Anti-Money Laundering

Criminals need clean money, and a brokerage account is a good place to clean it. Congress made every broker-dealer part of the defense, and the exam tests the mechanics.

What money laundering is

Money laundering means moving money that came from crime through ordinary-looking transactions. The goal is to make the money look like it came from a lawful source, so the criminal can spend it without questions.

The process runs in three stages:

• Placement puts the criminal cash into the financial system. The launderer deposits it at a bank, buys money orders, or funds a brokerage account. Placement carries the highest risk of getting caught, because raw cash is hard to explain.
• Layering moves the money through many transactions to break the trail. The launderer wires it between accounts, trades securities, and routes it through several countries.
• Integration returns the money in a form that looks earned: real estate, a salary from a shell company, or the proceeds of an investment portfolio.

Structuring is the classic placement move. It means breaking a large amount of cash into smaller deposits, each one under the reporting threshold, so no currency report gets filed. Splitting $60,000 of cash into $9,000 deposits is structuring. It is a federal crime by itself, even when the cash came from a legal source.

The AML program your firm must run

Section 352 of the USA PATRIOT Act requires every financial institution to run an anti-money laundering (AML) program. FINRA Rule 3310 applies that duty to broker-dealers, and MSRB Rule G-41 does the same for municipal dealers. The program must be in writing, and senior management must approve it in writing.

A compliant program has five parts:

• Written policies and procedures designed to comply with the Bank Secrecy Act, the 1970 law that created these reporting duties.
• An AML compliance officer, a named person responsible for day-to-day compliance. The firm gives FINRA that person's name and contact details, and updates them yearly.
• Ongoing training for the right employees.
• Independent testing of the program, once a year. Firm employees may run it, as long as they are independent of the AML function.
• Risk-based customer due diligence: understanding why the customer opened the account, and identifying the real owners behind a company account.

Section 314 of the USA PATRIOT Act covers information sharing. Under 314(a), FinCEN passes law enforcement requests to firms, and each firm searches its records for the named person. Under 314(b), firms may share information with each other voluntarily, after notifying FinCEN.

Section 326: prove the customer is real

Before your firm opens an account, it must verify who the customer is. Section 326 of the USA PATRIOT Act requires a written customer identification program (CIP). The firm collects four items:

• Name.
• Date of birth.
• A physical address. A post office box alone will not do.
• An identification number, usually the Social Security number for a US person, or a passport number with country of issue for a non-US person.

The firm then verifies the identity within a reasonable time. It can use documents, such as a driver's license, or non-documentary methods, such as a credit check. It also screens the customer against government terrorist lists and gives notice that it collects this information. The firm keeps the information for five years after the account closes.

The two reports: CTR and SAR

FinCEN, the Financial Crimes Enforcement Network, is the Treasury bureau that runs this reporting system. Both reports go to FinCEN, not to the SEC and not to FINRA.

A Currency Transaction Report (CTR) covers cash. The firm files a CTR when currency transactions by or for one person total more than $10,000 in one business day. Add same-day transactions together first.

The CTR has nothing to do with suspicion. The dollar amount alone triggers it. The deadline is 15 days after the transaction.

A Suspicious Activity Report (SAR) covers suspicion. The firm files a SAR when a transaction involves at least $5,000 and the firm knows or suspects that it:

• involves money from criminal activity,
• is designed to evade Bank Secrecy Act rules,
• has no business purpose, or
• uses the firm to hide criminal activity.

The money does not have to be cash. The deadline is 30 calendar days from the day the firm spots the facts. When no suspect has been identified, the firm gets 30 more days, capped at 60.

Never tell a customer that your firm filed a SAR. A SAR is confidential, and tipping off the subject is a violation by itself. The firm keeps the SAR and its records for five years.

OFAC and the SDN list

The Office of Foreign Assets Control (OFAC) is the Treasury office that runs US economic sanctions. OFAC publishes the Specially Designated Nationals and Blocked Persons (SDN) list, which names terrorists, drug traffickers, and parties tied to sanctioned regimes. Every US firm and person must comply.

Before your firm opens an account or moves money, it screens names against the SDN list. A match means the firm blocks the assets, freezing them in place in a separate account. The firm reports the block to OFAC within 10 business days. Blocking differs from returning: the firm never sends the money back to a sanctioned party.

How this gets tested

Most AML items make you pick between two things that look alike. Sort them this way:

• Cash over $10,000 in one day: CTR, within 15 days, no suspicion needed.
• Suspicion at $5,000 or more: SAR, within 30 days, cash or not.
• A name on the SDN list: OFAC, block the assets, no threshold.

A favorite item describes a customer who deposits $9,500 on Monday and $9,500 on Tuesday. Neither day breaks $10,000, so no CTR is due. The pattern is structuring, so the firm files a SAR. The firm never tells that customer about the filing.