Anti-money laundering (AML)
Also known as: AML
Anti-money laundering (AML) refers to the laws, regulations, and firm procedures designed to stop criminals from disguising illegally obtained funds as legitimate income. In the U.S., the Bank Secrecy Act is the foundation of AML compliance.
Anti-money laundering (AML) is the framework of laws and compliance programs aimed at detecting and preventing money laundering — the process of making illegally obtained money appear legitimate. The Bank Secrecy Act (BSA), strengthened by the USA PATRIOT Act, requires financial institutions, including broker-dealers, to maintain formal AML programs and report suspicious activity to FinCEN, the Financial Crimes Enforcement Network.
Money laundering typically moves through three stages. In placement, illicit cash first enters the financial system. In layering, the launderer runs the money through a series of transactions — wire transfers, security purchases, shell accounts — to obscure its origin. In integration, the funds re-emerge looking like legitimate business proceeds or investment returns.
Firms must verify customer identities under a customer identification program (CIP), file Currency Transaction Reports (CTRs) for cash transactions exceeding $10,000, and file Suspicious Activity Reports (SARs) when transactions appear designed to evade reporting rules or lack a lawful purpose. Red flags include structuring deposits just under the reporting threshold and accounts with heavy money movement but little securities activity. AML records must be retained under strict timeframes.
AML is tested across the securities licensing exams: the SIE covers recognizing illegal activity and the stages of laundering, while the Series 9 and Series 10 test a supervisor's responsibility for AML procedures, SAR filing, and record retention within a branch.
Key takeaways
- AML rules stem from the Bank Secrecy Act and USA PATRIOT Act and require firms to maintain formal compliance programs.
- Money laundering proceeds in three stages: placement, layering, and integration.
- Cash transactions over $10,000 trigger a CTR, and suspicious transactions trigger a SAR filed with FinCEN.
- Structuring — deliberately breaking deposits into amounts just under the reporting threshold to evade the reporting requirement — is both a red flag and a federal crime.
- The SIE, Series 9, and Series 10 exams all test AML stages, reporting requirements, and supervisory responsibilities.