ANTI-MONEY LAUNDERING POLICY

AVALON PARTNERS
Anti-Money Laundering (AML) Program:
Compliance and Supervisory Procedures

Firm Policy

It is the policy of the firm to prohibit and actively prevent money laundering and any activity that facilitates money laundering or the funding of terrorist or criminal activities. Money laundering is generally defined as engaging in acts designed to conceal or disguise the true origins of criminally derived proceeds so that the unlawful proceeds appear to have derived from legitimate origins or constitute legitimate assets. Generally, money laundering occurs in three stages. Cash first enters the financial system at the "placement" stage, where the cash generated from criminal activities is converted into monetary instruments, such as money orders or traveler's checks, or deposited into accounts at financial institutions. At the "layering" stage, the funds are transferred or moved into other accounts or other financial institutions to further separate the money from its criminal origin. At the "integration" stage, the funds are reintroduced into the economy and used to purchase legitimate assets or to fund other criminal activities or legitimate businesses. Terrorist financing may not involve the proceeds of criminal conduct, but rather an attempt to conceal the origin or intended use of the funds, which will later be used for criminal purposes.

Resources: NtM 02-21, page 5; SIA Preliminary Guidance for Deterring Money Laundering Activity (“SIA Guidance”), at pages 2-3 (Feb. 2002).

2. AML Compliance Officer Designation and Duties

The firm designates Vincent Au as its Anti-Money Laundering Program Compliance Officer, with full responsibility for the firm’s AML program. Vincent Au is qualified by experience, knowledge and training, including previous experience as an AML analyst. The duties of the AML Compliance Officer will include monitoring the firm’s compliance with AML obligations, overseeing communication and training for employees. The AML Compliance Officer will also ensure that proper AML records are kept in the Firm’s files. When warranted, the AML Compliance Officer will ensure Suspicious Activity Reports (SAR-SFs) are filed. No such reports have been filed as of the time of this review, however, such reports would also be kept in the branch files.

The firm will provide NASD with contact information for the AML Compliance Officer, including name, title, mailing address, e-mail address, telephone number and facsimile number. The firm will promptly notify NASD of any change to this information.

Rule(s): NASD Rule 3011.
Resources: NtM 02-78. Firms can submit their AML Compliance Officer information through NASD's AML Web site at www.nasdr.com/money.asp or at www.nasdr.com/contact_questionnaire.asp#aml_update.

3. Giving AML Information to Federal Law Enforcement Agencies and Other Financial Institutions
FinCEN Requests Under PATRIOT Act Section 314

Under Treasury’s final regulations (published in the Federal Register on September 26, 2002), we will respond to a Financial Crimes Enforcement Network (FinCEN) request about accounts or transactions by immediately searching our records, at our head office or at one of our branches operating in the United States, to determine whether we maintain or have maintained any account for, or have engaged in any transaction with, each individual, entity, or organization named in FinCEN's request. Upon receiving an information request, we will designate one person to be the point of contact regarding the request and to receive similar requests in the future. Unless otherwise stated in FinCEN's request, we are required to search current accounts, accounts maintained by a named suspect during the preceding 12 months, and transactions conducted by or on behalf of or with a named subject during the preceding six months. If we find a match, we will report it to FinCEN by completing FinCEN’s subject information form. This form can be sent to FinCEN by electronic mail at sys314a@fincen.treas.gov, or by facsimile transmission to 703-905-3660. If the search parameters differ from those mentioned above (for example, if FinCEN requests longer periods of time or limits the search to a geographic location), we will limit our search accordingly.

If we search our records and do not uncover a matching account or transaction, then we will not reply to a 314(a) request.

We will not disclose the fact that FinCEN has requested or obtained information from us, except to the extent necessary to comply with the information request. We will maintain procedures to protect the security and confidentiality of requests from FinCEN, such as those established to satisfy the requirements of Section 501 of the Gramm-Leach-Bliley Act.

We will direct any questions we have about the request to the requesting Federal law enforcement agency as designated in the 314(a) request.

Unless otherwise stated in the information request, we will not be required to treat the information request as continuing in nature, and we will not be required to treat the request as a list for purposes of the customer identification and verification requirements. We will not use information provided to FinCEN for any purpose other than (1) to report to FinCEN as required under Section 314 of the PATRIOT Act; (2) to determine whether to establish or maintain an account, or to engage in a transaction; or (3) to assist the firm in complying with any requirement of Section 314 of the PATRIOT Act.

Rules: NASD Rule 3011; Section 314 of the PATRIOT Act; 31 C.F.R. § 103.100.
Resources: www.fincen.gov/314a_announcement021203.pdf; www.fincen.gov/314a_pressrelease02062003.pdf; NASD Member Alert (2/14/03).
Sharing Information With Other Financial Institutions

We will share information about those suspected of terrorist financing and money laundering with other financial institutions for the purposes of identifying and reporting activities that may involve terrorist acts or money laundering activities and to determine whether to establish or maintain an account or engage in a transaction. We will file with FinCEN an initial notice before any sharing occurs and annual notices afterwards. We will use the notice form found at www.fincen.gov. Before we share information with another financial institution, we will take reasonable steps to verify that the other financial institution has submitted the requisite notice to FinCEN, either by obtaining confirmation from the financial institution or by consulting a list of such financial institutions that FinCEN will make available. We understand that this requirement applies even with respect to financial institutions with whom we are affiliated, and so we will obtain the requisite notices from affiliates and follow all required procedures.

We will employ strict procedures both to ensure that only relevant information is shared and to protect the security and confidentiality of this information, including segregating it from the firm’s other books and records.

In addition to sharing information with other financial institutions about possible terrorist financing and money laundering, we will also share information about particular suspicious transactions with our clearing broker for purposes of determining whether one of us will file a SAR-SF. In cases in which we file a SAR-SF for a transaction that has been handled both by us and by the clearing broker, we may share with the clearing broker a copy of the filed SAR-SF, unless it would be inappropriate to do so under the circumstances, such as where we filed a SAR-SF concerning the clearing broker or one of its employees.

Rules: NASD Rule 3011; Section 314 of the PATRIOT Act; 31 C.F.R. §103.19; 31 C.F.R. § 103.110.
Other Resources: The notice form can be found at http://www.fincen.gov/fi_infoappb.html.
Checking the Office of Foreign Assets Control (“OFAC”) List

Before opening an account, and on an ongoing basis, we will check to ensure that a customer does not appear on Treasury’s OFAC “Specifically Designated Nationals and Blocked Persons” List (SDN List) (See the OFAC Web Site at www.treas.gov/ofac, which is also available through an automated search tool on www.nasdr.com/money.asp), and is not from, or engaging in transactions with people or entities from, embargoed countries and regions listed on the OFAC Web Site. Because the OFAC Web Site is updated frequently, we will consult the list on a regular basis and subscribe to receive updates when they occur. We may access these lists through various software programs to ensure speed and accuracy. We will also review existing accounts against these lists when they are updated and we will document our review.

In the event that we determine a customer, or someone with or for whom the customer is transacting, is on the SDN List or is from or engaging in transactions with a person or entity located in an embargoed country or region, we will reject the transaction and/or block the customer's assets and file a blocked assets and/or rejected transaction form with OFAC. We will also call the OFAC Hotline at 1-800-540-6322.

Other Resources: NtM 02-21, page 6, n.24;
SDN List- http://www.treas.gov/ofac/t11sdn.pdf.
The OFAC Web site -- http://www.treas.gov/ofac/t11facsc.pdf -- contains checklists and information for securities firms to follow in checking the OFAC list. You can subscribe to receive updates at http://www.treas.gov/press/email/subscribe.html.
NASD provides a search engine to automate OFAC list searches at http://www.nasdr.com/ofac/
Blocked Properties Reporting Form -- http://www.treas.gov/offices/enforcement/ofac/legal/forms/td902250.pdf.
Voluntary Form for Reporting Blocked Transactions –
http://www.treas.gov/offices/enforcement/ofac/legal/forms/e_blockreport1....
Voluntary Form for Reporting Rejected Transactions –
http://www.treas.gov/offices/enforcement/ofac/legal/forms/e_recjectrepor....

5. Customer Identification and Verification

Firms are required to have and follow reasonable procedures to verify the identity of their customers who open new accounts. These procedures must address the types of information the firm will collect from the customer and how it will verify the customer's identity. These procedures must enable the firm to form a reasonable belief that it knows the true identity of its customers. The final rule, which Treasury and the SEC jointly issued on April 30, 2003, requires firms to be in compliance with the final rule by October 1, 2003.

The CIP must be in writing and be part of the firm’s anti-money laundering compliance program. It needs the approval of senior management if it is a material change to the anti-money laundering program.

Note that this regulation applies only to "customers" who open new “accounts” with a broker/dealer. A "customer" is defined as (1) a person that opens a new account or (2) an individual who opens a new account for an individual who lacks legal capacity or for an entity that is not a legal person. ("Customer" does not refer to persons who fill out account opening paperwork or who provide information necessary to establish an account, if such persons are not the accountholder as well. The definition of "customer" also does not include persons with authority over accounts.)

The following entities, however, are excluded from the definition of “customer:” a financial institution regulated by a Federal functional regulator or a bank regulated by a state bank regulator; a department or agency of the United States, of any State, or of any political subdivision of any State; any entity established under the laws of the United States, of any State, or of any political subdivision of a State that exercises governmental authority on behalf of the United States, any State, or any political subdivision of a State; any entity, other than a bank, whose common stock or analogous equity interests are listed on the New York Stock Exchange or the American Stock Exchange or have been designated as a Nasdaq National Market Security listed on Nasdaq (but only to the extent of domestic operations for any such persons that are financial institutions, other than banks), and a person that has an existing account with the broker/dealer, provided that the broker/dealer has a reasonable belief that it knows the true identity of the person.

Broker/dealers will not be required to verify the identities of persons with existing accounts at the firm, as long as the broker/dealer has a reasonable belief that it knows the true identity of the customer.

For purposes of this rule, an “account” is defined as a formal relationship with a broker/dealer established to effect transactions in securities, including, but not limited to, the purchase or sale of securities, securities loan and borrow activity, and the holding of securities or other assets for safekeeping or as collateral. The following are excluded from the definition of “account:” (1) an account that the broker/dealer acquires through any acquisition, merger, purchase of assets, or assumption of liabilities, and (2) an account opened for the purpose of participating in an employee benefit plan established under the Employee Retirement Income Security Act of 1974 ("ERISA").

In addition to the information we must collect under NASD Rules 2110 (Standards of Commercial Honor and Principles of Trade), 2310 (Recommendations to Customers - Suitability), and 3110 (Books and Records), and SEC Rules 17a-3(a)(9) (Beneficial Ownership regarding Cash and Margin Accounts) and 17a-3(a)(17) (Customer Accounts), we have established, documented, and maintained a written Customer Identification Program (or CIP). We will collect certain minimum customer identification information from each customer who opens an account; utilize risk-based measures to verify the identity of each customer who opens an account; record customer identification information and the verification methods and results; provide notice to customers that we will seek identification information and compare customer identification information with government-provided lists of suspected terrorists.

o Required Customer Information

Prior to opening an account, we will collect the following information for all accounts, if applicable, for any person, entity or organization who is opening a new account and whose name is on the account: the name; date of birth (for an individual); an address, which will be a residential or business street address (for an individual), an Army Post Office ("APO") or Fleet Post Office ("FPO") number, or residential or business street address of next of kin or another contact individual (for an individual who does not have a residential or business street address), or a principal place of business, local office or other physical location (for a person other than an individual); an identification number, which will be a taxpayer identification number (for U.S. persons) or one or more of the following: a taxpayer identification number, passport number and country of issuance, alien identification card number or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or other similar safeguard (for non-U.S. persons). In the event that a customer has applied for, but has not received, a taxpayer identification number, we will require a copy of the applicationto confirm that the application was filed before the customer opens the account and to obtain the taxpayer identification number within a reasonable period of time after the account is opened.

When opening an account for a foreign business or enterprise that does not have an
identification number, we will request alternative government-issued documentation such as the articles of incorporation or corporate charter, certifying the existence of the business or enterprise.

Rules: NASD Rule 3011; Section 326 of the PATRIOT Act; 31 C.F.R. §§103.122 et seq.

b. Customers Who Refuse To Provide Information

If a potential or existing customer either refuses to provide the information described above when requested, or appears to have intentionally provided misleading information, our firm will not open a new account and, after considering the risks involved, consider closing any existing account. In either case, our AML Compliance Officer will be notified so that we can determine whether we should report the situation to FinCEN (i.e., file a Form SAR-SF).
Verifying Information

Based on the risk, and to the extent reasonable and practicable, we will ensure that we have a reasonable belief that we know the true identity of our customers by using risk-based procedures to verify and document the accuracy of the information we get about our customers. In verifying customer identity, we will analyze any logical inconsistencies in the information we obtain.

We will verify customer identity through documentary evidence, non-documentary evidence, or both. We will use documents to verify customer identity when appropriate documents are available. In light of the increased instances of identity fraud, we will supplement the use of documentary evidence by using the non-documentary means described below whenever possible. We may also use such non-documentary means, after using documentary evidence, if we are still uncertain about whether we know the true identity of the customer. In analyzing the verification information, (the responsibility of the AML officer) we will consider whether there is a logical consistency among the identifying information provided, such as the customer’s name, street address, zip code, telephone number (if provided), date of birth, and social security number.

Appropriate documents for verifying the identity of customers include, but are not limited to, the following:

* For an individual, an unexpired government-issued identification evidencing nationality, residence, and bearing a photograph or similar safeguard, such as a driver’s license or passport; and
* For a person other than an individual, documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, a partnership agreement, or a trust instrument.

We understand that we are not required to take steps to determine whether the document that the customer has provided to us for identity verification has been validly issued and that we may rely on a government-issued identification as verification of a customer’s identity. If, however, we note that the document shows some obvious form of fraud, we must consider that factor in determining whether we can form a reasonable belief that we know the customer’s true identity.

We will use the following non-documentary methods of verifying identity:

* Contacting a customer;
* Independently verifying the customer’s identity through the comparison of information provided by the customer with information obtained from a consumer reporting agency, public database, or other source;
* Checking references with other financial institutions; or
* Obtaining an audited financial statement.

We will use non-documentary methods of verification in the following situations: (1) when the customer is unable to present an unexpired government-issued identification document with a photograph or other similar safeguard; (2) when the firm is unfamiliar with the documents the customer presents for identification verification; (3) when the customer and firm do not have face-to-face contact; and (4) when there are other circumstances that increase the risk that the firm will be unable to verify the true identity of the customer through documentary means.

We will verify the information within a reasonable time, not more than thirty days, before or after the account is opened. Depending on the nature of the account and requested transactions, we may refuse to complete a transaction before we have verified the information, or in some instances when we need more time, we may, pending verification, restrict the types of transactions or dollar amount of transactions. If we find suspicious information that indicates possible money laundering or terrorist financing activity, we will, after internal consultation with the firm's AML compliance officer, file a SAR-SF in accordance with applicable law and regulation.

We recognize that the risk that we may not know the customer’s true identity may be heightened for certain types of accounts, such as an account opened in the name of a corporation, partnership or trust that is created or conducts substantial business in a jurisdiction that has been designated by the U.S. as a primary money laundering concern or has been designated as non-cooperative by an international body. We will identify customers that pose a heightened risk of not being properly identified. Therefore, we will take the following additional measures that may be used to obtain information about the identity of the individuals associated with the customer when standard documentary methods prove to be insufficient: [add additional procedures for verifying identity of certain customers, such as obtaining information about individuals with authority or control over such account].

d. Lack of Verification

When we cannot form a reasonable belief that we know the true identity of a customer, we will do the following dependant on the judgment and overall assessment by the AML officer: (A) not open the account; (B) impose terms under which a customer may conduct transactions while we attempt to verify the customer’s identity; (C) close an account after attempts to verify customer’s identity fail; and (D) file a SAR-SF in accordance with applicable law and regulation.

e. Record keeping

We will document our verification, including all identifying information provided by a customer, the methods used and results of verification, and the resolution of any discrepancy in the identifying information. We will keep records containing a description of any document that we relied on to verify a customer’s identity, noting the type of document, any identification number contained in the document, the place of issuance, and if any, the date of issuance and expiration date. With respect to non-documentary verification, we will retain documents that describe the methods and the results of any measures we took to verify the identity of a customer. We will maintain records of all identification information for five years after the account have been closed; we will retain records made about verification of the customer's identity for five years after the record is made.

f. Comparison with Government Provided Lists of Terrorists and Other Criminals

From time to time, we may receive notice that a Federal government agency has issued a list of known or suspected terrorists. Prior to the opening of a new account we will determine whether a customer appears on any such list of known or suspected terrorists or terrorist organizations issued by any Federal government agency and designated as such by Treasury in consultation with the Federal functional regulators. We will follow all Federal directives issued in connection with such lists.

We will continue to comply with Treasury’s Office of Foreign Asset Control rules prohibiting transactions with certain foreign countries or their nationals.

Other Resources: NtM 02-21, page 6, n.24; 31 C.F.R. §§ 103.122.
g. Notice to Customers

We will provide notice to customers that the firm is requesting information from them to verify their identities, as required by Federal law. We will provide all new customers with a copy of the NASD’s Customer Identification Program Notice stuffer along with their new account application form and other paperwork. No account will be opened unless the customer has been provided with this notification.

Important Information about Procedures for Opening a New Account
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means for you: When you open account, we will ask for your name, address, date of birth and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.].
Rule: 31 C.F.R. §103.122(g).
h. Reliance on another Financial Institution for Identity Verification

We may, under the following circumstances, rely on the performance by another financial institution (including an affiliate) of some or all of the elements of our customer identification program with respect to any customer that is opening an account or has established an account or similar business relationship with the other financial institution to provide or engage in services, dealings, or other financial transactions:

* When such reliance is reasonable under the circumstances;
* When the other financial institution is subject to a rule implementing the anti-money laundering compliance program requirements of 31 U.S.C. 5318(h), and is regulated by a Federal functional regulator; and
* When the other financial institution has entered into a contract with our firm requiring it to certify annually to us that it has implemented its anti-money laundering program, and that it will perform (or its agent will perform) specified requirements of the customer identification program.

Rule: 31 C.F.R. §§ 103.122 et seq.

6. Foreign Correspondent Accounts and Foreign Shell Banks
Detecting and Closing Correspondent Accounts of Unregulated Foreign Shell Banks

It is the policy of Avalon partners not to establish, maintain, administer, or manage correspondent accounts for unregulated foreign shell banks. We will detect banks that may fall into this category by requiring proof of regulation status and a physical address.

Rules: NASD Rule 3011; Section 313 of the PATRIOT Act; 31 C.F.R. §§103.175 et seq.

b. Certifications

We will require our foreign bank account holders to complete model certifications issued by the Treasury. We will send the certification forms to our foreign bank account holders for completion, which requires them to certify that they are not shell banks and to provide ownership and agent information. We will re-certify when we believe that the information is no longer accurate and at least once every three years.
Rules: NASD Rule 3011; Section 313 of the PATRIOT Act; 31 C.F.R. §§103.175 et seq.

c. Recordkeeping for Foreign Correspondent Accounts

We will keep records in a designated file at the firm’s offices and maintained by the AML officer identifying the owners of foreign banks with U.S. correspondent accounts and the name and address of the U.S. agent for service of legal process for those banks.

Rules: NASD Rule 3011; Sections 313 and 319 of the PATRIOT Act; 31 C.F.R. §§ 103.175, 177.
d. Summons or Subpoena of Foreign Bank Records; Termination of Correspondent Relationships.

When we receive a written request from a federal law enforcement officer for information concerning correspondent accounts, we will provide that information to the requesting officer not later than 7 days after receipt of the request. We will close, within 10 days, any account for a bank that we learn from Treasury or the Department of Justice has failed to comply with a summons or has contested a summons. Avalon’s designated AML officer will scrutinize any account activity during that 10-day period to ensure that any suspicious activity is appropriately reported and to ensure that no new positions are established in these accounts.

Rules: NASD Rule 3011; Sections 313 and 319 of the PATRIOT Act; 31 C.F.R. § 103.185.

7. Private Banking Accounts/Foreign Officials

A "private banking" account is an account (or any combination of accounts) that requires a minimum aggregate deposit of $1,000,000, is established for one or more individuals, and is assigned to or administered or managed by, in whole or in part, an officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account.

A "senior foreign political figure" includes a current or former senior official in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned commercial enterprise; a corporation, business, or other entity formed by or for the benefit of any such individual; an immediate family member of such an individual; or any individual publicly known (or actually known by the firm) to be a close personal or professional associate of such an individual.

The designated AML officer will review Avalon’s accounts to determine whether we offer any "private banking" accounts and we will conduct due diligence on such accounts in the event such are discovered. This due diligence will include, at least, (1) ascertaining the identity of all nominal holders and holders of any beneficial ownership interest in the account (including information on those holders' lines of business and sources of wealth); (2) ascertaining the source of funds deposited into the account; (3) ascertaining whether any such holder may be a senior foreign political figure; and (4) detecting and reporting, in accordance with applicable law and regulation, any known or suspected money laundering and/or use of the proceeds of foreign corruption.

The designated AML officer will review public information, including information available in Internet databases, to determine whether any "private banking" account holders are "senior foreign political figures." If we discover information indicating that a particular "private banking" account holder may be a "senior foreign political figure," and upon taking additional reasonable steps to confirm this information, we determine that the individual is, in fact, a "senior foreign political figure," we will conduct additional enhanced due diligence to detect and report transactions that may involve money laundering or the proceeds of foreign corruption.

In so doing, we will consider the risks that the funds in the account may be the proceeds of foreign corruption, including the purpose and use of the private banking account, location of the account holder(s), source of funds in the account, type of transactions conducted through the account, and jurisdictions involved in such transactions. The degree of scrutiny we will apply will depend on various risk factors, including, but not limited to, whether the jurisdiction the "senior foreign political figure" is from is one in which current or former political figures have been implicated in corruption and the length of time that a former political figure was in office. Our enhanced due diligence might include, depending on the risk factors, probing the account holder's employment history, scrutinizing the account holder's sources of funds, and monitoring transactions to the extent necessary to detect and report proceeds of foreign corruption, and reviewing monies coming from government, government controlled, or government enterprise accounts (beyond salary amounts).

If we do not find information indicating that a "private banking" account holder is a "senior foreign political figure," and the account holder states that he or she is not a "senior foreign political figure," then additional enhanced due diligence is not required.

In either case, if due diligence (or the required enhanced due diligence, if the account holder is a "senior foreign political figure") cannot be performed adequately, we will, after consultation with the firm's AML compliance officer and as appropriate, not open the account, suspend the transaction activity, file a SAR, or close the account.

Rules: NASD Rule 3011; Section 312 of the PATRIOT Act; 31 C.F.R. §§103.182.
Other Resources: Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of Foreign Official Corruption - http://www.ustreas.gov/press/releases/guidance.htm;
"Private Banking Activities" (June 30, 1997) – www.federal reserve.gov;
Guidance on Enhanced Scrutiny of Transaction That May Involve Proceeds of Foreign Corruption – http://www.treas.gov/press/releases/docs/guidance.htm.

8. Monitoring Accounts for Suspicious Activity

The designated AML officer will manually monitor a sufficient amount of account activity via the daily activity reports received from the Clearing Agent to permit identification of patterns of unusual size, volume, pattern or type of transactions, geographic factors such as whether jurisdictions designated as “non-cooperative” are involved, or any of the “red flags” identified in Section 8. b. below. We will look at transactions, including trading and wire transfers, in the context of other account activity to determine if a transaction lacks financial sense or is suspicious because it is an unusual transaction or strategy for that customer. The AML Compliance Officer or his or her designee will be responsible for this monitoring, will document when and how it is carried out, and will report suspicious activities to the appropriate authorities. Among the information we will use to determine whether to file a Form SAR-SF are exception reports that include transaction size, location, type, number, and nature of the activity. We will create employee guidelines with examples of suspicious money laundering activity and lists of high-risk clients whose accounts may warrant further scrutiny. Our AML Compliance Officer will conduct an appropriate investigation before a SAR is filed. Our monitoring of specific transactions includes a monthly review of account statements and wire transfers.
Emergency Notification to the Government by Telephone

When conducting due diligence or opening an account, we will immediately call Federal law enforcement when necessary, and especially in these emergencies: a legal or beneficial account holder or person with whom the account holder is engaged in a transaction is listed on or located in a country or region listed on the OFAC list, an account is held by an entity that is owned or controlled by a person or entity listed on the OFAC list, a customer tries to use bribery, coercion, or similar means to open an account or carry out a suspicious activity, we have reason to believe the customer is trying to move illicit cash out of the government’s reach, or we have reason to believe the customer is about to use the funds to further an act of terrorism. We will first call the OFAC Hotline at 1-800-540-6322. The other contact numbers we will use are: Financial Institutions Hotline (1-866-556-3974), local U.S. Attorney’s Office (212-416-8000), local FBI Office (973-792-3000), and local SEC Office (646-428-1620).

Other Resources: SDN List -- http://www.treas.gov/ofac/t11sdn.pdf.
Red Flags

Red flags that signal possible money laundering or terrorist financing include, but are not limited to:

* The customer exhibits unusual concern about the firm's compliance with government reporting requirements and the firm's AML policies (particularly concerning his or her identity, type of business and assets), or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspicious identification or business documents.

* The customer wishes to engage in transactions that lack business sense or apparent investment strategy, or are inconsistent with the customer's stated business or investment strategy.

* The information provided by the customer that identifies a legitimate source for funds is false, misleading, or substantially incorrect.

* Upon request, the customer refuses to identify or fails to indicate any legitimate source for his or her funds and other assets.

* The customer (or a person publicly associated with the customer) has a questionable background or is the subject of news reports indicating possible criminal, civil, or regulatory violations.

* The customer exhibits a lack of concern regarding risks, commissions, or other transaction costs.

* The customer appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate commercial reasons, to provide information or is otherwise evasive regarding that person or entity.

* The customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry.

* The customer attempts to make frequent or large deposits of currency, insists on dealing only in cash, or asks for exemptions from the firm's policies relating to the deposit of cash.

* The customer engages in transactions involving cash or cash equivalents or other monetary instruments that appear to be structured to avoid the $10,000 government reporting requirements, especially if the cash or monetary instruments are in an amount just below reporting or recording thresholds.

* For no apparent reason, the customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third-party transfers.

* The customer is from, or has accounts in, a country identified as a non-cooperative country or territory by the FATF.

* The customer's account has unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity.

* The customer's account shows numerous currency or cashiers check transactions aggregating to significant sums.

* The customer's account has a large number of wire transfers to unrelated third parties inconsistent with the customer's legitimate business purpose.

* The customer's account has wire transfers that have no apparent business purpose to or from a country identified as a money laundering risk or a bank secrecy haven.

* The customer's account indicates large or frequent wire transfers, immediately withdrawn by check or debit card without any apparent business purpose.

* The customer makes a funds deposit followed by an immediate request that the money be wired out or transferred to a third party, or to another firm, without any apparent business purpose.

* The customer makes a funds deposit for the purpose of purchasing a long-term investment followed shortly thereafter by a request to liquidate the position and transfer of the proceeds out of the account.

* The customer engages in excessive journal entries between unrelated accounts without any apparent business purpose.

* The customer requests that a transaction be processed to avoid the firm's normal documentation requirements.

* The customer, for no apparent reason or in conjunction with other red flags, engages in transactions involving certain types of securities, such as penny stocks, Regulation S stocks, and bearer bonds, which although legitimate, have been used in connection with fraudulent schemes and money laundering activity. (Such transactions may warrant further due diligence to ensure the legitimacy of the customer's activity.)

* The customer's account shows an unexplained high level of account activity with very low levels of securities transactions.

* The customer maintains multiple accounts, or maintains accounts in the names of family members or corporate entities, for no apparent purpose.

* The customer's account has inflows of funds or other assets well beyond the known income or resources of the customer.

Responding to Red Flags and Suspicious Activity

When a member of the firm detects any red flag he or she will investigate further under the direction of the AML Compliance Officer. This may include gathering additional information internally or from third-party sources (such as the FBI, State Department and FinCin), contacting the government, freezing the account, or filing a Form SAR-SF. Members of the firm are made aware of this responsibility and given instructions on red flags to look for in the WSP provided to them and as part of their on going AML Continuing Education.
9. Suspicious Transactions and BSA Reporting

Filing a Form SAR-SF

We will file Form SAR-SFs for any account activity (including deposits and transfers) conducted or attempted through our firm involving (or in the aggregate) $5,000 or more of funds or assets where we know, suspect, or have reason to suspect: 1) the transaction involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation, 2) the transaction is designed, whether through structuring or otherwise, to evade the any requirements of the BSA regulations, 3) the transaction has no business or apparent lawful purpose or is not the sort in which the customer would normally be expected to engage, and we know, after examining the background, possible purpose of the transaction and other facts, of no reasonable explanation for the transaction, or 4) the transaction involves the use of the firm to facilitate criminal activity. Regular account activity reviews performed by the designated AML officer will be used to detect these types of set ups.

We will not base our decision on whether to file a SAR-SF solely on whether the transaction falls above a set threshold. We will file a SAR-SF and notify law enforcement of all transactions that raise an identifiable suspicion of criminal, terrorist, or corrupt activities. [See: NtM 02-21, page 9.] In high-risk situations, we will notify the government immediately (See Section 8 for contact numbers) and will file a SAR-SF with FinCEN. Securities law violations that are reported to the SEC or a Self-Regulatory Organization (SRO) may also be reported promptly to the local U.S. Attorney, as appropriate.

We will not file SAR-SFs to report violations of Federal securities laws or SRO rules by our employees or registered representatives that do not involve money laundering or terrorism, but we will report them to the SEC or SRO. [See: NtM 02-21, page 10, n.35.]

All SAR-SFs will be periodically reported to the Board of Directors and senior management, with a clear reminder of the need to maintain the confidentiality of the SAR-SF.

We will report suspicious transactions by completing a SAR-SF and we will collect and maintain supporting documentation as required by the BSA regulations. We will file a SAR-SF no later than 30 calendar days after the date of the initial detection of the facts that constitute a basis for filing a SAR-SF. If no suspect is identified on the date of initial detection, we may delay filing the SAR-SF for an additional 30 calendar days pending identification of a suspect, but in no case, will the reporting be delayed more than 60 calendar days after the date of initial detection.

We will retain copies of any SAR-SF filed and the original or business record equivalent of any supporting documentation for five years from the date of filing the SAR-SF in a designated file on Avalon’s premises. We will identify and maintain supporting documentation and make such information available to FinCEN, any other appropriate law enforcement agencies, or federal or state securities regulators, upon request.

We will not notify any person involved in the transaction that the transaction has been reported, except as permitted by the BSA regulations. We understand that anyone who is subpoenaed or required to disclose a SAR-SF or the information contained in the SAR-SF, except where disclosure is requested by FinCEN, the SEC, or another appropriate law enforcement or regulatory agency or an SRO registered with the SEC, will decline to produce to the SAR-SF or to provide any information that would disclose that a SAR-SF was prepared or filed. We will notify FinCEN of any such request and our response.

Rules: NASD Rule 3011; Section 356 of the PATRIOT Act; 31 C.F.R. §103.19.
Other Resources: FinCEN’s Web Site contains additional information (See www.fincen.gov), including annual SAR Activity Reviews and SAR Bulletins, which discuss trends in suspicious reporting and give helpful tips. NTM 02-21, page 12, n.38; NtM 02-47.

SAR-SF Form (fill-in version) -- http://www.fincen.gov/fin101_formandinstructions.pdf
http://www.fincen.gov/fin101_form_only.pdf
SAR Activity Reviews -- http://www.fincen.gov/pub_main.html
SAR Bulletins -- http://www.fincen.gov/pub_main.html
Currency Transaction Reports (CTR)

Our firm prohibits the receipt of currency and has the following procedures to prevent its receipt: All funds are received by our fully disclosed clearing agent. If we discover currency has been received, we will file with FinCEN CTRs for transactions involving currency that exceed $10,000. Multiple transactions will be treated as a single transaction if they total more than $10,000 during any one business day. We will use the CTR form at http://www.fincen.gov/reg_bsaforms.html#4789.

Rules: 31 C.F.R.§§103.11, 103.22
Currency and Monetary Instrument Transportation Reports (CMIR)

Our firm prohibits the receipt of currency and has the procedures described in the previous subsection to prevent its receipt. If in spite of our best efforts, we discover currency has been received, We will file with the Commissioner of Customs a CMIR whenever the firm transports, mails, ships or receives or causes or attempts to transport, mail, ship or receive monetary instruments of more than $10,000 at one time (on one calendar day or, if for the purposed of evading the reporting requirements, on one or more days) in or out of the U.S. We will file a CMIR for all such shipments or receipts of monetary instruments, except for currency or monetary instruments shipped or mailed through the postal service or by common carrier. We will, however, file a CMIR for such receipts of currency and monetary instruments and for shipments and deliveries made by the firm by means other than the postal service or common carrier, even when such shipment or transport is made by the firm to an office of the firm located outside the U.S. We will use the CMIR Form at http://www.fincen.gov/reg_bsaforms.html#4790.

Rules: 31 C.F.R. §§103.11, 103.23.
Foreign Bank and Financial Accounts Reports (FBAR)

We will file with FinCEN an FBAR for any financial accounts of more than $10,000 that we hold, or for which we have signature or other authority over, in a foreign country. We will use the FBAR Form at http://www.fincen.gov/f9022-1.pdf.

Rules: 31 C.F.R. §103.24.
Transfers of $3,000 or More Under the Joint and Travel Rule

When we transfer funds of $3,000 or more, we will record on the transmittal order at least the following information: the name and address of the transmitter and recipient, the amount of the transmittal order, the identity of the recipient’s financial institution, and the account number of the recipient. We will also verify the identity of transmitters and recipients who are not established customers of the firm (i.e., customers of the firm who have not previously maintained an account with us or for whom we have not obtained and maintained a file with the customer's name, address, taxpayer identification number, or, if none, alien identification number or passport number and country of issuance).

Rules: 31 C.F.R. §103.33(f)
10. AML Record Keeping

SAR-SF Maintenance and Confidentiality

We will hold SAR-SFs and any supporting documentation confidential. We will not inform anyone outside of a law enforcement or regulatory agency or securities regulator about a SAR-SF. We will refuse any subpoena requests for SAR-SFs or SAR-SF information and immediately tell FinCEN of any such subpoena we receive. We will segregate SAR-SF filings and copies of supporting documentation from other firm books and records in separate files in distinct locations on premises to avoid disclosing SAR-SF filings. Our AML Compliance Officer will handle all subpoenas or other requests for SAR-SFs.We will share information with our clearing broker about suspicious transactions in order to determine when a SAR-SF should be filed. As mentioned earlier, we may share with the clearing broker a copy of the filed SAR-SF – unless it would be inappropriate to do so under the circumstances, such as where we file a SAR-SF concerning the clearing broker or its employees.

Rules: 31 C.F.R. §103.19; 67 Fed. Reg. 126, 44501-44502 (July 1, 2002).
Responsibility for AML Records and SAR Filing

Our AML Compliance Officer and his or her designee will be responsible to ensure that AML records are maintained properly and that SARs are filed as required. See: NtM 02-21, page 14.
Records Required

As part of our AML program, our firm will create and maintain SAR-SFs, CTRs, CMIRs, FBARs, and relevant documentation on customer identity and verification (See Section 5 above) and funds transfers and transmittals as well as any records related to customers listed on the OFAC list. We will maintain SAR-SFs and their accompanying documentation for at least five years. We will keep other documents according to existing BSA and other record keeping requirements, including certain SEC rules that require six-year retention.

Rules: NASD Rule 3011; 31 C.F.R. §103.19; 31 C.F.R. §103.33(f).

11. Clearing/Introducing Firm Relationships

We will work closely with our clearing firm to detect money laundering. We will exchange information, records, data and exception reports as necessary to comply with AML laws. Both our firm and our clearing firm have filed (and kept undated) the necessary annual certifications for such information sharing, which can be found at http://www.fincen.gov/fi_infoappb.html. As a general matter, we have agreed that our clearing firm will monitor customer activity on our behalf, and we will provide our clearing firm with proper customer identification information as required to successfully monitor customer transactions. We have allocated these functions and set them forth in a written document. We understand that the allocation of functions will not relieve either of us from our independent obligation to comply with AML laws, except as specifically allowed under the PATRIOT Act and its implementing regulations.

Rules: NASD Rule 3011; Sections 314(b) and 352 of the PATRIOT Act; Section 3.b. above.
12. Training Programs

We will develop ongoing employee training under the leadership of the AML Compliance Officer and senior management. Our training will occur on at least an annual basis. It will be based on our firm’s size, its customer base, and its resources.

Our training will include, at a minimum: how to identify red flags and signs of money laundering that arise during the course of the employees’ duties; what to do once the risk is identified; what employees' roles are in the firm's compliance efforts and how to perform them; the firm's record retention policy; and the disciplinary consequences (including civil and criminal penalties) for non-compliance with the PATRIOT Act.

We will develop training in our firm, or contract for it. Delivery of the training may include educational pamphlets, videos, intranet systems, in-person lectures, and explanatory memos. Currently our training program is all representatives must take the designated online training course. We will maintain records to show the persons trained, the dates of training, and the subject matter of their training.

We will review our operations to see if certain employees, such as those in compliance, margin, and corporate security, require specialized additional training. Our written procedures will be updated to reflect any such changes.

Rules: NASD Rule 3011; Section 352 of the PATRIOT Act.

13. Program to Test AML Program
Staffing

The testing of our AML program will be performed by Ken Werner, an independent third party. Their qualifications include [describe].

Evaluation and Reporting

After we have completed the testing, staff will report its findings to senior management. We will address each of the resulting recommendations.
Rules: NASD Rule 3011; Section 352 of the PATRIOT Act.

14. Monitoring Employee Conduct and Accounts

We will subject employee accounts to the same AML procedures as customer accounts, under the supervision of the AML Compliance Officer. We will also review the AML performance of supervisors (including but not limited to their role in supervising the AML responsibilities of the employees under their supervision), as part of their annual performance review. The AML Compliance Officer’s accounts will be reviewed by Michael Ference.

Rules: NASD Rule 3011; Section 352 of the PATRIOT Act.
15. Confidential Reporting of AML Non-Compliance

Employees will report any violations of the firm’s AML compliance program to the AML Compliance Officer, unless the violations implicate the Compliance Officer, in which case the employee shall report to Vincent Au, President. Such reports will be confidential, and the employee will suffer no retaliation for making them.

Rules: NASD Rule 3011; Section 352 of the PATRIOT Act.

16. Additional Areas of Risk

The firm has reviewed all areas of its business to identify potential money laundering risks that may not be covered in the procedures described above.