Anti-Money Laundering (AML) refers to the laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds (dirty money) as legitimate income.
Three stages of money laundering: 1. Placement: Introducing illegal funds into the financial system (e.g., depositing cash). 2. Layering: Concealing the trail through complex transactions (wire transfers, shell companies, cryptocurrency conversions). 3. Integration: Reintroducing funds into the economy as clean money (real estate purchase, luxury goods).
FINRA AML program requirements (FINRA Rule 3310): All broker-dealers must maintain a written AML compliance program with five elements: 1. Policies and procedures to detect and report suspicious activity. 2. Independent testing (annual audit). 3. A designated AML compliance officer. 4. Ongoing employee training. 5. Customer identification procedures (CIP).
Key reporting obligations: - CTR (Currency Transaction Report): Cash transactions >$10,000; filed with FinCEN. - SAR (Suspicious Activity Report): Suspicious activity ≥$5,000; filed with FinCEN. Must NOT tip off the subject.
Structuring (illegal): Breaking up large cash amounts into smaller deposits/transactions to avoid CTR filing — a separate federal crime.
Risk-based approach: Firms must conduct risk assessments to identify their highest-risk customers and products (e.g., foreign PEPs — politically exposed persons — require enhanced due diligence).
> Exam tip: AML program must have all 5 elements. SAR tipping off is prohibited — a critical rule. Structuring is illegal even if the underlying funds are legitimate. Tested heavily on the SIE, Series 7, and Series 65/66.