Financial professionals must act in the best interest of their customers. At the same time, they also have a legal and ethical duty to watch for suspicious activity. If a representative believes a customer may be involved in illegal activity, the representative must escalate the concern and follow the firm’s reporting procedures.
The term money laundering is often linked to the Al Capone era. During Prohibition, Capone made large amounts of money selling alcohol illegally. The mob used laundromats to make that “dirty” cash look legitimate. Because laundromats handle a lot of cash, Capone and his crew could mix illegal funds with real business revenue and deposit it as if it came from normal operations. The goal was to hide the true source of the money and make it harder for authorities to trace.
Money laundering still happens today, but it’s often more sophisticated. Criminals may use bank and investment accounts to disguise where illegally obtained funds came from. After terrorists in the 9/11 attacks used financial accounts to fund their operations, the Patriot Act was signed into law and the Bank Secrecy Act was amended. These laws require financial firms to identify and report potential money laundering. Under the Bank Secrecy Act, firms must create and maintain anti-money laundering (AML) programs, which help representatives recognize red flags and report suspicious activity.
Money laundering involves three stages:
Placement is the process of moving “illegal” money into the financial system. For example, assume Bob sells illegal drugs and receives $100,000 in cash. He needs to get that money into the financial system, so he starts depositing it into his bank account. That step - getting the cash into the system - is placement. Bob also wants to avoid triggering attention.
Currency transaction reports (CTRs) help the government track large cash movements. Whenever a customer deposits or receives more than $10,000 in currency, the financial firm must report it to the federal government (specifically with FinCEN, discussed below) within 15 days. If Bob wants to avoid a CTR, he might try to break the cash into smaller deposits just under $10,000 - for example, depositing $9,900 each week. Intentionally reducing a transaction to avoid a CTR is illegal and is known as structuring.
Sometimes a customer may not be doing anything illegal, but their behavior still looks suspicious. For example, it’s a customer’s right to ask about CTRs, but it may raise concern if they ask unusually detailed questions about the firm’s reporting rules and internal procedures. When suspicious activity is identified, financial professionals must report the issue to their superiors. If warranted, the firm must file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department. SARs must be filed within 30 days of the suspicious activity.
The next step in Bob’s money laundering scheme is layering. After the “dirty” funds enter the system, Bob makes many transactions to obscure the trail. This can include transferring money between accounts that appear unrelated, including accounts in different countries. Even if the accounts look unconnected, Bob may control all of them. The more transactions involved, the harder it becomes for authorities to follow the paper trail.
The final step is integration, where the layered funds are moved into legitimate-looking sources. For example, Bob might start a real estate business and buy properties using the layered funds. Once the money is invested in assets that appear legitimate, it can look “clean.”
Member firms must train representatives to detect and report potential money laundering. Firms must also designate an employee as their AML (anti-money laundering) compliance officer, who is responsible for creating and implementing systems to detect red flags, such as:
If a representative identifies any of the above actions, they must escalate the issue to a supervisor. From there, the appropriate parties at the firm investigate and report to the relevant authorities if necessary.
When a customer opens an account, the firm must check a document called the Specifically Designated Nationals (SDN) list. This list includes individuals controlled by or acting on behalf of hostile nations, as well as known terrorists and drug traffickers. If a customer’s name appears on the SDN list, the firm must freeze the account and stop doing business with the customer. The account assets are reported and may be seized by the U.S. Government.
The Office of Foreign Assets Control (OFAC), also part of the U.S. Treasury Department, maintains and oversees the SDN list. OFAC also controls which countries financial firms are allowed to do business with.
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