1.5 Customer Identification and Due Diligence

Broker-dealer operations departments represent the critical frontline defense against money laundering, financial terrorism, and identity theft. Before an account can be approved for securities trading, operations professionals must implement rigorous Customer Identification Programs (CIP), conduct thorough Customer Due Diligence (CDD), obtain valid tax withholding certifications, and establish compliant supervisory records in accordance with federal law and FINRA rules.

The Customer Identification Program (CIP)

Section 326 of the USA PATRIOT Act of 2001, codified into the Bank Secrecy Act (BSA) regulations under 31 C.F.R. § 1023.220, requires every broker-dealer to establish and maintain a written Customer Identification Program (CIP). The program must be incorporated into the firm's Anti-Money Laundering (AML) compliance procedures and approved by senior management.

The foundational objective of CIP is to enable the broker-dealer to form a reasonable belief that it knows the true identity of each customer opening an account.

The Four Mandatory Identification Elements

Obtain the required identifying information before account opening, subject to specific regulatory exceptions such as an applicant awaiting a TIN. Identity verification may occur within a reasonable time before or after opening under the risk-based CIP. The elements are:

1. Full Legal Name: The individual's full legal name or the full registered name of the business entity.
2. Date of Birth: Required for all natural persons.
3. Physical Street Address: A residential or business street address for an individual, or a principal place of business, local office or other physical location for an entity, subject to specified exceptions.
4. Taxpayer Identification Number (TIN): A Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) for U.S. persons.

For non-U.S. persons without an SSN or Individual Taxpayer Identification Number (ITIN), the firm must collect one or more of the following:

• A foreign passport number and country of issuance;
• An alien identification card number (e.g., Green Card); or
• The number and country of issuance of any other unexpired government-issued document bearing a photograph and evidence of nationality or residence.

Identity Verification Procedures & Timelines

Collecting customer information is only the first phase; the broker-dealer must verify that information within a reasonable time before or after account opening.

Documentary vs. Non-Documentary Verification

• Documentary Verification: Operations professionals inspect unexpired, government-issued photo identification. For individuals, acceptable documents include a state driver's license, a U.S. passport, or a military ID. For entities, documentary verification involves reviewing certified articles of incorporation, government-issued business licenses, or partnership agreements. Documents must be scrutinized for physical alterations, mismatched fonts, or invalid security features.
• Non-Documentary Verification: Required when accounts are opened digitally or by mail, when the customer cannot present an original photo ID, or when the firm is unfamiliar with foreign documentation. Methods include:
  1. Contacting the customer directly;
  2. Independently verifying information through consumer reporting agencies (e.g., credit bureaus) or public databases;
  3. Checking references with other financial institutions; and
  4. Obtaining and analyzing authenticated financial statements.

CIP Recordkeeping Mandates

Broker-dealers must retain CIP records under strict federal retention schedules:

• Core Identifying Data (Name, DOB, Street Address, TIN): Must be preserved for five years after the account is officially closed.
• Verification Records (Document descriptions, non-documentary methods, resolution of discrepancies): Must be preserved for five years after the record is created.

OFAC Sanctions Screening

As an essential component of onboarding, operations must check customer names against the Specially Designated Nationals and Blocked Persons (SDN) List maintained by the U.S. Treasury's Office of Foreign Assets Control (OFAC).

• A possible name match requires sanctions investigation. A confirmed blocking prohibition requires blocking property/interests within the firm’s possession or control; some sanctions require rejection instead. Similar names alone do not establish a confirmed match.
• The firm cannot allow trading, withdrawals, or account transfers.
• The firm must report the blocked property to OFAC within 10 business days of the freeze.

FinCEN Customer Due Diligence (CDD) & Beneficial Ownership

Under the Financial Crimes Enforcement Network (FinCEN) Customer Due Diligence (CDD) Rule, broker-dealers must identify and verify the beneficial owners of legal entity customers (such as corporations, LLCs, general partnerships, and business trusts) opening an account.

The rule establishes two distinct prongs that must be satisfied:

1. The Ownership Prong: The firm must identify each individual who, directly or indirectly, owns 25% or more of the equity interests of the legal entity customer. Depending on the company's capital structure, this may result in zero individuals (e.g., if five unrelated partners each own 20%) or up to a maximum of four individuals.
2. The Control Prong: The firm must identify exactly one individual who exercises significant operational or managerial responsibility to control, manage, or direct the legal entity customer (e.g., a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, or Managing Member).

Obtain the required ownership information and certification using the model form or another compliant method. FinCEN’s February 13, 2026 relief permits collection at the entity’s first account, when prior information becomes unreliable, and as required by ongoing risk-based CDD instead of automatically at each later account. This duty differs from Corporate Transparency Act BOI filings.

Exempt Entities: Publicly traded companies listed on national securities exchanges (e.g., NYSE, Nasdaq), regulated banks, registered broker-dealers, registered investment companies, and governmental authorities are exempt from beneficial ownership certification requirements.

Sources checked 2026-10-20: FINRA Series 99 outline, FINRA customer accounts, FinCEN CDD FAQs.