- According to the USA PATRIOT Act, records relating to customer identity verification must be maintained by a broker-dealer for at least:
Answer: five years after the account is closed.
The USA PATRIOT Act requires firms to maintain records used to verify a customer's identity for five years after the account is closed. This extended retention period ensures that law enforcement has access to this crucial information long after the customer relationship has ended.
- The Financial Crimes Enforcement Network (FinCEN) is a bureau of which government department?
Answer: The Department of the Treasury
FinCEN is a bureau within the U.S. Department of the Treasury. Its mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
- Failure to comply with Bank Secrecy Act and USA PATRIOT Act regulations can result in which of the following penalties for a firm and its employees?
Answer: Civil and criminal penalties, including fines and imprisonment.
The consequences for AML failures are severe and can include significant civil monetary penalties, as well as criminal penalties for willful violations, which can include substantial fines and imprisonment for the individuals involved. Regulatory actions like censure or suspension are also possible, but the law provides for severe civil and criminal penalties.
- During the account opening process, a new customer's name matches an entry on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list. The broker-dealer must:
Answer: block or freeze the assets and report the match to OFAC.
OFAC requires firms to block or freeze the assets of any individual or entity on the SDN list. The firm must also report the block to OFAC within 10 days. Simply rejecting the application and returning funds is not sufficient, as it could allow the individual to move the assets elsewhere. A CTR is not relevant in this situation.
- The initial stage of money laundering, where illicit funds are first introduced into the legitimate financial system, is known as:
Answer: placement.
Placement is the first stage of money laundering. It involves placing illegal cash into the financial system, for example, by making cash deposits into a bank or brokerage account. Layering is the second stage, involving complex transactions to obscure the source of the funds. Integration is the final stage, where the money is returned to the criminal as legitimate-appearing funds. Structuring is a technique used during placement to avoid detection.
- Which of the following is considered a primary 'red flag' for potential money laundering activity in a customer account?
Answer: The customer shows a lack of concern for investment risks or transaction costs.
A significant red flag for money laundering is a customer who seems unconcerned with the financial performance of their transactions, such as risks, commissions, or other costs. This can indicate that the primary goal is not to make a profit, but rather to move and legitimize funds. The other options are generally normal investor behaviors.
- A customer makes three separate cash deposits into their brokerage account on the same business day: one for $4,000, another for $3,000, and a third for $5,000. Which of the following actions is the firm required to take?
Answer: File a Currency Transaction Report (CTR) because the total cash deposited exceeds $10,000.
The Bank Secrecy Act requires firms to aggregate multiple cash transactions from the same customer on the same business day. In this case, the total cash deposited is $12,000 ($4,000 + $3,000 + $5,000), which exceeds the $10,000 threshold. Therefore, the firm must file a CTR. While the activity might also be structured and warrant a SAR, the CTR is definitely required.
- After a reportable cash transaction occurs, a broker-dealer must file a Currency Transaction Report (CTR) with FinCEN within:
Answer: 15 calendar days.
A firm must file a CTR on FinCEN Form 112 within 15 calendar days of the reportable currency transaction. This timeline is a key compliance requirement under the Bank Secrecy Act.
- A firm's anti-money laundering (AML) compliance officer has just directed the filing of a Suspicious Activity Report (SAR) concerning a client's recent wire transfers. The client calls their registered representative to ask about the status of these transfers. The representative is permitted to:
Answer: discuss the transfers but is prohibited from mentioning the SAR filing.
Federal law strictly prohibits the disclosure of a Suspicious Activity Report (SAR) filing to the subject of the report. This is often referred to as 'tipping off.' The registered representative can discuss the client's account activity but cannot, under any circumstances, reveal that a SAR was filed or is being contemplated.
- Under the USA PATRIOT Act's Customer Identification Program (CIP), a broker-dealer is required to obtain which of the following pieces of information from a new customer?
Answer: The customer's date of birth and an identification number.
The Customer Identification Program (CIP) requires firms to obtain, at a minimum, four pieces of information: name, address, date of birth, and an identification number (such as a Social Security number for a U.S. person). While other information like income or investment objectives is necessary for suitability (Know Your Customer rule), it is not a specific requirement of the CIP for identity verification.
- A broker-dealer's Anti-Money Laundering (AML) compliance program must, at a minimum, include all of the following EXCEPT:
Answer: an annual filing of the program's policies with the SEC.
An AML compliance program must include: (1) policies, procedures, and internal controls; (2) the designation of an AML compliance officer; (3) ongoing employee training; and (4) an independent audit function to test the program. There is no requirement to file the program's policies annually with the SEC, although the program must be in writing and available for inspection.
- A broker-dealer's written Anti-Money Laundering (AML) program must be approved by:
Answer: a member of the firm's senior management.
A firm's AML program must be in writing and approved by a member of its senior management. While legal counsel may be involved in drafting it, and regulators (like FINRA and the SEC) will examine it, formal approval comes from within the firm's leadership to ensure accountability.
- Which of the following customer identification documents would be considered unacceptable for verifying identity under a firm's Customer Identification Program (CIP)?
Answer: An expired driver's license.
A firm's CIP must include procedures for using documentary methods to verify a customer's identity. Acceptable documents include unexpired, government-issued identification evidencing nationality or residence, which typically includes a photograph or similar safeguard. An expired driver's license is not a valid form of identification for CIP purposes.
- What is the primary function of the Office of Foreign Assets Control (OFAC)?
Answer: To enforce economic and trade sanctions against targeted foreign countries and regimes.
OFAC's primary mission is to administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals. It maintains lists, such as the SDN list, of individuals and entities with whom U.S. persons are prohibited from dealing. FinCEN is responsible for collecting financial transaction information to combat money laundering.
- A client intentionally makes several cash deposits of $9,000 on consecutive days to avoid triggering a CTR filing. This illegal practice is known as:
Answer: structuring.
Structuring is the illegal act of breaking up a large cash transaction into smaller ones (typically below the $10,000 CTR threshold) to evade reporting requirements. This activity is a red flag for money laundering and requires the firm to file a Suspicious Activity Report (SAR).
- Under the Bank Secrecy Act, a broker-dealer is required to file a Currency Transaction Report (CTR) with FinCEN for which of the following scenarios?
Answer: A customer depositing $11,000 in cash into their account in a single transaction.
A Currency Transaction Report (CTR) must be filed for any cash transaction or series of related cash transactions exceeding $10,000 in a single business day. A cash deposit of $11,000 meets this requirement. Transactions by check do not involve currency and therefore do not trigger CTR filing requirements. Multiple cash deposits totaling less than $10,000 would not require a CTR unless they appear to be structured to avoid reporting.
- A registered representative becomes aware of a transaction of at least $5,000 that they suspect involves funds derived from illegal activity. The firm is required to file a:
Answer: Suspicious Activity Report (SAR) with FinCEN.
Firms are required to file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) for any transaction or group of transactions of at least $5,000 where the firm suspects it involves funds from illegal activity, is designed to evade BSA regulations, or has no apparent lawful purpose.
- Under a firm's Customer Identification Program (CIP), the firm must verify a new customer's identity:
Answer: within a reasonable period before or after the account is opened.
The CIP rule requires firms to have procedures to verify the identity of each customer to the extent reasonable and practicable. The verification must occur within a reasonable time before or after the customer's account is opened. This allows accounts to be opened but may restrict transactions until verification is complete.
- The ultimate responsibility for a broker-dealer's anti-money laundering (AML) program rests with:
Answer: the firm's senior management.
While the AML compliance officer is responsible for the day-to-day implementation and management of the AML program, ultimate responsibility for the firm's AML compliance rests with its senior management. They are responsible for approving the program and ensuring it has sufficient resources to be effective.
- An individual sends a series of wire transfers from their brokerage account to multiple foreign banks in different names, with no apparent business purpose. This activity is most characteristic of which stage of money laundering?
Answer: Layering
Layering is the second stage of money laundering, characterized by a series of complex financial transactions designed to obscure the audit trail and separate the illicit funds from their original source. Sending multiple wire transfers to different accounts and jurisdictions is a classic layering technique.
