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

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

FINRA Rule 3310: AML Compliance Program

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

Four Pillars of AML Compliance

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

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

Structuring (Smurfing)

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

Example: Instead of depositing $15,000, making three deposits of $4,900 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

Financial institutions and employees who file SARs in good faith are protected from liability:

• Cannot be sued by the customer
• Protected from civil liability
• Protected from criminal prosecution

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 verify customer identity before opening an account.

Required Information

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

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

Key Takeaways

• BSA and USA PATRIOT Act establish AML requirements
• CTRs filed for cash transactions over $10,000
• SARs filed for suspicious activity ($5,000+ with suspect)
• Structuring is illegal—must be reported
• Never tip off customers about SAR filings
• Safe harbor protects good-faith reporters
• FINRA Rule 3310 requires written AML program