Money laundering is the process of making illegally obtained money appear to come from a legitimate source. The three classic stages:
1. Placement: Introducing illegal cash into the financial system (e.g., depositing drug proceeds into a bank) 2. Layering: Obscuring the trail through complex transactions (wire transfers, currency exchanges, shell companies) 3. Integration: The money re-enters the economy appearing legitimate (buying real estate, luxury goods, or investments)
Securities firms are attractive for money laundering because they can facilitate rapid movement of large sums and create complex transaction trails. The financial services industry is therefore subject to extensive AML regulations.
---
The Bank Secrecy Act (1970) is the foundational U.S. AML law. It requires financial institutions to:
The BSA is administered by FinCEN (Financial Crimes Enforcement Network), a bureau of the U.S. Treasury.
---
A Currency Transaction Report (CTR) must be filed when a customer conducts a cash transaction exceeding $10,000 in a single business day.
Key rules:
Real-world example: A customer walks in and deposits $12,000 in cash to buy securities. The firm MUST file a CTR. The customer has done nothing illegal -- the CTR is simply a regulatory reporting requirement triggered by the cash amount.
---
A Suspicious Activity Report (SAR) must be filed when the firm suspects or has reason to suspect:
Key rules:
Real-world example: A customer regularly deposits $9,500 in cash every few days. The pattern suggests intentional structuring to stay below $10,000. The firm files a SAR. The customer must NOT be told.
---
Structuring (also called "smurfing") is breaking up transactions into smaller amounts specifically to avoid the $10,000 CTR threshold. Structuring is a federal crime -- even if the underlying money is from a completely legal source.
Example: A person deposits $4,000 on Monday, $4,000 on Wednesday, and $4,000 on Friday -- each deposit below $10,000. If the intent is to avoid the CTR, this is illegal structuring, regardless of where the money came from.
A CTR IS required even if the customer states they are trying to avoid reporting. The firm must file the CTR AND must file a SAR for the suspicious structuring.
---
| Feature | CTR | SAR | |---|---|---| | Trigger | Cash transaction >$10,000 | Suspicious activity $5,000+ | | Suspicion required? | No -- mandatory based on amount | Yes -- based on suspicion | | Filed with | FinCEN | FinCEN | | Notify customer? | No | Absolutely NOT (criminal violation) | | Trigger type | Objective (dollar amount) | Subjective (firm's judgment) |
---
The USA PATRIOT Act (2001) required all financial institutions to establish a Customer Identification Program (CIP) as part of their AML compliance. At minimum, CIP requires collecting:
The firm must verify this information using documents (passport, driver's license) or non-documentary methods. CIP procedures must be applied to ALL new accounts, not selectively.
---
The Beneficial Ownership Rule (FinCEN rule, 2016) requires financial institutions to identify and verify the beneficial owners of legal entity customers (corporations, LLCs, partnerships, trusts) that open new accounts.
25% threshold: Any individual who owns 25% or more of the equity interests of the legal entity must be identified and verified.
Control prong: At least one individual who controls, manages, or directs the legal entity (e.g., CEO, managing member) must also be identified, even if they own less than 25%.
Purpose: Prevent shell companies and anonymous entities from hiding criminal proceeds in the financial system.
---
Under the PATRIOT Act, every broker-dealer must have a written AML compliance program that includes:
---
---
Quiz Questions:
Q1. A customer deposits $11,500 in cash to purchase a mutual fund. The customer has done nothing suspicious -- this is a routine transaction. Is a CTR required?
A) No, because there is no suspicious activity B) Yes, a Currency Transaction Report must be filed because the cash exceeds $10,000 C) No, because mutual fund purchases are exempt from BSA reporting D) Yes, but only if the customer refuses to provide identification
Answer: B -- A CTR is required for ANY cash transaction exceeding $10,000 in a single business day, regardless of whether there is any suspicion of wrongdoing. The CTR is triggered purely by the dollar amount, not by suspicious behavior. Mutual fund purchases are not exempt. The customer has committed no violation -- CTRs are routine compliance filings.
---
Q2. A registered representative notices that a long-time customer has made four separate cash deposits of $8,500 within two weeks -- each below the $10,000 CTR threshold. The rep suspects the customer is structuring deposits to avoid reporting. What is the MOST appropriate action?
A) File a CTR for each individual deposit since they were each under $10,000 B) Confront the customer and ask directly whether they are trying to avoid reporting requirements C) File a SAR with FinCEN and do NOT alert the customer D) Take no action because each deposit was below the $10,000 threshold
Answer: C -- The pattern of deposits just below $10,000 is a classic structuring red flag. When the firm suspects structuring or other suspicious activity involving $5,000 or more, it must file a SAR with FinCEN. Under NO circumstances should the customer be informed that a SAR was filed (B violates the tipping-off prohibition). Individual deposits below $10,000 do not require a CTR (A), but the firm's suspicion triggers SAR filing.
---
Q3. Under the beneficial ownership rule, a broker-dealer opening an account for a corporation must identify any individual who:
A) Owns any shares of the corporation, regardless of percentage B) Owns 10% or more of the corporation's equity interests C) Owns 25% or more of the corporation's equity interests D) Is a named officer of the corporation, regardless of ownership
Answer: C -- The FinCEN Beneficial Ownership Rule requires identification of any individual owning 25% or more of the equity interests of a legal entity customer. Additionally, at least one individual exercising control over the entity must also be identified (the "control prong"), even if that person owns less than 25%. The 25% threshold is the key number.
---
Q4. An employee at a broker-dealer files a SAR in good faith, and it is later determined that the transaction was not actually suspicious. Which of the following BEST describes the employee's legal exposure?
A) The employee faces civil liability for filing an incorrect report B) The employee faces criminal liability for making a false report to FinCEN C) The employee has safe harbor protection and faces no liability for the good-faith filing D) The employee must reimburse the customer for any harm caused by the investigation
Answer: C -- The BSA provides a safe harbor for financial institutions and their employees who file SARs in good faith. Even if the transaction turns out to be innocent, a good-faith filing does not create liability. This safe harbor encourages reporting without fear of litigation. There is no liability for good-faith compliance (A, B, and D are all wrong).
---
Q5. A customer who has been told that a Currency Transaction Report will be filed asks the registered representative to split the $15,000 cash deposit into two deposits of $7,500 to avoid the reporting requirement. The registered representative should:
A) Accommodate the customer to maintain the relationship B) Refuse to split the deposit and still file a CTR for the full $15,000 transaction; also file a SAR for the structuring request C) Split the deposit as requested since each amount is under $10,000 D) File a CTR only if the customer insists on making the split deposits
Answer: B -- Splitting the deposit to avoid CTR reporting is illegal structuring. The firm must NOT accommodate the request and must file a CTR for the full $15,000 transaction. Additionally, the customer's explicit request to structure deposits is itself suspicious activity requiring a SAR filing. The representative must NOT tip off the customer that a SAR will be filed. Accommodating the request (A, C) would make the representative complicit in the structuring violation.