Identifying and Escalating Suspicious Activity

The last piece of Function 2.2 makes the registered representative (rep) the front line for detecting money laundering, fraud, and customer harm. The exam tests two things: recognizing red flags at account opening (and during the relationship), and knowing exactly what to do (and what not to do) when something looks wrong.

What is the anti-money laundering (AML) framework for broker-dealers?

Legal basis:

• The Bank Secrecy Act (BSA) requires every broker-dealer (BD) to have an anti-money laundering (AML) program
• FinCEN (Financial Crimes Enforcement Network) is the bureau of the U.S. Treasury that administers the BSA
• Broker-dealer suspicious-transaction reporting is governed by 31 CFR 1023.320

The firm's AML program must include procedures to detect suspicious activity and report it through a Suspicious Activity Report (SAR).

What are common red flags for suspicious activity at a broker-dealer?

The rep watches for patterns that are inconsistent with the customer's stated profile or the customer's normal behavior. Examples tested on the exam:

Think of it this way: The rep does not need to prove money laundering; the rep only needs to notice that the story does not fit. If the customer's actions do not match what the customer said at account opening, the rep escalates and the AML officer decides.

Exam Tip: Gotchas

Structuring is breaking deposits into amounts just under $10,000 to dodge Currency Transaction Report (CTR) filing. It is a red flag on its own, even if the underlying funds are legal. The pattern (structured deposits) is what matters, not the provable source.

How should a rep escalate suspicious activity?

When something looks wrong, the rep's job is clear, and it is limited:

• Escalate to the firm's designated AML compliance officer or principal
• Do NOT confront the customer
• Do NOT conduct an independent investigation
• Do NOT warn the customer that something is being reviewed

All escalations should be documented and preserved per the firm's books-and-records procedures.

Exam Tip: Gotchas

The rep's role when a red flag surfaces is to escalate, not to investigate or confront. Confronting the customer is not permitted and may itself constitute tipping off. Pass it up to the AML officer; the AML officer decides whether to file a SAR.

What does the tipping-off prohibition forbid?

Tipping off means notifying the customer (or anyone else involved in the transaction) that a Suspicious Activity Report (SAR) has been filed or is contemplated.

Key points:

• The BSA prohibits the filer of a SAR, or any director, officer, employee, or agent of a broker-dealer, from notifying any person involved in a suspicious transaction that the activity has been reported
• The prohibition applies even to employees of the firm who do not have a need to know
• Permitted disclosures (narrow): to FinCEN, federal/state/local law enforcement, a federal regulator examining the firm for BSA compliance, or the relevant self-regulatory organization (SRO)
• If a rep is subpoenaed for SAR information, the rep must decline to produce it and notify the firm and FinCEN

Exam Tip: Gotchas

Reps cannot tell a customer that the firm has filed (or plans to file) a SAR. Tipping off is a federal violation. The correct action is internal escalation to the firm's AML officer. Disclosure is permitted only to FinCEN, law enforcement, federal regulators examining the firm for BSA compliance, and the relevant SRO.

What are the Suspicious Activity Report (SAR) filing mechanics?

Exam Tip: Gotchas

The SAR filing window is 30 calendar days from the date the firm detects the suspicious activity (extendable to 60 days if no suspect has been identified). The existence of a filed SAR is confidential and cannot be disclosed to the customer under any circumstances.