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Question 181
A financial institution in Country A receives a request from law enforcement in Country B to freeze assets of a customer suspected of involvement in a major fraud scheme. However, the customer has not been charged with any crime. What should the institution do?
A) Verify the legitimacy of the law enforcement request through official channels, consult with legal counsel regarding jurisdictional authority and customer rights, determine if a court order or mutual legal assistance treaty request exists, and comply only if legally authorized while documenting all actions
B) Immediately freeze all customer assets based solely on the foreign request without verification
C) Ignore the request since it comes from a foreign jurisdiction
D) Inform the customer of the request before taking any action
Answer: A
Explanation:
Cross-border asset freeze requests present complex legal and jurisdictional challenges that require careful navigation to balance law enforcement cooperation with legal obligations to customers and compliance with applicable laws. Financial institutions must verify request legitimacy before taking action that could violate customer rights or expose the institution to liability.
Verifying legitimacy through official channels protects against fraudulent requests and ensures the institution responds to genuine law enforcement needs. Verification should involve contacting the requesting agency through independently obtained contact information rather than using details provided in the request itself, which could be falsified. Institutions should confirm the requesting officer’s identity and authority, validate that the investigation is genuine, and determine the legal basis for the freeze request. Some sophisticated fraudsters impersonate law enforcement to freeze victim accounts or gather financial intelligence.
Consulting legal counsel addresses jurisdictional questions and ensures compliance with conflicting legal obligations. The institution must determine whether Country B’s law enforcement has authority to compel actions by institutions in Country A, whether domestic law permits freezing assets without criminal charges, and whether customer notification is required or prohibited. Legal frameworks vary significantly across jurisdictions regarding pre-charge asset freezes, with some requiring judicial authorization while others permit administrative freezes. Institutions operating internationally must understand these variations.
Determining if proper legal instruments exist is essential for lawful compliance. Mutual legal assistance treaties provide formal frameworks for cross-border enforcement cooperation, establishing procedures for requests and defining what actions can be compelled. Court orders from Country B may need recognition and enforcement in Country A through established legal processes. Without proper legal authority, freezing assets could constitute wrongful interference with customer property rights, exposing the institution to civil liability.
Compliance when legally authorized protects both law enforcement interests and institutional interests. If verification confirms the request is legitimate and legal authority exists, the institution should implement the freeze using appropriate account restrictions that prevent withdrawals while maintaining records. Documentation should include the requesting agency, legal basis, scope of freeze (specific accounts or all customer relationships), duration, and internal approvals. This documentation provides evidence of good faith compliance if the customer later challenges the action.
The scenario mentions the customer has not been charged, which in some jurisdictions may limit law enforcement authority to freeze assets without judicial oversight. Presumption of innocence principles in many legal systems restrict pre-charge asset seizures to situations with judicial authorization based on probable cause. Institutions must understand whether the requesting jurisdiction’s legal standards meet these requirements and whether their home jurisdiction recognizes such authority.
Tipping off prohibitions may prevent customer notification depending on applicable law and the nature of the investigation. If the freeze relates to ongoing money laundering or terrorist financing investigation, notifying the customer could constitute illegal tipping off that undermines the investigation. However, some jurisdictions require customer notification for asset freezes unless a court order specifically prohibits it. Legal counsel must determine which obligations apply. Option B risks liability from improper freezes without legal authority. Option C fails to cooperate with potentially legitimate law enforcement. Option D may violate tipping off prohibitions.
Question 182
A customer has been banking with an institution for 15 years with consistent, predictable transaction patterns. Suddenly, the account begins receiving multiple large wire transfers from foreign jurisdictions, which are immediately transferred out to different countries. What should trigger enhanced scrutiny?
A) The significant deviation from established baseline behavior patterns, regardless of relationship longevity, requires investigation to determine if the account has been compromised or the customer’s circumstances have changed legitimately
B) Long-term customers should not be subject to additional scrutiny regardless of activity changes
C) Only new customers require enhanced monitoring
D) Pattern changes in existing customer accounts are not relevant to AML compliance
Answer: A
Explanation:
Significant deviations from established customer behavior patterns represent critical AML red flags that require investigation regardless of relationship history. While customer tenure provides valuable context, it does not exempt accounts from scrutiny when activity fundamentally changes. The scenario describes classic money laundering typology where accounts with established histories are exploited because they may attract less attention than new accounts.
Behavioral baseline establishment allows institutions to identify anomalies by comparing current activity against historical patterns. For the 15-year customer with consistent behavior, the institution should have detailed profiles showing typical transaction types, volumes, frequencies, geographic patterns, and counterparties. Sophisticated transaction monitoring systems establish these baselines and generate alerts when statistical deviations exceed defined thresholds. The sudden appearance of large international wire transfers represents a dramatic departure requiring explanation.
Account compromise represents one possible explanation for dramatic activity changes. Criminals may obtain account credentials through phishing, malware, insider threats, or social engineering, then use compromised accounts to launder funds. Established accounts with positive banking histories are particularly valuable for money laundering because they may not trigger the same scrutiny as newly opened accounts. The immediate outbound transfers suggest the account is being used as a pass-through vehicle to layer funds and obscure audit trails.
Legitimate circumstance changes provide alternative explanations that investigation should explore. The customer may have sold a business, received an inheritance, begun international business operations, or experienced other significant life events that legitimately alter transaction patterns. Enhanced due diligence should involve contacting the customer to inquire about the activity changes, requesting documentation supporting new transaction patterns, and updating customer profiles to reflect changed circumstances. If explanations are reasonable and verifiable, the activity may be legitimate despite differing from historical patterns.
The pattern of immediate outbound transfers after receiving foreign wires is particularly suspicious because it suggests the account serves only to facilitate fund movement rather than serving the customer’s actual banking needs. Legitimate businesses receiving international payments typically retain funds for operational purposes rather than immediately transferring elsewhere. The layering of funds through multiple jurisdictions obscures the audit trail, making it difficult to trace funds back to illicit origins or forward to ultimate beneficiaries.
Long-term relationship history should inform but not override AML scrutiny. While tenure demonstrates some degree of legitimacy and institutions naturally develop trust in established customers, money laundering methodologies specifically exploit this trust. Criminals may maintain accounts with normal activity for extended periods specifically to establish credibility before using them for laundering. Alternatively, previously legitimate customers may become involved in criminal activity or have accounts taken over by criminals.
Investigation procedures should include reviewing the source of incoming wires, identifying beneficiaries of outbound transfers, conducting OFAC and sanctions screening on all parties, assessing whether the jurisdictions involved present elevated risks, attempting customer contact to verify transactions, and determining if account credentials may have been compromised. If satisfactory explanations cannot be obtained or if the customer is unaware of the transactions, SAR filing is appropriate along with consideration of law enforcement notification if account takeover is suspected. Option B creates dangerous exemptions based on tenure rather than risk. Option C ignores that criminals specifically target established accounts. Option D fundamentally misunderstands dynamic risk assessment principles.
Question 183
An AML compliance officer discovers that a bank employee has been accepting cash from customers and not recording the deposits properly, causing Currency Transaction Reports to be filed incorrectly. What violations have potentially occurred?
A) Potential violations include structuring if deposits were deliberately kept below thresholds, BSA recordkeeping violations for inaccurate CTRs, possible embezzlement if funds were misappropriated, and potential SAR filing obligations regarding the employee’s conduct
B) Only employment policy violations with no AML implications
C) Minor bookkeeping errors that require no reporting
D) Customer service issues unrelated to compliance
Answer: A
Explanation:
The scenario describes serious compliance violations and potential criminal activity that implicates multiple regulatory requirements and creates significant institutional risk. Employee involvement in transaction processing irregularities represents one of the highest-risk situations for financial institutions because insiders can deliberately circumvent controls that would detect external money laundering.
Structuring violations may have occurred if the employee deliberately kept deposit amounts below CTR reporting thresholds to avoid reporting requirements. Whether done for the employee’s benefit, at customer request, or to assist customers in evading reporting, structuring represents a criminal violation of the Bank Secrecy Act. Financial institution employees who facilitate structuring face criminal prosecution, and institutions face civil penalties for failing to prevent employee involvement in structuring schemes. The compliance officer must investigate whether the improper recording patterns suggest systematic avoidance of reporting thresholds.
BSA recordkeeping violations arise from inaccurate or incomplete CTR filings. Financial institutions are strictly liable for accurate BSA reporting, and errors that result in failure to file required CTRs or filing CTRs with incorrect information violate federal law. Even if the employee’s conduct was not deliberately intended to evade reporting, the resulting inaccurate CTRs constitute violations. The institution must file corrected CTRs and may need to conduct lookback reviews to identify additional unreported transactions handled by this employee.
Embezzlement represents potential criminal theft if the employee misappropriated customer funds rather than properly depositing them. The scenario’s mention of cash acceptance and improper recording suggests funds may not have been deposited at all, or may have been partially deposited with the remainder stolen. This would constitute both employee theft and potential wire fraud or bank fraud charges. Customers whose deposits were not properly credited would have grounds for claims against the institution.
SAR filing obligations arise from the employee’s suspicious conduct even if customers were not involved in money laundering. SARs must be filed for insider abuse, including employee violations of BSA requirements or employee theft. The narrative should describe the employee’s conduct, the extent of improper transaction handling, amounts involved, and potential violations identified. SAR filing serves to alert law enforcement to insider threats and creates regulatory compliance documentation of the institution’s detection and response.
Investigation procedures must determine the scope of the employee’s misconduct by reviewing all transactions handled by the individual during the relevant period, identifying affected customers, assessing whether customers were aware of and complicit in improper handling, calculating total unreported amounts, and determining if other employees were involved. Transaction reconstruction may be necessary to file accurate corrected CTRs and identify all unreported currency transactions.
The institution faces multiple regulatory consequences including potential civil money penalties for CTR violations, examination criticism for inadequate employee supervision and transaction monitoring controls, possible enforcement actions if the conduct reveals systemic control weaknesses, and reputational damage. Beyond regulatory consequences, the institution must address customer remediation if funds were misappropriated, employment actions including termination and potential criminal referral, and control enhancements to prevent recurrence.
Control failures that allowed this conduct to continue undetected represent additional compliance weaknesses requiring remediation. Effective controls should include segregation of duties preventing individual employees from both accepting and recording deposits, supervisory review of teller transactions, exception reporting identifying employees with unusual patterns, and employee training emphasizing BSA obligations. The compliance officer must assess why existing controls failed to detect the conduct sooner and implement enhanced controls. Option B dramatically understates serious legal violations. Option C dismisses material compliance failures. Option D ignores significant AML implications of insider misconduct.
Question 184
A money services business is approached by a customer wanting to purchase multiple money orders just below the $3,000 threshold that would require recordkeeping. The customer says they need multiple money orders to pay different bills. How should the MSB respond?
A) Recognize this as potential structuring designed to evade recordkeeping requirements, aggregate all money orders as a single transaction for recordkeeping purposes as required by regulation, and file a SAR if the customer is deliberately attempting to evade reporting
B) Sell the money orders as requested since each is below the threshold
C) Refuse service without explanation or documentation
D) Only maintain records if specifically requested by the customer
Answer: A
Explanation:
The scenario describes attempted structuring specifically designed to evade the money order recordkeeping requirement under 31 CFR 1010.415, which requires money services businesses to maintain records for money order sales between $3,000 and $10,000. Structuring money order purchases to avoid this recordkeeping represents a violation of the Bank Secrecy Act that MSBs must prevent.
Recognizing structuring attempts requires training employees to identify red flags including customers requesting amounts just below reporting thresholds, purchasing multiple instruments when one would serve the same purpose, making unusual inquiries about reporting requirements before conducting transactions, and appearing knowledgeable about specific threshold amounts. The customer’s request for multiple money orders just below $3,000 to “pay different bills” presents classic structuring indicators, particularly if a single larger money order or other payment method would be more convenient.
Transaction aggregation rules require MSBs to combine multiple currency transactions by the same customer on the same day and treat them as a single transaction for reporting purposes. This aggregation prevents structuring by ensuring that customers cannot evade reporting simply by breaking transactions into smaller amounts. When a customer purchases multiple money orders totaling over $3,000 in a single visit or business day, the MSB must maintain records as if it were a single transaction exceeding the threshold. Aggregation applies regardless of the customer’s stated reasons for wanting multiple instruments.
The regulatory requirement for aggregation is explicit and does not allow discretion based on customer explanations. Even if the customer legitimately needs to pay multiple bills, the BSA requires recordkeeping for the aggregated amount. The customer’s convenience does not override compliance obligations. MSBs must collect required information including customer identification, address, social security number or other taxpayer identification, and transaction details for all aggregated purchases exceeding thresholds.
SAR filing becomes necessary if the customer’s behavior suggests deliberate structuring intent. Indicators include customers who protest when informed about aggregation requirements, customers who abandon transactions when told records will be maintained, customers who make inquiries about avoiding recordkeeping, or customers with patterns of making purchases just below thresholds on different days. While the customer may have legitimate reasons for wanting multiple money orders, the compliance obligation is to file SARs when facts suggest structuring attempts.
Employee training on structuring recognition and aggregation requirements is critical for MSBs because front-line staff must make real-time decisions about suspicious transactions. Training should include specific examples of structuring scenarios, explanation of aggregation rules, procedures for handling customers who resist recordkeeping, and escalation protocols for suspicious situations. Employees must understand they should not warn customers about structuring prohibitions in ways that help customers evade detection.
The BSA’s structuring prohibition applies to both customers who structure and financial institutions that facilitate structuring. MSBs that knowingly allow customers to structure by failing to aggregate transactions or by suggesting ways to avoid thresholds can face criminal prosecution. This creates strong institutional incentives to maintain robust structuring prevention controls including employee training, transaction monitoring, and supervisory review of high-risk transactions.
Some customers may genuinely be unaware that their transaction requests constitute structuring, while others deliberately attempt to evade reporting. The MSB’s obligation is the same regardless of intent: aggregate transactions and maintain required records. The determination of whether to file a SAR should consider whether the customer’s behavior suggests knowing and deliberate structuring versus innocent misunderstanding. However, the aggregation and recordkeeping requirement applies in all cases. Option B facilitates illegal structuring and violates BSA aggregation requirements. Option C may be appropriate if the customer insists on evading requirements but should be accompanied by SAR filing. Option D misunderstands mandatory recordkeeping obligations.
Question 185
A compliance officer at a securities firm notices that a customer’s trading patterns show consistent small losses, but the customer continues trading at high volumes without apparent concern about losses. The customer’s funds come from international wire transfers. What might this indicate?
A) Potential integration-stage money laundering where illicit funds are invested into securities markets, with losses accepted as the cost of creating apparent legitimate investment history and generating funds with clean paper trail
B) Legitimate high-frequency trading strategy
C) Normal learning curve for inexperienced investors
D) Market timing strategy that will eventually become profitable
Answer: A
Explanation:
This scenario presents indicators of integration-stage money laundering utilizing securities markets to clean illicit proceeds and create the appearance of legitimate wealth from investment activities. Securities markets offer attractive vehicles for money laundering because they provide liquidity, apparent legitimacy, and opportunities to generate documentation showing legal sources of funds.
The acceptance of consistent losses distinguishes money laundering from genuine investment activity. Rational investors respond to persistent losses by modifying strategies, seeking professional advice, reducing position sizes, or exiting markets entirely. Continued high-volume trading despite consistent losses suggests the trading serves purposes other than generating investment returns. For money launderers, trading losses represent the cost of laundering, similar to fees paid to money services businesses, which criminals accept as the price of converting dirty money into apparently clean assets.
High trading volumes without concern for profitability enable rapid movement of large amounts through markets, creating extensive transaction histories that obscure the origins of funds. Each trade generates documentation—confirmations, statements, tax forms—that collectively create a paper trail appearing to show legitimate investment activity. When questioned about wealth sources, money launderers can point to investment accounts and trading history as apparent legitimate origins, even though the initial funding came from crime.
International wire transfer funding adds additional red flags indicating potential money laundering. Legitimate investors typically fund accounts from domestic sources tied to verifiable employment, business income, or existing investment accounts. International transfers, particularly from high-risk jurisdictions or through multiple intermediary banks, suggest efforts to obscure the ultimate source of funds. The layering of funds through international wires before investment creates distance between illicit origins and the securities account.
Securities-based laundering methodologies include purchasing securities with illicit funds then selling them to generate proceeds that appear to be investment gains, using securities accounts to receive and transfer funds while conducting minimal trading, manipulating low-volume stock prices through wash trading or matched orders, and using securities as collateral for loans providing apparently legitimate liquidity. The scenario’s pattern of high-volume trading with consistent small losses most closely resembles using markets to churn funds and create documentation.
Enhanced due diligence should investigate the source of the international wire transfers by requesting documentation showing the origin of funds, verifying the customer’s stated occupation and income sources through independent means, analyzing trading patterns for wash trading or other manipulative practices, assessing whether the trading strategy has any rational investment basis, and determining if the customer has investment experience or knowledge consistent with the trading volume. Customer interviews should probe the customer’s investment objectives and risk tolerance, as indifference to losses is inconsistent with stated investment goals.
Securities firms must implement surveillance systems that identify not only market manipulation but also potential money laundering typologies including trading patterns inconsistent with profit-seeking, funding sources inconsistent with customer profiles, and lack of rational investment strategy. Front-running, insider trading, and market manipulation surveillance systems may not detect money laundering patterns, requiring separate monitoring capabilities.
If investigation cannot establish legitimate investment purposes or verify legal sources of funding, SAR filing is appropriate. The narrative should describe the trading patterns, losses incurred, funding sources, and reasons for suspecting money laundering. Securities firms should coordinate with their broker-dealer compliance and AML functions because some patterns that appear suspicious for AML purposes may have securities regulation explanations. However, securities violations and money laundering are not mutually exclusive, and both types of suspicious activity may require reporting. Option B ignores that legitimate HFT seeks profits through volume, not consistent losses. Option C and D fail to explain indifference to persistent losses and international funding sources.
Question 186
A customer requests that their bank not file Currency Transaction Reports on their cash deposits, offering to pay a fee for this service. How should the bank respond?
A) Decline the request, explain that CTR filing is a legal requirement that cannot be waived for any reason, document the customer’s request, file a SAR regarding the attempted bribery and knowledge of reporting requirements suggesting possible structuring intent, and consider terminating the relationship
B) Accept the fee and agree not to file CTRs as requested
C) Negotiate a higher fee for the service
D) File CTRs but don’t tell the customer they were filed
Answer: A
Explanation:
The customer’s request represents attempted bribery to induce BSA violations, creating multiple serious compliance and legal issues that the bank must address through documentation, reporting, and possible relationship termination. The scenario presents clear evidence of the customer’s awareness of reporting requirements and apparent desire to evade them, strongly suggesting involvement in criminal activity.
Declining the request is mandatory because CTR filing is a non-negotiable legal requirement under the Bank Secrecy Act. Financial institutions have no discretion to waive, delay, or fail to file CTRs for currency transactions exceeding $10,000. The CTR requirement exists regardless of customer preferences, relationship value, or any offered compensation. Agreeing to the customer’s request would constitute willful BSA violation by the bank and the individual employee, exposing both to criminal prosecution under 31 USC 5322.
Explaining the legal requirement serves customer education purposes while creating a record that the customer was informed of reporting obligations. This explanation should be provided clearly but without suggesting ways the customer could restructure transactions to avoid reporting, which would constitute illegal structuring assistance. The employee should state that all financial institutions must comply with the same requirements and that the bank cannot make exceptions.
Documenting the request creates critical evidence for SAR filing and potential future prosecution. Documentation should record the date, time, customer identity, specific request made, any justification offered by the customer, the amount of the offered fee or consideration, and the employee’s response declining the request. This documentation demonstrates the institution’s appropriate response and provides law enforcement with evidence of the customer’s intent to evade reporting.
SAR filing is mandatory because the customer’s request provides grounds for suspicion regarding attempted BSA violation, possible bribery, and knowledge of reporting requirements suggesting structuring experience or intent. The request itself constitutes suspicious activity regardless of whether the customer has previously structured transactions. The SAR narrative should detail the customer’s request, any explanations provided, the context of existing banking relationship, and whether review of historical transactions reveals possible past structuring.
The attempt to bribe bank employees constitutes federal criminal offense under bribery statutes beyond the BSA violations. The offered fee represents an attempt to corrupt the performance of official duties (CTR filing). While the employee may not be a government official, inducing violations of federal reporting requirements can constitute bribery or conspiracy. Law enforcement may pursue charges even if the bank declined the bribe and filed appropriate reports.
Relationship termination should be strongly considered because the customer has demonstrated willingness to engage in criminal activity and induce bank violations. Continuing relationships with customers who attempt to involve the bank in illegal activity creates ongoing risk of future violations, reputation damage, and potential liability. However, abrupt account closure immediately after the suspicious request could constitute tipping off. The bank should consult legal counsel regarding appropriate timing and method of relationship termination that balances avoiding tipping off against minimizing continued risk exposure.
Employee training must emphasize that customer requests to avoid reporting, offers of compensation for compliance failures, or suggestions of special treatment regarding regulatory requirements must be immediately declined and reported to compliance. Employees should understand they could face individual criminal liability for accepting such offers. Training should include role-playing scenarios preparing employees for these difficult customer interactions.
The scenario highlights the importance of strong ethical culture and employee integrity in compliance programs. The customer apparently believed the bank might be willing to violate reporting requirements for compensation, suggesting either previous experience with corrupt institutions or a willingness to test boundaries. Institutions must ensure all employees understand that no amount of revenue justifies compliance violations and that employees will be supported when declining inappropriate customer requests. Option B and C represent serious federal crimes with imprisonment potential. Option D technically complies with CTR filing but fails to address the suspicious request through SAR filing.
Question 187
An AML investigator identifies a pattern where multiple customers with no apparent connection make deposits to the same third-party account in small amounts. The third-party account holder then wires the consolidated funds internationally. What money laundering technique does this represent?
A) Smurfing or structured placement where multiple individuals make small deposits to avoid reporting thresholds, with funds then consolidated and layered internationally, indicating organized money laundering network
B) Normal business collections from unrelated customers
C) Crowdfunding for a legitimate international project
D) Informal value transfer system for immigrant communities
Answer: A
Explanation:
This scenario describes sophisticated smurfing operations that utilize multiple individuals to structure deposits below reporting thresholds, then consolidate and layer the funds internationally to obscure their illicit origins. The pattern indicates organized money laundering networks rather than individual activity, suggesting professional criminal organizations with established infrastructure and recruited participants.
Smurfing involves recruiting multiple individuals, called smurfs or runners, to conduct numerous small financial transactions that individually appear insignificant but collectively move large amounts of illicit proceeds into the financial system. Each smurf may deposit amounts below CTR thresholds at different branches or institutions, avoiding triggering automated reporting or attracting attention. The apparent lack of connection between depositors is deliberately designed to prevent pattern recognition, though sophisticated transaction monitoring systems can identify these networks.
The consolidation of funds into a single account represents the collection phase where distributed deposits are aggregated, preparing for subsequent layering. The account receiving deposits serves as a collection vehicle controlled by money laundering organizers. This consolidation creates a point of vulnerability where pattern analysis can detect the scheme by identifying accounts receiving multiple unrelated deposits, particularly in round amounts or just below reporting thresholds, from individuals whose relationships to the account holder cannot be explained.
International wiring provides the layering component that distances funds from their criminal origins and makes tracing difficult. Wire transfers, particularly to high-risk jurisdictions or through multiple intermediary banks, obscure audit trails and may place funds beyond the reach of law enforcement. The international component also suggests that the underlying criminal activity may involve transnational crimes such as drug trafficking, human smuggling, or international fraud schemes generating proceeds that need to be laundered and repatriated.
Detection methodologies should include network analysis identifying accounts receiving deposits from multiple apparently unrelated individuals, pattern recognition identifying multiple small deposits followed by large consolidating withdrawals or wires, relationship analysis attempting to establish connections between depositors and account holders, and comparison of depositor profiles against account holder’s stated business to identify inconsistencies. Advanced analytics using social network analysis can map relationships between seemingly unrelated accounts.
Investigation procedures must identify all participants in the network by analyzing which accounts made deposits, determining if depositors maintain accounts at the institution or are walk-in customers, conducting background research on depositors to understand their relationships and possible common connections, reviewing surveillance footage if available to determine if multiple deposits were made by the same individuals using different identities, and assessing whether depositors appear to be witting participants or unknowing money mules. Some smurfing networks recruit individuals unaware they’re participating in money laundering.
The scale of smurfing operations varies from small local networks to massive international operations moving millions. Professional money laundering organizations offer smurfing as a service to other criminal groups, charging fees to launder drug proceeds, fraud revenues, or other illicit funds. These organizations recruit smurfs through various means including cash payment offers, coercion, or by targeting vulnerable populations such as undocumented immigrants or individuals with financial difficulties.
SAR filings should describe the entire network when possible, identifying the collection account, all identified depositors, ultimate wire transfer recipients, and any established relationships. Narrative should explain why the pattern appears to represent structured placement rather than legitimate business activity. Multiple SARs may be necessary if numerous institutions are involved, requiring coordination to ensure comprehensive reporting.
Law enforcement cooperation may involve proactive outreach beyond SAR filing if the network appears to represent significant ongoing criminal enterprise. While institutions should not conduct extensive investigations that might interfere with law enforcement operations, providing comprehensive analysis of identified patterns assists authorities in understanding the scope of operations. Option B fails to explain why unrelated customers would deposit to a third party or why patterns avoid reporting thresholds. Option C and D provide superficial explanations inconsistent with the systematic structuring patterns and international layering.
Question 188
A compliance officer discovers that the institution’s AML training program has not been updated in five years and does not cover recent regulatory changes or emerging money laundering typologies. What are the implications?
A) The institution faces regulatory violations for inadequate training program maintenance, increased risk of employees failing to detect money laundering due to outdated knowledge, potential examination criticism and enforcement actions, and need for immediate comprehensive training program overhaul
B) Five-year-old training is sufficient since money laundering techniques never change
C) Training requirements are optional recommendations rather than mandatory
D) Only new employees need training on current requirements
Answer: A
Explanation:
Outdated AML training programs create serious regulatory violations and operational risks by leaving employees unprepared to detect evolving money laundering methodologies and comply with current regulatory requirements. Training program maintenance represents a fundamental pillar of effective AML compliance that examiners scrutinize carefully during regulatory examinations.
Regulatory requirements explicitly mandate ongoing training that reflects current risks, regulations, and institutional policies. Federal banking regulators, FinCEN, and state regulators require financial institutions to provide periodic training appropriate to employee roles and responsibilities. The training must be updated to reflect regulatory changes, emerging typologies, lessons learned from internal SAR filings, examination findings, and evolving institutional risk profiles. Five years without updates virtually guarantees the training is materially deficient.
The specific regulatory violations include failure to maintain an adequate AML program as required by the Bank Secrecy Act and implementing regulations, failure to provide appropriate training as specified in the institution’s own AML policy, and potential violations of specific training requirements added by regulations or guidance issued during the five-year gap. Each of these violations can result in civil money penalties, examination criticism, memoranda of understanding, consent orders, or other enforcement actions depending on severity and whether deficiencies contributed to actual money laundering failures.
Employee knowledge gaps created by outdated training translate directly into operational failures in money laundering detection. Employees unaware of current typologies cannot recognize suspicious activity using those methodologies. Staff untrained on regulatory changes may fail to comply with new reporting requirements, recordkeeping obligations, or enhanced due diligence standards. Front-line employees who interact with customers daily are the first line of defense against money laundering, and their effectiveness depends entirely on current, comprehensive training.
Recent regulatory changes over any five-year period likely include significant developments such as beneficial ownership requirements, updates to OFAC sanctions programs, FinCEN Geographic Targeting Orders, revisions to SAR filing requirements, changes in CTR exemption procedures, and updates to customer due diligence rules. Employees untrained on these changes will inevitably make compliance errors, exposing the institution to violations and enforcement actions.
Emerging money laundering typologies evolve constantly as criminals adapt to law enforcement and regulatory pressure. Over five years, significant new methodologies have likely emerged in areas such as virtual currency laundering, trade-based money laundering techniques, exploitation of emerging payment systems, professional money laundering organizations, and techniques for evading beneficial ownership identification. Training programs must continuously incorporate intelligence from FinCEN advisories, law enforcement bulletins, industry associations, and internal SAR analysis to keep pace with threats.
Examination criticism is virtually certain when examiners discover five-year-old training materials. Regulators assess training program adequacy by reviewing training content, delivery methods, frequency, attendance records, and testing procedures. Examiners specifically look for evidence that training is updated regularly to reflect changes. Discovery of outdated training typically generates examination criticisms, potentially elevated to Matters Requiring Attention or Matters Requiring Immediate Attention depending on other findings, and contributes to overall AML program ratings.
Question 189
A customer relationship manager is pressured by senior management to open an account for a high-value client despite red flags identified during due diligence, including unclear beneficial ownership and sources of funds from high-risk jurisdictions. What should the relationship manager do?
A) Escalate concerns to the independent compliance function and senior management, document all red flags and pressure received, refuse to open the account until concerns are adequately addressed, and if necessary report through whistleblower channels if pressure continues despite unresolved risks
B) Open the account as directed by senior management without raising concerns
C) Open the account but file a SAR afterward to cover institutional liability
D) Resign rather than addressing the issue through proper channels
Answer: A
Explanation:
This scenario addresses the critical issue of management pressure to override compliance controls, one of the most serious threats to effective AML programs. The relationship manager faces a classic conflict between commercial pressures and compliance obligations that requires navigating institutional politics while protecting both personal integrity and institutional compliance.
Escalating to independent compliance functions provides the designed channel for resolving conflicts between business and compliance objectives. Effective AML programs include independent compliance functions with authority to escalate concerns outside business line management, ensuring compliance decisions are not overridden by revenue considerations. The relationship manager should document red flags comprehensively and present them to compliance officers who can assess risks independently of business pressures. This escalation protects both the individual manager and the institution by ensuring decisions are made with full awareness of risks.
Escalating to senior management beyond the immediate supervisor who is applying pressure creates accountability at higher organizational levels where fiduciary responsibilities and regulatory consequences may be better understood. The relationship manager should elevate concerns through appropriate channels, potentially including the Chief Compliance Officer, Chief Risk Officer, or even Board-level Risk Committee if lower-level management refuses to address concerns. This escalation documents that the institution was made aware of risks at the highest levels.
Documenting red flags and pressure received creates critical evidence protecting the individual employee from retaliation and providing regulators and prosecutors with evidence of institutional compliance failures if the account is improperly opened. Documentation should detail specific red flags including unclear beneficial ownership structures, inability to verify legitimate sources of funds, high-risk jurisdictions involved, any negative media or background check findings, specific recommendations made regarding additional due diligence or account denial, identity of managers applying pressure to open the account, specific statements made pressuring account opening, and dates of all communications and escalations. This documentation should be maintained securely and potentially provided to compliance, internal audit, or legal departments.
Question 190
A bank customer uses mobile check deposit to deposit numerous checks from different individuals, all in amounts just below $10,000. The checks are deposited on weekends and evenings. Shortly after deposit, the funds are withdrawn through ATMs in small amounts. What does this pattern suggest?
A) Possible check fraud scheme combined with structuring, where fraudulent or stolen checks are being deposited through remote channels to delay detection, with funds quickly withdrawn before checks return, and amounts structured to avoid reporting
B) Normal mobile banking usage by a busy professional
C) Legitimate business receipts deposited outside normal business hours for convenience
D) Personal checks from family members helping with expenses
Answer: A
Explanation:
This scenario presents multiple red flags indicating a sophisticated fraud scheme combining check fraud with money laundering techniques, exploiting mobile deposit technology to delay detection while rapidly extracting funds before fraudulent instruments are discovered. The pattern shows criminal understanding of both payment system timing and reporting thresholds.
Check fraud through mobile deposit exploits the delayed verification process inherent in remote deposit capture technology. Unlike in-person deposits where tellers can examine checks for signs of alteration or forgery, mobile deposits rely on image analysis and automated fraud detection systems that may not immediately identify sophisticated forgeries, counterfeit checks, or stolen instruments. Criminals exploit the provisional credit period when funds are made available before checks are fully processed and potentially returned for fraud, insufficient funds, or closed accounts. The evening and weekend deposits maximize the delay before banks can contact issuing institutions to verify check legitimacy.
Multiple checks from different individuals present a red flag because legitimate businesses typically receive checks from consistent customer bases or business partners, while individuals normally don’t receive numerous large checks from various sources. The pattern suggests the checks may be stolen from mailboxes or businesses, created using compromised account information obtained through data breaches, or counterfeited using desktop publishing technology. Each check may come from a different victim, with the fraudster depositing all checks into a single account to consolidate criminal proceeds.
Amounts just below $10,000 indicate structuring awareness and intent to avoid Currency Transaction Report filing requirements. While CTRs apply to currency transactions and these are check deposits, the structuring suggests the perpetrator has general knowledge of financial reporting thresholds and deliberately keeps transactions below attention-triggering amounts. Some institutions have internal reporting thresholds for large check deposits that the amounts may be designed to avoid. The consistency of amounts just below a round number like $10,000 is statistically unlikely for legitimate varied receipts and indicates deliberate calculation.
Rapid ATM withdrawals in small amounts after deposit represent the extraction phase where the criminal converts fraudulent deposits into cash before detection. ATM withdrawals provide anonymity compared to in-person teller withdrawals where criminals face identification and potential surveillance. Small withdrawal amounts may be designed to avoid ATM transaction limits while maximizing speed of cash extraction. The rapid sequence of deposits followed immediately by withdrawals indicates the account serves solely as a pass-through vehicle for fraud proceeds rather than legitimate banking needs.
Question 191
An AML compliance program includes transaction monitoring, but alerts are frequently overridden without adequate documentation of the review rationale. What compliance deficiency does this represent?
A) Inadequate alert investigation and documentation creating inability to demonstrate effective monitoring, potential for missed money laundering, regulatory criticism for ineffective controls, and need for enhanced alert handling procedures and training
B) Efficient alert management reducing false positives
C) Appropriate use of compliance judgment in clearing alerts
D) Normal operations showing the monitoring system generates too many alerts
Answer: A
Explanation:
The pattern of frequently overriding alerts without adequate documentation represents a serious AML program deficiency that undermines the effectiveness of transaction monitoring systems and creates regulatory risk. This practice essentially neutralizes monitoring controls by allowing suspicious activity to be dismissed without rigorous investigation or documented rationale.
Inadequate alert investigation violates fundamental principles of effective transaction monitoring that require each alert to receive appropriate scrutiny based on its risk level. While not every alert represents genuine money laundering and some false positives are inevitable in automated monitoring systems, each alert should be investigated sufficiently to determine whether it represents suspicious activity or has an innocent explanation. Overriding alerts without investigation means potentially suspicious activity is never properly evaluated, defeating the purpose of monitoring.
Documentation requirements serve multiple critical purposes including demonstrating to examiners that the institution’s monitoring program functions effectively, creating audit trails for quality assurance reviews that assess whether alert handling is consistent and appropriate, providing evidence of good faith compliance efforts if money laundering is later discovered, enabling identification of monitoring system weaknesses that generate excessive false positives, and supporting SAR narrative development when investigations determine activity is suspicious. Without documentation, none of these objectives can be achieved.
Regulatory expectations for alert documentation require recording who reviewed each alert, what investigation steps were taken, what information was considered, what conclusions were reached, and what rationale supported clearing alerts without SAR filing. Best practices include maintaining investigation notes in monitoring systems, documenting all data sources consulted, recording customer contact if made, noting explanations provided for unusual activity, and retaining documentation accessible for examiner review. Minimal documentation that merely shows alerts were “cleared” without substantive analysis is inadequate.
The pattern of frequent overrides suggests several possible problems including inadequate staffing leaving investigators insufficient time for thorough alert review, poor alert handling training creating investigators who don’t understand how to conduct proper investigations, monitoring system generating excessive false positives due to poor tuning or inappropriate scenarios, pressure from management to clear alerts quickly rather than thoroughly to reduce backlogs, or organizational culture that views alert investigation as box-checking rather than genuine risk detection. Each of these root causes requires different remediation.
Question 192
A non-profit organization’s account shows receipts consistent with its stated charitable purpose, but a significant portion of funds is being transferred to individuals in countries with active terrorist organizations. The organization’s principals have no clear connection to the destination countries. What concern does this raise?
A) Potential terrorist financing where a charitable organization is being used as a front to collect and transfer funds to support terrorist activities, requiring enhanced due diligence, regulatory reporting, and possible account closure
B) Normal charitable operations providing humanitarian aid in conflict zones
C) Cultural donations to diaspora communities with no security concerns
D) International development work in underserved regions
Answer: A
Explanation:
This scenario presents classic terrorist financing red flags involving exploitation of charitable organizations to collect and transfer funds supporting terrorist activities. Charities have been identified by FATF and law enforcement as particularly vulnerable to terrorist financing abuse due to their legitimacy, public trust, access to funds, and ability to operate in conflict zones where terrorist groups are active.
Charitable organization exploitation for terrorist financing occurs through several methods including creation of sham charities that exist solely to raise funds for terrorism with no legitimate charitable operations, infiltration of legitimate charities by terrorist sympathizers who divert a portion of funds to terrorist purposes while maintaining some genuine charitable work as cover, and coercion of charity operators who may be threatened into providing funds to terrorist groups in exchange for security of humanitarian workers in conflict zones. The scenario’s description suggests either a sham charity or an infiltrated legitimate organization.
Transfers to individuals rather than established charitable partners in destination countries raises concerns because legitimate international charities typically work through established local partner organizations, international NGOs with verified operations, or government agencies administering aid programs. Direct transfers to individuals lack accountability and transparency, making it difficult to verify funds actually serve charitable purposes rather than supporting terrorism. Terrorist organizations often designate specific individuals to receive and distribute funds to operational cells or to purchase weapons and supplies.
Countries with active terrorist organizations present high-risk destinations requiring enhanced scrutiny of all fund transfers. Regions with Islamic State, Al-Qaeda affiliates, Boko Haram, Al-Shabaab, or other designated terrorist organizations operating require institutions to verify that transferred funds will not benefit terrorists. This verification is particularly challenging in areas where terrorists control territory or operate among civilian populations, as funds ostensibly for humanitarian aid may be diverted through taxation, extortion, or direct capture by terrorist groups.
The principals’ lack of connection to destination countries raises questions about how the charity selected those locations and whether selection was driven by terrorist financing objectives rather than genuine humanitarian need. Legitimate charities typically have organizational missions focused on specific regions or causes, with leadership having established relationships to destination communities through prior work, ethnic or religious connections, or partnerships with local organizations. The absence of logical connections suggests the destinations may have been selected to route funds to terrorist groups rather than to address authentic charitable needs.
Question 193
A bank’s Customer Identification Program includes collecting name, address, date of birth, and identification number. However, the bank does not verify the information provided. What CIP requirement is violated?
A) The requirement to verify customer identity using documents, non-documentary methods, or a combination, not merely collect information without confirmation of accuracy and authenticity
B) No violation since information was collected
C) CIP only requires collection, not verification
D) Verification is optional at the institution’s discretion
Answer: A
Explanation:
The scenario describes a fundamental violation of Customer Identification Program requirements established under Section 326 of the USA PATRIOT Act. The CIP regulation explicitly requires financial institutions to not only collect identifying information but also verify the identity of customers through risk-based procedures using documents, non-documentary methods, or combinations thereof.
Collection without verification fails to achieve CIP’s core objective of ensuring that institutions know who their customers actually are rather than accepting claimed identities at face value. Identity fraud, synthetic identities, and use of stolen personal information represent significant money laundering enablement techniques. Terrorists and money launderers routinely use false identities to open accounts, and without verification, financial institutions become vulnerable to these schemes.
Documentary verification methods require examining documents that are unexpired and appear authentic, such as government-issued identification documents containing photograph, name, address, date of birth, and identification number. For individuals, acceptable documents typically include driver’s licenses, passports, national identification cards, or other government-issued identity documents. For legal entities, articles of incorporation, business licenses, partnership agreements, or trust documents may be required. Institutions must develop procedures for recognizing potential document fraud including altered documents, counterfeits, or use of documents belonging to other individuals.
Non-documentary verification methods become necessary when documents are unavailable or when risk-based analysis indicates additional verification is prudent. Non-documentary methods include contacting the customer through secondary communication channels to confirm information, independently verifying information through credit bureaus or database services, checking references with other financial institutions, obtaining financial statements, or comparing provided information against public records. For higher-risk customers, multiple verification methods may be appropriate.
Question 194
A compliance officer at a bank receives a suspicious activity report indicating that a politically exposed person (PEP) has opened multiple accounts with large wire transfers from offshore jurisdictions. What is the most appropriate initial action?
A) Conduct enhanced due diligence on the customer
B) Immediately close all accounts
C) Report to law enforcement
D) Freeze all transactions
Answer: A
Explanation:
Enhanced Due Diligence (EDD) is the appropriate risk-based approach when dealing with high-risk customers such as Politically Exposed Persons (PEPs). PEPs present elevated money laundering and corruption risks due to their positions of public trust and potential access to public funds. When red flags emerge involving a PEP, such as multiple accounts and large offshore wire transfers, the compliance officer must conduct thorough enhanced due diligence to understand the customer’s background, source of wealth, source of funds, business relationships, and the purpose of the account activities. EDD involves gathering additional information beyond standard customer due diligence, including verification of legitimate business purposes, beneficial ownership confirmation, ongoing monitoring with greater scrutiny, and senior management approval for maintaining the relationship. This investigation allows the institution to make informed decisions about whether the activity is legitimate or suspicious. This makes A the correct answer as the most appropriate initial response to PEP-related red flags.
B is incorrect because immediately closing all accounts without proper investigation could be premature and may constitute “de-risking” without adequate justification. More importantly, abruptly closing accounts might alert the customer to the institution’s suspicions, potentially causing them to move their activities elsewhere and hindering any ongoing or future law enforcement investigations. Account closure should only occur after proper due diligence, risk assessment, and consideration of regulatory obligations, and typically only when the institution cannot adequately manage the risks or when activity is clearly illegitimate.
C is incorrect because while reporting suspicious activity to law enforcement or filing a Suspicious Activity Report (SAR) may ultimately be necessary, this should occur after conducting enhanced due diligence and determining that the activity is indeed suspicious. The initial red flags described—being a PEP with multiple accounts and offshore transfers—require investigation but don’t automatically constitute suspicious activity without further context. The institution must first gather facts, assess the legitimacy of transactions, and determine whether the activity deviates from expected behavior before making a formal SAR filing.
D is incorrect because freezing all transactions is an extreme measure typically reserved for situations involving confirmed sanctions violations, court orders, asset freezing requirements, or clear indications of imminent criminal activity. Freezing accounts without proper investigation and legal basis could expose the institution to liability, damage customer relationships, and may not be legally justified based solely on the customer being a PEP with offshore transactions. Transaction freezing should follow proper procedures and typically occurs after investigation reveals clear grounds for such action.
Question 195
Which international organization is primarily responsible for setting global anti-money laundering and counter-terrorist financing standards that member countries are expected to implement?
A) Financial Action Task Force (FATF)
B) International Monetary Fund (IMF)
C) World Bank
D) United Nations Office on Drugs and Crime (UNODC)
Answer: A
Explanation:
The Financial Action Task Force (FATF) is the inter-governmental body established in 1989 that sets international standards for combating money laundering, terrorist financing, and proliferation financing. FATF develops and promotes policies to protect the global financial system through its 40 Recommendations, which are recognized as the international standard for AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism). These recommendations cover the legal and institutional framework countries should establish, the preventive measures financial institutions and designated non-financial businesses should implement, and the powers and procedures that competent authorities should possess. FATF conducts mutual evaluations of member countries to assess compliance with its standards and maintains lists of high-risk and non-cooperative jurisdictions. FATF’s recommendations are adopted by countries worldwide and form the basis for national AML/CFT legislation and regulations. This makes A the correct answer for the primary standard-setting organization for global AML/CFT requirements.
B is incorrect because while the International Monetary Fund (IMF) plays a role in the global financial system and conducts financial sector assessments that include AML/CFT components, it is not the primary standard-setting body for anti-money laundering regulations. The IMF works alongside FATF by incorporating AML/CFT assessments into its Financial Sector Assessment Program (FSAP) and provides technical assistance to countries, but it implements FATF standards rather than creating them. The IMF’s primary focus is monetary cooperation, financial stability, and economic growth.
C is incorrect because the World Bank, while involved in supporting countries’ efforts to strengthen their financial systems and governance frameworks, is not the primary AML/CFT standard-setter. The World Bank provides financing and technical assistance for AML/CFT capacity building and supports countries in implementing FATF standards through the Stolen Asset Recovery (StAR) Initiative and other programs. However, the World Bank applies standards rather than creates them, with its primary mission being poverty reduction and economic development.
D is incorrect because although the United Nations Office on Drugs and Crime (UNODC) addresses transnational organized crime, drug trafficking, corruption, and terrorism through various conventions (such as the UN Convention against Transnational Organized Crime and the UN Convention against Corruption), it is not the primary AML/CFT standard-setting organization. UNODC provides technical assistance and promotes implementation of UN conventions, but FATF holds the specific mandate for developing comprehensive AML/CFT standards that financial institutions worldwide must follow.
Question 196
A customer relationship manager notices that a long-standing business client has suddenly changed transaction patterns, with significant increases in cash deposits and wire transfers to high-risk jurisdictions. What should the relationship manager do first?
A) Document observations and escalate to the compliance department
B) Contact the customer to inquire about the changes
C) Continue monitoring without taking action
D) File a suspicious activity report immediately
Answer: A
Explanation:
When front-line staff such as relationship managers identify unusual or suspicious activity, the proper protocol is to document their observations thoroughly and escalate the matter to the compliance or AML department for investigation. The compliance department has specialized expertise, access to complete customer information, transaction history, and risk assessment tools necessary to evaluate whether the activity truly represents suspicious behavior requiring regulatory reporting. Documentation should include specific details about the transaction pattern changes, dates, amounts, jurisdictions involved, and any other relevant contextual information. Escalation ensures that trained compliance professionals can conduct proper due diligence, review the customer’s profile and expected activity, and determine appropriate next steps in accordance with the institution’s AML policies and regulatory obligations. This makes A the correct answer as it follows proper internal reporting procedures while preserving evidence and maintaining confidentiality.
B is incorrect because directly contacting the customer to inquire about suspicious transactions risks “tipping off” the customer to the institution’s concerns. Most AML regulations explicitly prohibit informing customers that their activities are under investigation or that a suspicious activity report may be filed. Tipping off can constitute a criminal offense in many jurisdictions and can compromise law enforcement investigations by alerting criminals to scrutiny, potentially causing them to destroy evidence, flee, or move their activities to other institutions. Any customer contact regarding unusual activity should only occur after compliance review and with proper procedures to avoid tipping off.
C is incorrect because continuing to monitor without taking action when red flags have been identified fails to meet the relationship manager’s responsibility to report suspicious activity internally. While ongoing monitoring is part of the AML program, once suspicious indicators are observed, staff must escalate concerns to compliance rather than passively continuing surveillance. Failing to escalate could result in delayed detection of money laundering, missed opportunities for intervention, and potential regulatory violations if the institution fails to file required suspicious activity reports within mandated timeframes.
D is incorrect because filing a suspicious activity report (SAR) is the responsibility of the compliance department, not individual relationship managers. While relationship managers play crucial roles in identifying suspicious activity through their customer interactions, they lack the complete information, expertise, and authority to make SAR filing decisions. The compliance department must conduct thorough investigations, review all relevant information, consult with senior management when appropriate, and make informed determinations about whether activity meets the threshold for SAR filing under applicable regulations.
Question 197
In the context of anti-money laundering, what is the primary purpose of implementing a risk-based approach to customer due diligence?
A) Allocate resources efficiently by focusing on higher-risk customers and transactions
B) Eliminate the need for customer identification procedures
C) Reduce compliance costs by treating all customers equally
D) Avoid conducting enhanced due diligence on any customers
Answer: A
Explanation:
The risk-based approach (RBA) is a cornerstone principle of modern AML compliance programs and is specifically designed to allocate institutional resources efficiently by focusing enhanced scrutiny and controls on customers, products, services, and geographic areas that present higher money laundering and terrorist financing risks. Rather than applying uniform procedures to all customers regardless of risk, the RBA requires institutions to assess and categorize risks, then apply proportionate due diligence and monitoring measures. High-risk customers such as PEPs, customers from high-risk jurisdictions, or those engaged in cash-intensive businesses receive enhanced due diligence, while lower-risk customers may receive simplified measures. This approach enables financial institutions to use their compliance resources most effectively, focusing attention where threats are greatest while maintaining efficient operations for lower-risk relationships. The RBA is explicitly endorsed by FATF and incorporated into AML regulations worldwide. This makes A the correct answer for describing the fundamental purpose of risk-based customer due diligence.
B is incorrect because implementing a risk-based approach absolutely does not eliminate the need for customer identification procedures. Customer Identification Program (CIP) requirements remain mandatory for all customers regardless of risk level. The risk-based approach determines the depth and frequency of due diligence beyond basic identification, but foundational identity verification remains a universal requirement. Even low-risk customers must be properly identified with verification of identity information, and this identification forms the basis for subsequent risk assessment.
C is incorrect because the risk-based approach specifically does not treat all customers equally—that would be the opposite of a risk-based approach. The entire premise of RBA is differential treatment based on assessed risk levels. While the risk-based approach can optimize compliance costs by avoiding unnecessary procedures for low-risk customers, this is achieved through risk differentiation, not equal treatment. Treating all customers identically regardless of risk would represent a “one-size-fits-all” approach that wastes resources on low-risk relationships while potentially providing inadequate scrutiny of high-risk ones.
D is incorrect because the risk-based approach actually requires enhanced due diligence (EDD) for higher-risk customers and situations. EDD is a core component of the RBA, providing additional information gathering, verification, and monitoring for customers presenting elevated risks. Far from avoiding EDD, the risk-based approach mandates more intensive due diligence measures for PEPs, customers from high-risk jurisdictions, complex beneficial ownership structures, unusual transaction patterns, and other risk indicators. The RBA ensures that EDD is applied where needed rather than randomly or never applied at all.
Question 198
A customer’s account shows multiple incoming wire transfers from various foreign entities followed by immediate outgoing transfers to different accounts. This pattern is most characteristic of which money laundering stage?
A) Layering
B) Placement
C) Integration
D) Structuring
Answer: A
Explanation:
Layering is the second stage of the classic three-stage money laundering process and involves creating complex layers of financial transactions to obscure the audit trail and disguise the original source of illicit funds. The pattern described—multiple incoming wire transfers from various foreign entities followed by rapid outgoing transfers to different accounts—is characteristic of layering because it creates distance between the funds and their criminal origin through multiple movements. Layering typically involves moving money through multiple accounts, jurisdictions, financial institutions, or transactions to make tracing difficult for law enforcement and compliance professionals. Common layering techniques include wire transfers through multiple countries, conversion between currencies, use of shell companies, complex loan arrangements, and buying and selling investments. The complexity and rapid movement of funds through various entities and accounts serves to obscure the money trail. This makes A the correct answer for describing the stage characterized by multiple rapid transfers creating transaction complexity.
B is incorrect because placement is the first stage of money laundering, where illicit proceeds initially enter the financial system. Placement typically involves converting cash into other monetary instruments, making deposits into financial institutions, smuggling currency across borders, or purchasing assets with cash. The described pattern of multiple wire transfers between accounts represents movement and complexity beyond initial entry, indicating the funds have already been placed into the financial system and are now being layered through multiple transactions.
C is incorrect because integration is the final stage of money laundering, where laundered funds are reintroduced into the legitimate economy appearing to come from legal sources. Integration might involve purchasing real estate, luxury goods, businesses, or other assets, paying salaries or dividends from seemingly legitimate companies, or making investments. The described rapid movement of funds between multiple accounts through wire transfers represents ongoing layering complexity rather than the final stage where funds are used for apparently legitimate purposes.
D is incorrect because structuring refers specifically to breaking down large transactions into smaller amounts to avoid regulatory reporting thresholds, not to the pattern of multiple rapid transfers between various entities and accounts. While structuring involves multiple transactions, it focuses on avoiding Currency Transaction Report requirements through deliberately sized transactions rather than creating complex transfer patterns to obscure the audit trail. The described activity shows layering complexity rather than threshold avoidance characteristic of structuring.
Question 199
Under FATF recommendations, which of the following parties should financial institutions identify when conducting customer due diligence for legal entities?
A) Beneficial owners
B) All employees
C) Tax advisors
D) Accountants
Answer: A
Explanation:
FATF Recommendation 10 and related guidance explicitly require financial institutions to identify and verify the beneficial owners of legal entity customers as part of customer due diligence obligations. Beneficial owners are the natural persons who ultimately own or control a customer or the natural person on whose behalf a transaction is being conducted. For legal entities, this typically means identifying individuals who own or control 25% or more of the entity’s shares or voting rights, though some jurisdictions apply lower thresholds. Identifying beneficial ownership is crucial because criminals and money launderers frequently use complex corporate structures, shell companies, trusts, and nominee arrangements to conceal their identities and obscure the true ownership of illicit funds. Without beneficial ownership identification, institutions cannot properly assess customer risk or detect when accounts are being used by hidden criminals. Financial institutions must obtain and verify beneficial ownership information through reliable, independent source documents and maintain this information throughout the business relationship. This makes A the correct answer as beneficial ownership identification is a fundamental FATF requirement for legal entity customer due diligence.
B is incorrect because financial institutions are not required to identify all employees of legal entity customers during customer due diligence. While institutions must identify authorized signatories and individuals with transaction authority on accounts, there is no requirement or practical need to identify every employee of a corporate customer. CDD focuses on understanding who controls and benefits from the customer entity, not documenting its entire workforce. Attempting to identify all employees would be impractical, resource-intensive, and would not serve the AML objective of understanding beneficial ownership and control.
C is incorrect because tax advisors are external service providers rather than parties that must be identified during customer due diligence for the entity itself. While financial institutions may need to understand the nature of a customer’s business relationships in certain contexts, there is no general requirement to identify tax advisors as part of standard CDD procedures. Tax advisors themselves may be customers requiring their own CDD, but they are not identified as part of another entity’s due diligence unless they exercise control over the entity or its accounts.
D is incorrect because accountants, like tax advisors, are external service providers and are not required to be identified during customer due diligence for legal entities. While accountants may prepare financial statements or other documents used in CDD, and while they might themselves be subject to CDD requirements when acting as customers or gatekeepers, there is no requirement to identify a customer entity’s accountants as part of that entity’s due diligence. The focus remains on beneficial owners who ultimately control the entity.
Question 200
A financial institution discovers that it has been processing transactions for a customer who is listed on the OFAC Specially Designated Nationals (SDN) list. What is the institution’s immediate obligation?
A) Block or freeze the assets and report to OFAC
B) Close the account and return all funds
C) Continue processing transactions while investigating
D) Notify the customer before taking action
Answer: A
Explanation:
When a financial institution identifies that it has assets or is processing transactions for an individual or entity on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons (SDN) list, it has an immediate legal obligation to block or freeze those assets and promptly report the blocked property to OFAC. This requirement stems from U.S. sanctions regulations that prohibit transactions with SDN-listed parties. Blocking means that the assets must be placed into a blocked, interest-bearing account where they are frozen and cannot be accessed, transferred, or used until OFAC provides authorization. The institution must also reject any future transactions involving the SDN-listed party. Reporting to OFAC must occur within 10 business days using specific forms, providing details about the blocked property, account holder, and circumstances of discovery. The institution must continue to block the property even if the customer claims the designation is erroneous—only OFAC can authorize unblocking. This makes A the correct answer as it describes the immediate legal obligations when discovering SDN matches.
B is incorrect because closing the account and returning funds to an SDN-listed person would constitute a prohibited transaction under OFAC sanctions regulations. Financial institutions are explicitly forbidden from transferring, paying, exporting, withdrawing, or dealing in any property or interests in property belonging to blocked persons. Returning funds would violate sanctions by providing the blocked person access to their assets. Instead, assets must remain frozen in blocked accounts until OFAC provides specific authorization for any transactions, which is extremely rare and occurs only under special circumstances with proper licensing.
C is incorrect because continuing to process transactions while investigating would constitute ongoing violations of OFAC sanctions regulations. Once an SDN match is identified, immediate blocking is required—there is no grace period for investigation or business-as-usual operations. Each transaction processed after identification of an SDN match potentially constitutes a separate sanctions violation subject to significant civil and criminal penalties. Institutions should have screening procedures in place before initiating transactions, and upon discovering an SDN match, must immediately cease processing and freeze assets rather than continuing operations pending investigation.
D is incorrect because notifying the customer before blocking assets could constitute illegal tipping off and would directly violate OFAC’s requirements. Sanctions regulations do not require customer notification before blocking, and such notification could allow the SDN-listed person to attempt to move assets, destroy evidence, or otherwise evade sanctions enforcement. While customers may eventually be informed of blocking actions through account statements or when they attempt to access funds, immediate pre-blocking notification is neither required nor appropriate. The institution’s first obligation is to block assets and report to OFAC, not to notify the sanctioned party.
