Anti-Money Laundering (AML)

Lesson

Anti-money laundering (AML) regulations are designed to prevent the illegal practice of generating income through criminal activities and concealing the origins of those funds.

Practice Question #1

Which of the following is a primary goal of anti-money laundering regulations?

A) Preventing insider trading

B) Ensuring fair market competition

C) Detecting and preventing the concealment of illegally obtained funds

D) Encouraging international trade

Select an option above to see an explanation here.

A) Insider trading is a separate issue from money laundering. B) Fair market competition is not directly related to money laundering. C) AML regulations aim to detect and prevent the concealment of illegally obtained funds. D) Encouraging international trade is not a primary goal of AML regulations.

Terms

Anti-Money Laundering (AML):: A set of regulations, laws, and procedures to prevent criminals from disguising illegally obtained funds as legitimate income.
Money Laundering:: Making illegally-gained proceeds appear legal by hiding their origins or ownership.
Know Your Customer (KYC):: A process used by financial institutions to verify the identity of their clients and assess potential risks of illegal activities.
Customer Identification Program (CIP):: A requirement for financial institutions to collect and verify their clients' personal information.
Suspicious Activity Report (SAR):: A report filed by financial institutions when they detect suspicious transactions that may involve money laundering or other financial crimes.
Currency Transaction Report (CTR):: A report filed by financial institutions for cash transactions exceeding $10,000 in a single day.
Office of Foreign Assets Control (OFAC):: A U.S. government agency responsible for enforcing economic and trade sanctions against countries and individuals involved in terrorism, narcotics, and other illegal activities.
Financial Crimes Enforcement Network (FinCEN):: A U.S. Department of the Treasury bureau that collects and analyzes information to combat money laundering, terrorist financing, and other financial crimes.
Bank Secrecy Act (BSA):: A U.S. law requiring financial institutions to assist government agencies in detecting and preventing money laundering.

Practice Question #2

What is the purpose of a Suspicious Activity Report (SAR)?

A) To report cash transactions exceeding $10,000

B) To report potential insider trading activities

C) To report suspected money laundering or other financial crimes

D) To report violations of trade sanctions

Select an option above to see an explanation here.

A) Currency Transaction Reports (CTRs) are used to report cash transactions exceeding $10,000. B) Insider trading activities are reported separately from SARs. C) SARs are used to report suspected money laundering or other financial crimes. D) Violations of trade sanctions are reported to the Office of Foreign Assets Control (OFAC).

Historical Example

In the early 2000s, a major international bank was found to have lax anti-money laundering controls, which allowed billions of dollars in drug money to be laundered through the bank. The bank was fined heavily and had to implement stricter AML policies to prevent future occurrences.

Practice Question #3

Which U.S. law requires financial institutions to assist government agencies in detecting and preventing money laundering?

A) The Bank Secrecy Act (BSA)

B) The Patriot Act

C) The Securities Exchange Act of 1934

D) The Investment Advisers Act of 1940

Select an option above to see an explanation here.

A) The Bank Secrecy Act (BSA) requires financial institutions to assist government agencies in detecting and preventing money laundering. B) The Patriot Act includes provisions to combat money laundering and terrorist financing, but it is not the primary law requiring financial institutions to assist government agencies. C) The Securities Exchange Act of 1934 primarily regulates the secondary trading of securities. D) The Investment Advisers Act of 1940 regulates investment advisers and their fiduciary duties.

Real-World Example

A financial advisor notices that a client has been making multiple large cash deposits just under the $10,000 reporting threshold. The advisor suspects the client may be attempting to avoid detection and should file a Suspicious Activity Report with FinCEN.