A client, Mr. Henderson, informs his investment adviser representative (IAR) that he plans to make a significant cash deposit into his investment account, which he received from the sale of an antique car to an anonymous buyer for an unusually high price. Mr. Henderson seems evasive when asked for details about the transaction. What is the IAR's primary obligation in this situation?
- ATo inform the IAR's firm's compliance department, who will then decide if further action is needed.
- BTo accept the deposit, as the client has a right to invest their funds as they wish.
- CTo advise Mr. Henderson on the tax implications of the large cash deposit.
- DTo file a Suspicious Activity Report (SAR) with the appropriate authorities.
Show answer & explanationAnswer & explanation
Correct answer: D. To file a Suspicious Activity Report (SAR) with the appropriate authorities.
The scenario describes classic red flags for potential money laundering (large, unusual cash transaction; evasiveness about source of funds). Investment advisers and their representatives are subject to anti-money laundering (AML) regulations and have an obligation to file a Suspicious Activity Report (SAR) with FinCEN if they detect suspicious activity, even if the firm's compliance department is also informed.
Why the other options are wrong
- A. Informing compliance is a good internal step, but the ultimate regulatory obligation is to file a SAR, not just delegate the decision.
- B. Accepting potentially illicit funds without reporting is a serious violation of AML regulations.
- C. While tax advice might be relevant, the primary concern here is regulatory and ethical.
AML & SAR Filing for IAs/IARs
Investment Advisers and IARs must detect and report suspicious financial activity, including potential money laundering, by filing a Suspicious Activity Report (SAR) with FinCEN.
- Applies to IAs and IARs.
- Detects suspicious activity (e.g., money laundering).
- Requires filing a SAR with FinCEN.
Memory trick: Spot the shady money, report it quick, and keep silent.