identity of their customers. This obligation is designed to prevent money laundering, terrorist financing, and other financial crimes.

Why KYC Matters

KYC obligations are essential for protecting the financial system from financial crime. By identifying and verifying the identity of their customers, broker-dealers can help to prevent criminals from using the financial system to launder money or finance terrorism.

According to a study by the World Bank, the total amount of money laundered globally each year is estimated to be between $800 billion and $2 trillion. This money can be used to finance terrorist activities, corruption, and other criminal activities.

KYC obligations also help to protect broker-dealers from legal liability. If a broker-dealer fails to implement adequate KYC policies and procedures, it may be held liable for any financial crimes that are committed through its accounts.

Benefits of KYC

In addition to protecting the financial system from financial crime, KYC obligations can also benefit broker-dealers. By implementing KYC policies and procedures, broker-dealers can:

• Reduce their risk of legal liability.
• Improve their customer relationships.
• Increase their efficiency.

Common Mistakes to Avoid

When implementing KYC policies and procedures, broker-dealers should avoid the following common mistakes:

• Failing to collect sufficient information. KYC policies and procedures should require broker-dealers to collect sufficient information about their customers to identify and verify their identity. This information may include the customer's name, address, date of birth, and social security number.
• Failing to verify the customer's identity. KYC policies and procedures should require broker-dealers to verify the identity of their customers using independent sources. This may include obtaining a copy of the customer's driver's license or passport, or verifying the customer's information through a third-party database.
• Failing to keep records of KYC information. KYC policies and procedures should require broker-dealers to keep records of all KYC information collected about their customers. These records should be kept for a period of at least five years.

How to Implement KYC Policies and Procedures

Broker-dealers can implement KYC policies and procedures by following these steps:

1. Develop a KYC policy. The KYC policy should outline the broker-dealer's KYC obligations and the procedures that will be used to meet those obligations.
2. Implement the KYC policy. The broker-dealer should implement the KYC policy by training its employees and developing the necessary systems and procedures.
3. Monitor the KYC policy. The broker-dealer should monitor the KYC policy to ensure that it is being implemented effectively.

Call to Action

Broker-dealers should take steps to implement KYC policies and procedures as soon as possible. By doing so, they can help to protect the financial system from financial crime and improve their own business operations.

Resources

• FINRA's KYC Rule
• SEC's KYC Rule
• World Bank's Study on Money Laundering

Stories

Story 1

A broker-dealer failed to implement adequate KYC policies and procedures. As a result, the broker-dealer was used by criminals to launder money. The broker-dealer was fined $1 million by FINRA.

Lesson learned: Broker-dealers must implement adequate KYC policies and procedures to avoid legal liability.

Story 2

A broker-dealer implemented KYC policies and procedures. As a result, the broker-dealer was able to identify and prevent a customer from using the broker-dealer's accounts to launder money. The broker-dealer was commended by FINRA for its efforts.

Lesson learned: KYC policies and procedures can help broker-dealers to protect the financial system from financial crime.

Story 3

A broker-dealer failed to keep records of KYC information collected about its customers. As a result, the broker-dealer was unable to comply with a subpoena from a law enforcement agency. The broker-dealer was fined $500,000 by FINRA.

Lesson learned: Broker-dealers must keep records of all KYC information collected about their customers.

Tables

Table 1

Estimated Amount of Money Laundered Globally Each Year

Source: World Bank, Global Snapshot of Money Laundering

Table 2

Common Mistakes to Avoid When Implementing KYC Policies and Procedures

Table 3

Benefits of KYC