AML Practice Questions for the SIE

Answer: FinCEN, a bureau of the U.S. Treasury Department

The Bank Secrecy Act (BSA) is the foundation of U.S. anti-money laundering law, and the Treasury Secretary's authority to administer it has been delegated to FinCEN — the Financial Crimes Enforcement Network, a bureau of the Treasury Department. FinCEN issues the BSA's implementing regulations under that delegated authority and is the recipient of the reports the BSA requires, including Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs), which firms submit through FinCEN's BSA E-Filing System. FINRA Rule 3310 is the rule that obligates each member firm to develop and implement a written AML program reasonably designed to achieve and monitor the member's compliance with the BSA — but FINRA is a self-regulatory organization. Watch the distinction the exam is testing: examining firms for BSA compliance is not the same as administering the statute. Both FINRA and the SEC do inspect broker-dealers for BSA/AML compliance, yet neither administers the BSA nor receives the filings. OFAC is a frequent trap because it is also part of Treasury — but OFAC's role is economic sanctions and the Specially Designated Nationals (SDN) list, which firms screen against and report blocked assets to under a separate sanctions regime. BSA reports run to FinCEN.

The Trap: Confusing FinCEN with FINRA, the SEC, or OFAC as administrator of the Bank Secrecy Act — especially mistaking BSA examination authority (SEC/FINRA) for BSA administration (FinCEN)

• The Securities and Exchange Commission (SEC): Misconception: assuming a securities firm's AML reports go to the securities regulator. The SEC regulates the securities markets and inspects broker-dealers for BSA compliance, but it does not administer the statute, and BSA reports are not filed with it — they go to FinCEN.
• The Office of Foreign Assets Control (OFAC): Documented OFAC/FinCEN confusion: both sit within Treasury, but OFAC administers economic sanctions and the SDN list — a separate regime from Bank Secrecy Act administration and reporting.
• FINRA: Misconception: confusing the SRO that mandates the written AML program (Rule 3310) with the federal agency that administers the underlying statute. FINRA requires the program and examines members for compliance, but it does not administer the BSA or receive BSA filings.

Verified against: Bank Secrecy Act, 31 U.S.C. 5311 et seq.; Treasury Order 180-01 (BSA administration delegated to the Director of FinCEN); fincen.gov.

Answer: Placement, layering, integration

Money laundering proceeds in three stages, in this order: (1) placement — illicit cash first enters the financial system; (2) layering — a series of transfers and transactions designed to obscure where the money came from; and (3) integration — the funds re-emerge looking like legitimate income or assets. A helpful picture is a washing machine: dirty cash goes in (placement), runs through a spin cycle of transfers (layering), and comes out clean and folded (integration). Each wrong option scrambles the sequence — remember that money cannot be disguised before it enters the system and cannot come out 'clean' before its trail is hidden. Recognizing these stages is central to the AML programs required of broker-dealers under the Bank Secrecy Act and FINRA Rule 3310.

The Trap: Scrambling the placement → layering → integration sequence

• Layering, placement, integration: Stage-order scramble: treats the obscuring of the trail as the first step, but money cannot be layered before it has entered the financial system.
• Placement, integration, layering: Stage-order scramble: has the funds re-emerging as legitimate before the trail is hidden — integration is the final stage, not the middle one.
• Integration, layering, placement: Stage-order scramble: the sequence fully reversed, a trap for students who memorized the three names but not their order.

Verified against: Bank Secrecy Act / FinCEN framework — three stages of money laundering (placement, layering, integration); FINRA Rule 3310

Answer: Layering

Moving funds through a rapid chain of wires among shell-company accounts with no business purpose is layering — the middle stage of money laundering, whose entire point is to obscure the audit trail between the money and its criminal source. Think of the washing machine: dirty cash in (placement), spin cycle of transfers (layering), clean funds out (integration). Placement is wrong because placement is the entry of illicit cash into the financial system; this money was already on deposit at the firm, and moving funds that are already inside the system is layering. Integration is wrong because the funds here are being hidden, not re-emerging as apparently legitimate income or assets — integration comes last, when the money resurfaces as a business, real estate, or similar visible holding. Structuring is not a stage at all: under the Bank Secrecy Act it means deliberately breaking up cash transactions to evade the $10,000 Currency Transaction Report threshold. It is a separate federal crime, it applies to currency rather than wires, and it sits outside the three-stage cycle entirely. One wording trap worth knowing: 'layering' also names an unrelated market-manipulation tactic — entering orders with no intent to execute them, in order to create false price pressure. That is why this question asks specifically about the money-laundering process; read the qualifier before you choose. Complex, purposeless wire patterns like this one are classic red flags that a firm's anti-money-laundering program under FINRA Rule 3310 must be reasonably designed to detect and report.

The Trap: Misclassifying layering as placement (or calling any fund movement 'structuring'); secondary trap — confusing money-laundering layering with manipulative order layering

• Structuring: Confusing structuring with the laundering stages: structuring means deliberately splitting cash transactions to evade the $10,000 currency-reporting threshold. It is its own federal crime under the Bank Secrecy Act, but it is not one of the three stages — and it involves currency, not wires.
• Integration: Stage misclassification: integration is the final stage, when funds re-emerge as apparently legitimate — typically the purchase of a business, real estate, or other visible 'clean' asset. These transfers are hiding the money, not surfacing it.
• Placement: Stage misclassification: treats any early movement of funds as placement. Placement is the entry of illicit cash into the financial system — that step was already complete before this money sat on deposit at the firm. Shuffling funds that are already inside the system is layering.

Verified against: Bank Secrecy Act / FinCEN framework — layering stage of money laundering; FINRA Rule 3310 (AML compliance program)

Answer: Integration

This is integration — the third and final stage of money laundering, in which funds that have already been placed into the financial system and layered through obscuring transactions re-emerge as apparently legitimate wealth, here disguised as car-wash profits. Placement is wrong because the cash entered the system long ago; layering is wrong because the obscuring transfers (the offshore shell accounts) were the previous step — the purchase of a legitimate business is what brings the money back out 'clean.' Smurfing is a synonym for structuring: breaking cash transactions into small pieces to evade the Bank Secrecy Act's currency-reporting threshold. It is an illegal technique often seen at the placement stage, not a stage itself. Remember the sequence: dirty money in (placement), spin cycle (layering), clean money out (integration).

The Trap: Misclassifying integration as layering; treating smurfing/structuring as a laundering stage

• Layering: Stage misclassification: the offshore transfers were the layering; buying a legitimate business so the money resurfaces as clean income is the step AFTER the trail has been obscured.
• Placement: Stage misclassification: placement is the first entry of illicit cash into the financial system, which happened long before this step.
• Smurfing: Documented confusion: smurfing is another name for structuring — splitting cash deposits to evade currency reporting. It is a technique, not the final laundering stage.

Verified against: washing-machine teaching angle

Answer: The firm must designate an AML compliance officer and provide that person's identity and contact information to FINRA

FINRA Rule 3310 requires each member firm's written AML program to include several core elements: risk-based policies and procedures to detect and report suspicious activity, designation of an AML compliance officer whose identity and contact information are provided to FINRA (and kept current), ongoing training for appropriate personnel, independent testing of the program (generally conducted annually), and customer due diligence. Choice B fails because the testing must be independent — it cannot be conducted by the AML officer whose program is being tested. Choice C fails because approval comes from the firm's own senior management in writing; no regulator pre-approves the program. Choice D fails because training extends to all appropriate personnel who could encounter suspicious activity, very much including registered representatives, not merely the compliance department.

The Trap: Believing FinCEN pre-approves AML programs / misknowing the pillars (self-testing, compliance-only training)

• AML training is required only for employees of the firm's compliance department: Misconception narrowing the training pillar: Rule 3310 requires ongoing training for appropriate personnel throughout the firm — including registered representatives who face customers — not just compliance staff.
• The written program must be approved in advance by FinCEN before it takes effect: Misconception that regulators pre-approve AML programs: the program must be approved in writing by a member of the firm's senior management, not filed with or pre-cleared by FinCEN.
• Independent testing of the program may be performed by the AML compliance officer who administers it: Misconception that testing is an internal formality: the required testing must be independent of the people who run the program — the AML officer cannot audit his or her own work.

Verified against: FINRA Rule 3310 — Anti-Money Laundering Compliance Program

Answer: Each individual who owns 25% or more of the LLC's equity, plus at least one individual who exercises significant control over the company

FinCEN's customer due diligence (CDD) requirement — often called the fifth pillar of an AML program — applies when a legal-entity customer such as an LLC or corporation opens an account. It uses a two-prong test: under the ownership prong, the firm identifies and verifies each individual who owns 25% or more of the entity's equity; under the control prong, it identifies at least one individual with significant responsibility for controlling or managing the entity (for example, a CEO, CFO, or managing member). The 10% and 5% figures are traps borrowed from other securities thresholds — insider/control-person status and large-shareholder reporting, respectively. Choice D is wrong because the control prong applies in every case: even if ownership is so dispersed that no one holds 25%, the firm must still identify a control person.

The Trap: Swapping the 25% beneficial-ownership threshold with 10%/5% from other rules, or dropping the control-person prong

• Each individual who owns 5% or more of the LLC's equity, plus a control person: Threshold swap: 5% is the large-shareholder public-reporting threshold for publicly traded stock, not the AML beneficial-ownership standard for legal-entity customers.
• Each individual who owns 10% or more of the LLC's equity, plus a control person: Threshold swap: 10% is the ownership level associated with insider (control-person) status elsewhere in securities regulation, not the beneficial-ownership trigger under the AML customer due diligence rule.
• Each individual who owns 25% or more of the LLC's equity; no control person needs to be identified: Drops the control prong: the rule has two prongs, and a control-person individual must be identified even if no one reaches the 25% ownership level.

Verified against: FinCEN Customer Due Diligence (CDD) Rule, 31 CFR §1010.230 — beneficial ownership requirements (the AML program's 'fifth pillar' under FINRA Rule 3310)

Answer: Name, date of birth, address, and Social Security number (or, for a non-U.S. person, a passport or other government-issued identification number)

Under the Bank Secrecy Act (as amended by the USA PATRIOT Act), a broker-dealer's Customer Identification Program must obtain four items from a customer before opening the account: name; date of birth (for an individual); address; and an identification number — a taxpayer identification number for U.S. persons (for an individual, normally the Social Security number), or for a non-U.S. person a taxpayer ID number, a passport number and country of issuance, an alien identification card number, or the number and country of issuance of another government-issued document evidencing nationality or residence. The firm must verify the customer's identity within a reasonable time before or after the account is opened, using documents, non-documentary methods, or a combination of both, and must give customers notice that identifying information is being requested to verify their identity. Watch the recordkeeping split: the identifying information itself is kept for five years after the account is closed, while the records describing how identity was verified are kept for five years after the record is made. The wrong choices all import data from elsewhere on the new-account form. Occupation, employer, annual income, net worth, and investment objectives are customer account record items under SEC Rule 17a-3(a)(17), and source of funds belongs to ongoing due diligence and suspicious-activity monitoring — useful information, but none of it is part of the CIP identity minimum.

The Trap: Confusing CIP's four identity items with suitability/new-account-profile data

• Name, address, occupation, and investment objectives: Confuses CIP with the suitability profile: occupation and investment objectives are know-your-customer data gathered for recommendations and recorded under SEC Rule 17a-3(a)(17), not part of the CIP identity-verification minimum.
• Name, Social Security number, annual income, and source of funds: Mixes CIP with broader due-diligence information: income is a 17a-3(a)(17) account-record item, and source of funds relates to ongoing customer due diligence and suspicious-activity monitoring — neither is part of the CIP identity minimum.
• Name, date of birth, employer, and estimated net worth: Confuses CIP with new-account financial-profile items: employer and net worth appear on account forms under SEC Rule 17a-3(a)(17) for suitability purposes but are not among CIP's four required identity elements.

Verified against: 31 CFR 1023.220(a)(2)(i)(A) (four items; obtained prior to opening), (a)(2)(ii) (verification within reasonable time before/after opening), (a)(3)(ii) (retention split: 5 yrs after account closed vs. 5 yrs after record made), (a)(5) (customer notice); FINRA guidance 'Comparison of the AML Customer Identification Rule and the SEC's Books & Records Customer Account Records Rule' (occupation/employer/income/net worth/objectives are 17a-3(a)(17), not CIP)

Answer: A SAR is filed when suspicious activity involves $5,000 or more and its existence must be kept confidential, while a CTR is filed automatically for cash exceeding $10,000 in one business day, regardless of whether anything seems suspicious

Keep the two reports separated by trigger, threshold, and secrecy. A SAR is judgment-based: a broker-dealer files with FinCEN when it knows or suspects illicit activity involving or aggregating $5,000 or more, within 30 days of initial detection (up to 60 days if no suspect has been identified), and the filing is strictly confidential — the customer must never be told a SAR was filed. A CTR (FinCEN Form 112) is mechanical: it is filed for currency transactions totaling more than $10,000 in a single business day (multiple same-day cash transactions are aggregated), requires no suspicion whatsoever, and applies to cash only — checks and wires do not count. A quick way to remember: SAR = Suspicious and Secret at $5,000; CTR = Cash, Ten-thousand-plus, Required automatically. One related figure worth knowing: under the travel rule, firms must record and pass along originator and beneficiary information on funds transmittals of $3,000 or more. Watch for deliberate splitting of cash into sub-$10,000 pieces to dodge the CTR — that is structuring, a crime in itself and a SAR red flag, even if the underlying money is clean.

The Trap: Crossing SAR/CTR thresholds and triggers (SAR needs $10,000; CTR needs suspicion; wires trigger CTRs)

• A CTR is required for any transfer exceeding $10,000 in a single business day, including checks and wire transfers as well as cash: Documented misconception that wires trigger CTRs. The report covers currency (physical cash) only — checks and wire transfers do not count toward the CTR threshold, no matter how large.
• A CTR is filed only when the firm suspects the cash came from an illegal source, so it depends on the judgment of the firm's compliance staff: Documented misconception that CTRs require suspicion. The CTR is purely mechanical — crossing the cash threshold triggers it automatically, with no judgment about the money's legality involved. Suspicion is the SAR's trigger, not the CTR's.
• A SAR is required only when the suspicious activity involves more than $10,000, the same dollar trigger that applies to a CTR: Threshold swap: this assigns the CTR's $10,000 figure to the SAR. The broker-dealer SAR threshold is suspicious activity involving or aggregating $5,000 or more — the two reports do not share a trigger amount.

Verified against: Bank Secrecy Act / FinCEN — Suspicious Activity Report requirement (31 CFR §1023.320) versus Currency Transaction Report requirement (31 CFR §1010.311, FinCEN Form 112)

Answer: The SDN list is maintained by OFAC, an office of the U.S. Treasury, and the firm must block (freeze) any assets involved and report the match

The Specially Designated Nationals list is maintained by OFAC — the Office of Foreign Assets Control, an office of the U.S. Treasury Department that administers economic sanctions. When a firm confirms a true match, it must block (freeze) any assets or transactions in which the listed person has an interest and report the blocking to OFAC; these obligations apply to all U.S. persons and businesses, not just broker-dealers. The wrong answers capture the classic mix-ups. FinCEN is a separate Treasury unit that receives SARs and CTRs, and FINRA is a securities self-regulatory organization — neither maintains the sanctions list. Why declining the account is not enough: a firm cannot open an account for a confirmed SDN, but simply saying 'no thanks' does not discharge the duty. If the application came in with an opening deposit, those funds must be blocked and reported — the money cannot just be returned to the customer, because returning it would be dealing in blocked property. Sanctions law requires blocking and reporting, not merely avoiding the customer. Why a SAR is not a substitute: filing a SAR flags activity for FinCEN, but it does not freeze anything, and it never authorizes proceeding with a prohibited relationship. Watch the deadlines as a tell — the 30-day clock in the wrong answer is the SAR deadline; an OFAC blocking report is due within 10 business days of the blocking. A firm may end up filing both, but the SAR never replaces the blocking obligation. Firms screen against the SDN list at account opening and on an ongoing basis, since OFAC updates the list with no fixed timetable.

The Trap: Attributing the SDN list to FinCEN or FINRA, or believing declining the account replaces the blocking duty

• The SDN list is maintained by FINRA, and the firm may simply decline to open the account with no further action: Wrong on both counts. FINRA is a securities self-regulatory organization and does not maintain the sanctions list — that is OFAC's. And walking away is not enough: if the application arrived with an opening deposit, that money must be blocked and reported, not simply handed back.
• The SDN list is maintained by FinCEN, and the firm's obligation is to file a CTR: Wrong on both counts. FinCEN is a different Treasury unit — it receives BSA reports such as SARs and CTRs, but it does not administer sanctions or publish the SDN list. And a CTR is a currency report triggered by cash over $10,000; it has nothing to do with a sanctions match.
• The firm may open the account normally as long as it files a SAR within 30 days: This swaps sanctions compliance for suspicious-activity reporting. A firm cannot open an account for a confirmed SDN at all, and the 30-day clock belongs to the SAR — not to the OFAC blocking obligation the match actually triggers.

Verified against: opening deposit must be blocked); 31 CFR 501.603/.604 (blocking and reject reports due within 10 business days).

Answer: File a SAR without informing the customer, because intentionally splitting cash deposits to evade the reporting threshold is structuring — a crime even when the funds are legitimately earned

The customer's own words establish intent to evade the Currency Transaction Report requirement, and deliberately splitting cash transactions to stay under the more-than-$10,000 threshold is structuring (smurfing) — a federal crime under the Bank Secrecy Act regardless of whether the underlying cash was earned legitimately. The firm should file a SAR with FinCEN (the activity far exceeds the $5,000 broker-dealer threshold and the evasive intent is known) and must not tell or warn the customer, because SARs are strictly confidential. Choice B is the classic trap: no CTR is due on any single day here, but engineering deposits to avoid the CTR is itself the offense. Choice C fails because the legitimacy of the money does not cure the intent to evade reporting. Worth noting: FinCEN clarified in 2025 that deposits merely falling near the $10,000 level do not by themselves require a SAR — it is this customer's stated purpose of dodging the reports that creates the suspicion.

The Trap: Believing structuring is legal if each deposit is under $10,000 or if the funds are legitimately earned

• Warn the customer that his deposit pattern will be reported if it continues, so he can adjust his banking habits: Tipping off: alerting a customer that his activity is (or will be) the subject of suspicious-activity reporting defeats the report's purpose and violates SAR confidentiality.
• Take no action, because the cash comes from a legitimate business: Misconception that structuring rules apply only to dirty money: structuring is illegal regardless of the funds' source — legitimate earnings deposited with intent to evade reporting still violate the law.
• Take no action, because no single deposit exceeded the $10,000 CTR threshold: Documented misconception that structuring is legal if each deposit stays under $10,000 — the deliberate evasion is itself the crime, which is exactly why staying under the threshold does not make the pattern safe.

Verified against: Bank Secrecy Act anti-structuring provision (31 U.S.C. §5324) and FinCEN Suspicious Activity Report requirement (31 CFR §1023.320)