3.8 AML Rules

Anti-Money Laundering (AML) Rules

Anti-Money Laundering regulations are designed to prevent criminals from using the financial system to disguise illegal funds. Understanding AML requirements is essential for the SIE exam.

What is Money Laundering?

Money laundering is the process of making illegally obtained money appear legitimate.

The Three Stages

Placement: Introducing illicit funds into financial system, for example cash deposits

Layering: Moving funds to disguise origin, for example multiple transfers

Integration: Returning funds as "legitimate", for example purchasing assets

Bank Secrecy Act (BSA)

The Bank Secrecy Act (1970) is the primary U.S. anti-money laundering law.

BSA Requirements

Financial institutions must:

Establish AML compliance programs

File reports on suspicious activities

Maintain records of transactions

Verify customer identities

USA PATRIOT Act

After September 11, 2001, the USA PATRIOT Act strengthened AML requirements:

Key Provisions

Customer Identification Program (CIP): Verify identity of new customers

Enhanced Due Diligence: Additional scrutiny for high-risk accounts

Information Sharing: Cooperation between institutions and government

Suspicious Activity Reporting: Report suspected illegal activity

FINRA Rule 3310: AML Compliance Program

Every broker-dealer must have an AML compliance program that includes:

Four Pillars of AML Compliance

Written Procedures: Policies for detecting and reporting suspicious activity

Compliance Officer: Designated AML Compliance Officer

Training: Ongoing employee training

Independent Testing: Regular audits of AML program

Senior Management Approval

The AML program must be:

Approved in writing by senior management

Reasonably designed to detect suspicious activity

Updated as regulations change

Currency Transaction Reports (CTRs)

A Currency Transaction Report must be filed for cash transactions over $10,000.

CTR Requirements

Threshold: Cash transactions over $10,000

Filing Deadline: Within 15 days

Filed With: FinCEN (Financial Crimes Enforcement Network)

Multiple Transactions: Aggregate if same person, same day

What Triggers a CTR

Single cash deposit over $10,000

Single cash withdrawal over $10,000

Multiple cash transactions totaling over $10,000 (same day, same person)

Note: CTRs are filed automatically for threshold transactions - they don't indicate wrongdoing.

Suspicious Activity Reports (SARs)

A Suspicious Activity Report is filed when activity may involve illegal conduct.

When to File a SAR

File a SAR when activity:

Has no business or lawful purpose

Is designed to evade BSA requirements

Involves potential money laundering

Involves potential terrorist financing

Involves insider abuse or fraud

SAR Filing Requirements

Threshold: $5,000 or more in funds or other assets (with or without an identified suspect)

Filing Deadline: 30 days after detection (60 if no suspect)

Filed With: FinCEN

Customer Notification: Prohibited ("tipping off")

Structuring (Smurfing)

Structuring is intentionally breaking transactions into smaller amounts to avoid reporting requirements.

Example: Instead of depositing $15,000 at once, making three separate deposits of $5,000 each.

Important: Structuring is illegal and should be reported via SAR, even if individual transactions are below $10,000.

SAR Filing Confidentiality

Safe Harbor Protection

Broker-dealers and their employees who file SARs are protected from liability to any person for the report (31 U.S.C. 5318(g)(3)):

Cannot be held liable to the customer for filing the report

Protected for not telling the person named in the report

Tipping Off Prohibition

It is illegal to inform a customer that:

A SAR has been or will be filed

An investigation is underway

Violation: Tipping off can result in criminal penalties.

Customer Identification Program (CIP)

Under CIP, firms must collect identifying information before opening an account and verify the customer's identity within a reasonable time before or after the account is opened.

Required Information

Name: Government-issued ID

Date of birth: ID document

Address: ID or utility bill

SSN or Tax ID: Customer attestation

Acceptable Identification

Driver's license

Passport

State-issued ID

Military ID

Customer Due Diligence (CDD)

Beyond basic identification, firms must understand the customer's:

Nature of business

Expected account activity

Source of funds

Beneficial owners (for entities)

Enhanced Due Diligence (EDD)

Additional scrutiny required for:

Foreign correspondent accounts

Private banking accounts

Politically exposed persons (PEPs)

High-risk countries

High-risk customers

Red Flags for Suspicious Activity

Transaction Patterns: Unusual cash activity, structuring

Account Behavior: Rapid movement of funds, no business purpose

Customer Behavior: Reluctance to provide information, false statements

Geographic: Transactions involving high-risk countries

FinCEN (Financial Crimes Enforcement Network)

FinCEN is the U.S. Treasury bureau that:

Collects and analyzes financial intelligence

Receives CTRs and SARs

Shares information with law enforcement

Issues AML guidance

Penalties for Non-Compliance

Failing to file reports: Civil fines, criminal charges

Tipping off: Criminal prosecution

Inadequate AML program: Regulatory action, fines

Willful violations: Imprisonment, major fines

Key Takeaways

BSA and USA PATRIOT Act establish AML requirements

CTRs filed for cash transactions over $10,000

SARs filed for suspicious activity involving $5,000 or more

Structuring is illegal - must be reported

Never tip off customers about SAR filings

Safe harbor protects SAR filers from liability to any person for the report

FINRA Rule 3310 requires written AML program