Money laundering is a form of financial crime that involves taking criminally obtained proceeds (dirty money) and disguising their origins so they’ll appear to be legitimately sourced. Anti-Money Laundering (AML) refers specifically to the activities financial institutions must perform to comply with legal requirements to actively detect and report suspicious financial transactions.
AML regulations in the United States have expanded from the 1970s Bank Secrecy Act’s requirements that banks report cash deposits greater than $10,000. Similar measures have been adopted by the European Union and other jurisdictions.
Firms must comply with the Bank Secrecy Act (BSA) and its implementing regulations (AML rules). The purpose of the Anti-Money Laundering (AML) rules is to help detect suspicious transactions, including the predicate offenses of securities fraud and market manipulation, such as money laundering and terrorist financing.
FINRA reviews a company’s compliance with anti-money laundering (AML) rules under FINRA Rule 3010, which sets forth minimum requirements for a firm’s written AML compliance program.
The basic tenets of a compliance program under FINRA Rule 3310 include the following:
- A senior manager must approve the program in writing.
- It must be reasonably well designed to ensure the firm can detect and report suspicious activity.
- A risk-based CIP must enable the firm to form a “reasonable belief” that it knows the true identities of its customers.
- It must be independently tested to ensure proper implementation of the program.
- Each FINRA member firm must submit contact information for its AML Compliance Officer through theFINRA Contact System (FCS).
- Ongoing training must be provided to appropriate personnel within financial institutions.
The program must include appropriate risk-based procedures for conducting ongoing customer due diligence, including
(i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and,
(ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information, including information regarding the beneficial owners of legal entity customers.
What Are Some Ways That Money Is Laundered?
Money launderers often use their associates’ legitimate businesses to launder illicit funds or inflate invoices in shell companies. Layering transactions are financial transfers designed to hide the source of illicit funds from law enforcement agencies. Smurfing refers to the practice of splitting up a large transaction into smaller ones to avoid detection by anti-money laundering (AML) agencies.