NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesHard
A client, Mr. Henderson, informs his investment adviser representative (IAR) that he plans to withdraw a large sum of cash from his investment account to purchase a luxury item from an unknown offshore vendor, insisting on privacy and becoming evasive when questioned about the vendor's legitimacy. The IAR observes several 'red flags' indicative of potential money laundering. What is the IAR's primary obligation in this situation?
- AReport the suspicious activity to the appropriate regulatory authority by filing a Suspicious Activity Report (SAR).
- BDocument the client's request and proceed with the withdrawal as per their instruction, maintaining client confidentiality.
- CAttempt to verify the legitimacy of the offshore vendor through independent research before processing the withdrawal.
- DAdvise the client against the transaction due to potential risk to his personal finances.
Show answer & explanationAnswer & explanation
Correct answer: A. Report the suspicious activity to the appropriate regulatory authority by filing a Suspicious Activity Report (SAR).
IARs and their firms are mandated by anti-money laundering (AML) regulations to report suspicious activities, such as those described, by filing a Suspicious Activity Report (SAR) with FinCEN. This obligation overrides client confidentiality in cases of suspected illicit activity.
Why the other options are wrong
- B. Processing the withdrawal and maintaining confidentiality in this scenario could make the IAR complicit in a potential crime or regulatory violation.
- C. Attempting independent verification is secondary to the immediate regulatory requirement to report suspicious activity.
- D. While good advice, it does not fulfill the regulatory obligation to report suspicious activity.
SAR Filing for IARs
The mandatory reporting by Investment Adviser Representatives (and their firms) of suspicious financial transactions to the Financial Crimes Enforcement Network (FinCEN).
- Triggered by 'red flags' of potential money laundering or other illicit activities.
- Overrides client confidentiality.
- Must be filed promptly, typically within 30 days of initial detection.
Memory trick: If money smells fishy, alert the financial police, not the client.