Anti-Money-Laundering Rules You Need to Know for the Series 7 Exam - dummies

Anti-Money-Laundering Rules You Need to Know for the Series 7 Exam

By Steven M. Rice

The Bank Secrecy Act establishes the U.S. Treasury Department as the regulator for anti-money laundering programs. All broker-dealers are required to develop programs to detect possible money-laundering abuses.

In addition, all broker-dealers must review the Office of Foreign Asset Control’s (OFAC) Specially Designated National’s (SDN) list to make sure that they’re not doing business with individuals or organizations that are on the list. Anti-money-laundering programs are designed to help prevent dirty money that has been cleaned (made to look like it came from a legitimate source) from being used to fund terrorist activities, illegal arms sales, drug trafficking, and so on.

Here are three stages of money laundering that you must be aware of for the Series 7 exam (please, don’t try this at home):

  1. Placement

    In this initial stage of money laundering, the funds, derived from criminal activity, are transferred into the financial system (typically via banks and broker-dealers).

  2. Layering

    Layering is the money launderers’ attempt to disguise the source of the funds, usually by moving the funds from one place to another through a series of transactions.

  3. Integration

    Integration is the final stage of money laundering, when illegal funds are mixed (commingled) with legitimate funds. Launderers usually accomplish this step through businesses that operate using cash, importing and exporting companies, and so on.

Broker-dealers and other financial institutions must report any cash or cash equivalent deposits, withdrawals, or transfers of $10,000 or more through a Currency Transaction Report (CTR) to FinCEN (the U.S. Treasury Financial Crimes Network). An institution must report suspicious activity of $5,000 or more of any type of transaction to FinCEN by filing a Suspicious Activity Report (SAR).

Here are some indications of money laundering at the opening of the account:

  • Concern with U.S. government reporting requirements

  • Reluctance to reveal information about business activities

  • Suspect ID such as a license or passport that looks like it was made in someone’s basement

  • Irrational transactions that are inconsistent with objectives

  • A fiduciary (the person who can legally make decisions for another investor) who’s reluctant to provide information about the customer

  • An individual’s lack of general knowledge of his industry

And here are some shady signals to look out for after the account is open:

  • Deposits of large amounts of cash or money orders

  • Structuring — the making of cash or cash-equivalent deposits (such as money orders) of just under $10,000 to avoid having them be reported to the U.S. government

  • Wire transfers to noncooperative countries

  • Sudden and unexplained wire activity

  • Making a deposit and transferring it to another party without any business purpose

  • Buying a long-term investment and liquidating it in the short-term

  • Transfers between multiple accounts for no apparent reason

  • Depositing bearer bonds and requesting the money immediately

  • A total lack of concern about risks and commissions

The signs of money laundering tend to make sense, so when answering a Series 7 exam question about money laundering, think to yourself, “If it looks like a duck and quacks like a duck, it’s probably a duck” — or in financial terms, “If it looks and seems like money laundering, it’s probably money laundering.”