It's official: You must know your customers. I mean really know them. Oh, sure, there have always been suitability requirements (Rule 405) and the like which forced any conscientious rep to understand what kind of investor his client was. But, as of October 1, knowing — or better, screening — your client became a federal law.
That's when Section 326 of the Patriot Act took effect. As one expert told me, with the Patriot Act, “Financial services firms have been deputized.” Or, as another says, “We now live in a police state.” Whatever your own feelings on the merits of the Patriot Act, financial services firms now have a legal obligation (read: not just a moral one) to verify that clients are who they say they are and not crooks laundering dirty money. That means checking passports and drivers' licenses, if they have those documents, and if they don't, well, you've got to figure out some other way to check them out. You also have an obligation to verify addresses and do internet searches. You must check names against government “baddie” lists to make sure prospects or clients are not wanted terrorists or criminals. Firms must designate an ombudsman and initiate training programs and audit their compliance.
Too many brokers I spoke to were complacent about their roles in the process, stating that the onus falls on the firm rather than the individual broker. It's true financial services firms are taking a hit. TowerGroup, a consultancy, estimates that brokerages will spend around $700 million from 2002 through 2005 on the technology necessary to get them in compliance with the Patriot Act. And many reps I spoke too seemed to think that broker/dealer firms have been invaded by and are now operated by lawyers and compliance personnel.
But make no mistake. The individual rep is now a front-line government operative, who must — upon pain of fine or imprisonment — actively screen clients. The “suspicious activity report” is now a fact of your life and must be filed for “suspicious” activity in amounts as little as $5,000. One rep I know, who has many immigrant clients, says, “What happens if a Pakistani client of mine wants to wire money to his brother? Is that suspicious activity? It's putting a big strain on me. I'm in the investment business. I've passed the Patriot Act tests, but I don't know how to prevent and detect money laundering.”
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