Definition of Money Laundering

Before diving into the compliance rules, you need to understand the crime they're designed to prevent.

What Is Money Laundering?

  • Money laundering is the process of making illegally obtained money appear legitimate
  • It disguises the origin, ownership, or destination of funds derived from criminal activity
  • Common sources of illicit funds include:
    • Drug trafficking
    • Fraud
    • Terrorism financing
    • Tax evasion
    • Embezzlement

The goal is simple: criminals want to use their illegal profits without attracting attention from law enforcement.

Think of it this way: Imagine someone robs a bank and walks out with bags of cash. They cannot just deposit it and buy a house. Money laundering is the process of running that cash through enough transactions (businesses, accounts, investments) that it comes out the other side looking like ordinary income.

Exam Tip: Gotchas

  • Money laundering is about disguising dirty money, not creating fake money. Do not confuse it with counterfeiting. The funds are real but illegally obtained.

Why It Matters to the Securities Industry

The securities industry is a prime target for money launderers because:

  • Large transaction volumes make it easier to hide illicit funds among legitimate trades
  • Complex financial instruments (shell companies, offshore accounts, derivatives) can obscure the money trail
  • Speed of electronic transfers allows rapid movement of funds across borders

This is why every broker-dealer must have systems in place to detect and report suspicious activity.

Two major federal laws criminalize money laundering and require financial institutions to fight it:

LawYearKey Requirement
Bank Secrecy Act (BSA)1970Requires financial institutions to keep records and file reports on certain transactions
USA PATRIOT Act2001Strengthened BSA requirements; added customer identification, information sharing, and enhanced due diligence
  • The BSA is sometimes called the "Anti-Money Laundering Act" because it created the foundation for all anti-money laundering (AML) compliance
  • The USA PATRIOT Act was passed after 9/11 to combat terrorism financing and significantly expanded AML obligations

Financial Industry Regulatory Authority (FINRA) Rule 3310 requires every FINRA member firm (broker-dealer) to establish and implement a written AML compliance program.

Exam Tip: Gotchas

  • The BSA (1970) came first and created the basic reporting framework. The USA PATRIOT Act (2001) built on top of it with stronger requirements. Both are still in effect; the PATRIOT Act did not replace the BSA.
  • The BSA applies to all financial institutions, not just banks. Do not let the name "Bank Secrecy Act" mislead you.