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Question 41
What is the purpose of a risk assessment in an anti-money laundering program?
A) To identify, assess, and understand money laundering and terrorist financing risks facing the institution
B) To calculate investment returns for customers
C) To determine employee salary levels
D) To assess the physical security of bank branches
Answer: A
Explanation:
A risk assessment is a foundational component of an effective anti-money laundering program that involves systematically identifying, assessing, and understanding the money laundering and terrorist financing risks that a financial institution faces based on its customers, products, services, delivery channels, and geographic locations. The purpose of conducting a comprehensive risk assessment is to enable the institution to implement a risk-based approach where resources and controls are allocated proportionately to identified risks, with enhanced measures applied to higher-risk areas and streamlined procedures for lower-risk situations. The risk assessment process examines inherent risks across multiple dimensions including customer risk factors such as politically exposed persons, cash-intensive businesses, or customers from high-risk jurisdictions, product and service risks including private banking, correspondent banking, or wire transfers which may be exploited for laundering, geographic risks associated with countries having weak AML controls or high levels of corruption, and delivery channel risks such as non-face-to-face account opening or new technologies that may obscure customer identity. The assessment considers both the likelihood of money laundering occurring and the potential impact if it does occur. Institutions must document their risk assessment methodology, findings, and conclusions in writing. The risk assessment informs decisions about policies, procedures, and controls, determining where enhanced due diligence is required, how transaction monitoring scenarios should be calibrated, what training employees need, and where independent testing should focus. Senior management and the board of directors should review and approve the risk assessment. Risk assessments must be updated periodically and when significant changes occur such as new products, markets, or regulatory developments. Regulatory expectations increasingly require sophisticated risk assessments that consider enterprise-wide risks comprehensively. A well-executed risk assessment demonstrates to regulators that the institution understands its risks and has designed its AML program appropriately to address them.
Why other options are incorrect: B is incorrect because risk assessments in AML focus on money laundering risks, not investment performance calculations. C is incorrect because risk assessments address compliance and financial crime risks, not compensation decisions. D is incorrect because while physical security is important, AML risk assessments focus on money laundering and terrorist financing vulnerabilities.
Question 42
What is a nested correspondent banking relationship?
A) When a respondent bank provides correspondent services to other banks through the correspondent bank’s account
B) When banks share office space in the same building
C) When banks have similar names
D) When banks operate in neighboring countries
Answer: A
Explanation:
A nested correspondent banking relationship, also called nested correspondent banking or downstream correspondent banking, occurs when a respondent bank uses its correspondent banking account to provide correspondent banking services to other banks, creating layers of banks between the ultimate transaction originator and the correspondent bank that provides access to payment systems and services. In this arrangement, the correspondent bank maintains an account for a respondent bank, but that respondent bank then allows other financial institutions to conduct transactions through the respondent’s account at the correspondent bank. This creates a situation where the correspondent bank has no direct relationship with, and very limited visibility into, the banks that are the ultimate originators of transactions flowing through its system. Nested correspondent relationships present heightened money laundering risks because the correspondent bank typically knows little about the banks nested behind its direct respondent, including their customer base, AML controls, ownership, and jurisdiction of operation. The correspondent bank may be unable to conduct adequate due diligence on nested banks and has limited ability to monitor transactions for suspicious activity when it cannot identify the true originators. Criminals exploit nested relationships by using banks with weak AML controls that have access to major payment systems through nesting arrangements with larger respondent banks. The Financial Action Task Force and regulators have expressed serious concerns about nested correspondent banking, with some correspondent banks prohibiting respondent banks from providing such services or requiring enhanced due diligence when they do. Correspondent banks must obtain assurance from respondent banks that they will not permit nested correspondent relationships or must conduct enhanced due diligence on nested banks if such relationships are permitted. This includes understanding which banks have access through the respondent, reviewing their AML controls, and ensuring adequate transaction monitoring covers nested activity.
Why other options are incorrect: B is incorrect because nested correspondent relationships are about banking service arrangements, not physical location sharing. C is incorrect because name similarity is unrelated to nested correspondent banking structures. D is incorrect because geographic proximity does not define nested relationships which are about service provision through intermediary banks.
Question 43
What is a payable-through account?
A) An account at a correspondent bank through which the respondent bank’s customers can conduct transactions directly
B) An account used exclusively for paying employee salaries
C) An account that automatically pays bills
D) A temporary account for processing single transactions
Answer: A
Explanation:
A payable-through account is a correspondent banking arrangement where the correspondent bank maintains an account for a respondent bank and permits the respondent bank’s customers to conduct transactions directly through that account, essentially giving foreign customers direct access to the correspondent bank’s services and payment systems. Unlike typical correspondent relationships where only the respondent bank conducts transactions through the correspondent account, payable-through accounts allow individual customers of the respondent bank to have transaction authority. This arrangement enables foreign individuals and entities to conduct dollar-denominated transactions and access U.S. or other major payment systems without establishing direct banking relationships with institutions in those countries. Payable-through accounts present significant money laundering risks because the correspondent bank has extremely limited visibility into and control over the ultimate parties conducting transactions. The correspondent bank typically relies entirely on the respondent bank to conduct customer due diligence and monitor transactions, with minimal ability to independently verify customer identities or assess the legitimacy of activities. If the respondent bank has weak AML controls or is located in a jurisdiction with inadequate supervision, criminals can exploit payable-through accounts to access major financial systems while evading scrutiny. Regulatory concerns about payable-through accounts led to enhanced requirements including that correspondent banks must obtain information about the respondent’s AML program, ensure the respondent conducts enhanced due diligence on customers with direct access to payable-through accounts, and confirm the respondent can provide customer information to the correspondent upon request. Many correspondent banks have eliminated payable-through account relationships due to the risks involved. Where such relationships continue, correspondent banks must conduct particularly robust due diligence on the respondent institution and implement enhanced monitoring of account activity to detect suspicious patterns that may indicate the accounts are being misused.
Why other options are incorrect: B is incorrect because payable-through accounts are correspondent banking arrangements, not payroll accounts. C is incorrect because this describes automatic bill payment services, not the correspondent banking concept. D is incorrect because payable-through accounts are ongoing arrangements, not temporary single-transaction accounts.
Question 44
What is concentration risk in correspondent banking?
A) Risk arising when a correspondent bank has excessive exposure to respondent banks in high-risk jurisdictions
B) Risk related to customer concentration in one industry
C) Risk of employees not concentrating on their work
D) Risk of having too many branches in one location
Answer: A
Explanation:
Concentration risk in correspondent banking refers to the risk that arises when a correspondent bank has excessive exposure to respondent banks located in high-risk jurisdictions, or when a significant portion of the correspondent’s business is concentrated with respondent banks that present elevated money laundering or compliance risks. This concentration creates vulnerabilities because problems with multiple high-risk respondent relationships or the loss of a significant portion of the correspondent business due to regulatory concerns can have material impacts on the correspondent bank’s risk profile, reputation, and financial performance. Geographic concentration in regions known for weak AML controls, corruption, or financial crime increases the likelihood that the correspondent bank may unwittingly facilitate money laundering or face regulatory scrutiny. Similarly, concentration among respondent banks with weak compliance programs or those serving high-risk customer segments amplifies overall risk. Financial institutions must assess concentration risk as part of their enterprise-wide risk management, considering both the number and aggregate volume of high-risk correspondent relationships. Excessive concentration may indicate inadequate risk management, insufficient due diligence, or business models that prioritize revenue over compliance. Regulators examine concentration risk during examinations, and significant concentrations in high-risk correspondent banking may trigger enhanced supervisory attention or enforcement actions. Institutions should establish limits on acceptable concentrations of high-risk correspondent relationships, conduct regular monitoring of concentration levels, implement appropriate risk mitigation measures when concentrations are elevated, and ensure senior management and boards are aware of concentration risks. Strategic decisions about accepting or continuing high-risk correspondent relationships should consider concentration impacts. Some correspondent banks have reduced concentration risk through de-risking, terminating relationships with respondent banks in particularly high-risk jurisdictions, though this practice has raised concerns about financial exclusion in some regions.
Why other options are incorrect: B is incorrect because while industry concentration is a credit risk concept, the question specifically asks about correspondent banking concentration risk related to geographic or risk profile concentration. C is incorrect because concentration risk is a financial and compliance concept, not related to employee attention. D is incorrect because physical branch concentration is a different business risk, not the correspondent banking concentration risk being addressed.
Question 45
What is a concentration account?
A) An internal bank account that consolidates funds from multiple customer accounts for operational efficiency
B) An account requiring high levels of mental concentration to manage
C) An account exclusively for concentrated investment strategies
D) An account that holds only one type of asset
Answer: A
Explanation:
A concentration account, also called a pooling account or omnibus account, is an internal bank account used by financial institutions to consolidate or pool funds from multiple customer accounts for operational efficiency in processing transactions, managing liquidity, and facilitating fund movements. These accounts are used for legitimate banking purposes such as aggregating customer deposits before transferring to correspondent banks, consolidating funds for investment, or facilitating efficient settlement of transactions. However, concentration accounts present money laundering risks because they commingle funds from different customers, potentially obscuring the source and ownership of funds and making it difficult to trace specific transactions back to individual customers. The anonymity created by concentration accounts can be exploited by money launderers if proper controls are not in place. Criminals may use concentration accounts to layer funds by moving money from individual accounts into concentration accounts where transactions become difficult to attribute to specific parties. The USA PATRIOT Act and banking regulations require financial institutions to implement specific controls for concentration accounts including not allowing customers to direct transactions through concentration accounts, ensuring adequate records are maintained linking concentration account transactions to specific customer accounts, conducting enhanced due diligence on any parties permitted to direct activity in concentration accounts, and implementing monitoring systems that can identify suspicious patterns even when funds flow through concentration accounts. Institutions must have policies restricting which employees can authorize concentration account use and under what circumstances. Internal audit functions should regularly review concentration account usage to ensure compliance with policies. The use of concentration accounts should be limited to legitimate operational purposes with clear business justifications documented. Proper safeguards enable institutions to achieve operational efficiencies while preventing money launderers from exploiting concentration accounts to obscure the audit trail.
Why other options are incorrect: B is incorrect because concentration accounts are defined by their operational purpose of consolidating funds, not cognitive requirements. C is incorrect because concentration accounts are banking operational tools, not investment strategy accounts. D is incorrect because concentration accounts typically hold multiple customers’ funds, not single asset types.
Question 46
What is an appropriate response when a financial institution identifies a customer on an OFAC sanctions list?
A) Block or reject the transaction and freeze assets, then report to OFAC
B) Process the transaction normally without any action
C) Notify the customer immediately about the sanctions match
D) Close the account but release all funds to the customer
Answer: A
Explanation:
When a financial institution identifies that a customer or transaction involves a party on the Office of Foreign Assets Control sanctions list, the institution must take immediate action to comply with U.S. sanctions laws. The appropriate response includes blocking or rejecting the transaction to prevent prohibited dealings with sanctioned parties, freezing any assets or property interests of the sanctioned party that are within the institution’s possession or control, and reporting the blocked property or rejected transaction to OFAC within required timeframes. Blocking means prohibiting any transfer, payment, withdrawal, or other dealing involving property in which a sanctioned party has an interest, effectively freezing those assets. The institution must maintain blocked property in interest-bearing accounts where possible and may not release blocked funds without specific authorization from OFAC. Rejected transactions are those that would involve sanctioned parties but where the institution does not possess or control property that can be blocked, such as incoming wire transfers that are simply returned to the originator. The institution must file reports with OFAC documenting blocked property and rejected transactions, typically using the online reporting system. These reports include details about the sanctions match, the property or transaction involved, and the parties. The institution must maintain records of all sanctions screening, blocking actions, and rejected transactions. Staff must be trained on sanctions compliance procedures including how to respond to screening hits. Institutions cannot notify sanctioned parties that their assets are blocked without OFAC authorization, as this could constitute unlawful tipping off. Legal counsel often assists with OFAC compliance given the complexity of sanctions regulations and serious penalties for violations. Some situations may require applying for specific licenses from OFAC to conduct otherwise prohibited transactions. The institution must continue to block property until OFAC provides authorization to unblock or until sanctions are lifted.
Why other options are incorrect: B is incorrect because processing transactions with sanctioned parties violates sanctions laws and exposes the institution to severe penalties. C is incorrect because notifying the customer could constitute tipping off and is prohibited without OFAC authorization. D is incorrect because releasing funds to a sanctioned party violates blocking requirements and sanctions laws.
Question 47
What is the purpose of ongoing monitoring in customer due diligence?
A) To ensure customer information remains current and to detect transactions inconsistent with customer profiles
B) To constantly watch customers through surveillance cameras
C) To send monthly account statements to customers
D) To call customers weekly to check on their satisfaction
Answer: A
Explanation:
Ongoing monitoring is a critical component of customer due diligence that involves continuously reviewing customer accounts and transactions throughout the relationship to ensure customer information remains current and accurate, to detect transactions or patterns of activity that are inconsistent with what the institution knows about the customer, and to identify potentially suspicious activity requiring investigation and possible reporting. While initial customer due diligence occurs at account opening, ongoing monitoring recognizes that customer risk profiles can change over time, customer activities may evolve, and suspicious patterns may only become apparent through analysis of transactions over extended periods. The purpose of ongoing monitoring includes verifying that transactions are consistent with the institution’s knowledge of the customer’s business and risk profile, ensuring that customer due diligence information including beneficial ownership remains accurate through periodic reviews and updates, identifying unusual or suspicious transaction patterns that may indicate money laundering, detecting changes in customer risk requiring updated risk ratings or enhanced due diligence, and ensuring that relationships remain within the institution’s risk appetite. Ongoing monitoring is implemented through automated transaction monitoring systems that screen transactions against rules and scenarios designed to detect red flags, periodic reviews of high-risk customers at intervals appropriate to their risk level, event-driven reviews triggered by significant account changes or suspicious indicators, and processes to update customer information regularly. The frequency and intensity of ongoing monitoring should be risk-based, with higher-risk customers receiving more frequent reviews and lower alert thresholds. Monitoring examines transaction volumes, patterns, counterparties, geographic factors, and any deviations from expected activity. Institutions must have processes to investigate alerts generated by monitoring systems, document investigation findings, and escalate suspicious activity appropriately. Effective ongoing monitoring requires quality customer data, properly calibrated monitoring scenarios, adequate investigation resources, and regular tuning of systems to reduce false positives while maintaining detection effectiveness.
Why other options are incorrect: B is incorrect because ongoing monitoring refers to transaction and account review, not physical surveillance. C is incorrect because account statements are customer communications, not the compliance concept of ongoing monitoring. D is incorrect because ongoing monitoring is about transaction analysis and risk assessment, not customer satisfaction surveys.
Question 48
What is a beneficial owner?
A) The natural person who ultimately owns or controls a customer or on whose behalf a transaction is conducted
B) A person who receives employee benefits from their employer
C) A customer who benefits from banking services
D) The person whose name appears on an account
Answer: A
Explanation:
The beneficial owner is the natural person who ultimately owns or controls a customer that is a legal entity, or the natural person on whose behalf a transaction is being conducted. This concept is fundamental to anti-money laundering compliance because criminals frequently use legal entities such as corporations, trusts, partnerships, and foundations to obscure their ownership of assets and control over accounts, hiding their identity behind layers of corporate structure. Identifying beneficial owners allows financial institutions to understand who really stands behind their legal entity customers and to conduct appropriate due diligence on those ultimate controlling parties. The Financial Action Task Force Recommendations and regulations in most jurisdictions require institutions to identify and verify beneficial owners as part of customer due diligence for legal entity customers. For legal entities, beneficial owners typically include natural persons who own or control a certain percentage of the entity’s shares or voting rights, commonly set at twenty-five percent or more, though thresholds vary by jurisdiction. When no individual meets the ownership threshold, institutions must identify natural persons exercising control through other means such as senior managing officials who have executive authority. For legal arrangements like trusts, beneficial owners include the settlor who established the trust, trustees who administer it, protectors if any, beneficiaries or class of beneficiaries, and any other natural persons exercising ultimate effective control. Identifying beneficial owners requires financial institutions to obtain ownership and control structure information from customers, verify that information through documentation such as corporate records, and maintain records of beneficial ownership. The process can be complex for multi-layered corporate structures spanning multiple jurisdictions. Many countries now require entities to disclose beneficial ownership information to authorities or maintain registers. Beneficial ownership identification helps detect when individuals subject to sanctions, identified as PEPs, or known for criminal activity are hiding behind legal entities.
Why other options are incorrect: B is incorrect because beneficial owner is a legal and compliance term about ultimate ownership, not employment benefits. C is incorrect because the term refers to ultimate ownership and control, not simply receiving banking services. D is incorrect because the nominal account holder may be different from the beneficial owner who ultimately controls the account.
Question 49
What is source of funds?
A) The origin of the particular funds used in a specific transaction or relationship
B) The bank where funds are deposited
C) The country where a customer lives
D) The investment portfolio allocation
Answer: A
Explanation:
Source of funds refers to the origin and history of the particular funds used in a specific transaction or business relationship, answering the question of where the money came from for this specific activity. This concept is distinct from but related to source of wealth. Understanding source of funds helps financial institutions determine whether funds have a legitimate origin and whether the transaction is consistent with what is known about the customer. Source of funds information is particularly important for enhanced due diligence situations including large transactions, relationships with politically exposed persons, customers from high-risk jurisdictions, or any situation where the origin of funds is unclear or potentially suspicious. Examples of legitimate sources of funds include salary or wages from employment, proceeds from sale of assets such as real estate or investments, inheritance, gifts from family members, business profits, loan proceeds, or pension distributions. When conducting enhanced due diligence, institutions should obtain documentation supporting the stated source of funds such as pay stubs, sale agreements, inheritance documents, tax returns, or business financial statements. The institution evaluates whether the source of funds makes sense given what is known about the customer’s background and financial profile. Red flags regarding source of funds include inability or reluctance to explain where money came from, explanations that are implausible or inconsistent with the customer’s profile, frequent changes in explanations, documentation that appears falsified, sources from high-risk jurisdictions or activities, or funds from third parties with unclear relationships to the customer. Source of funds analysis is particularly critical for politically exposed persons where institutions must understand whether funds represent legitimate income or potential proceeds of corruption. Cash-intensive businesses present challenges because the source of specific cash deposits may be difficult to verify. Institutions should document source of funds information obtained during due diligence and periodically verify that ongoing funding sources remain consistent with original representations. Understanding source of funds supports suspicious activity detection by establishing whether transactions align with expected funding patterns.
Why other options are incorrect: B is incorrect because source of funds refers to where money originated, not which institution holds it. C is incorrect because geographic location is separate from the source of funds concept which focuses on origin of money. D is incorrect because portfolio allocation describes investment distribution, not the origin of funds.
Question 50
What is source of wealth?
A) The origin of a customer’s total accumulated assets and net worth
B) The specific transaction being conducted
C) The customer’s current employment
D) The bank account balance
Answer: A
Explanation:
Source of wealth refers to the origin of a customer’s total accumulated assets and overall net worth, providing a broader picture of how the customer built their wealth over time. This concept differs from source of funds which focuses on the origin of money for specific transactions. Understanding source of wealth helps institutions assess whether a customer’s overall financial profile makes sense and whether their assets could reasonably have been accumulated through stated legitimate means. Source of wealth information is particularly important for enhanced due diligence of high-net-worth individuals, politically exposed persons, and customers whose wealth appears inconsistent with their stated background. Examples of legitimate sources of wealth include career earnings over time from employment or business ownership, inheritance of family wealth, successful investments that appreciated significantly, sale of a business or valuable assets, or winnings from legitimate gambling or lotteries. When assessing source of wealth, institutions consider the customer’s employment history, business interests, family background, education, and known assets to determine whether the claimed wealth accumulation is plausible. For politically exposed persons, understanding source of wealth is critical to distinguish between legitimate earnings from government salaries and investments versus potential proceeds of corruption. Institutions may request documentation supporting source of wealth claims such as business ownership documents, tax returns over multiple years, trust or inheritance documents, or information about major asset sales. Evaluating source of wealth requires understanding the customer’s financial journey over potentially decades rather than focusing on individual transactions. Red flags include wealth that appears dramatically inconsistent with known income sources, inability to explain how wealth was accumulated, wealth obtained during periods of public service where corruption risks are high, or wealth from countries or industries associated with high corruption levels. Source of wealth analysis complements source of funds review to create comprehensive understanding of customer finances and detect potential money laundering or corruption.
Why other options are incorrect: B is incorrect because source of wealth concerns overall accumulated assets, not individual transactions which is source of funds. C is incorrect because current employment is only one potential component of source of wealth, not the complete concept. D is incorrect because account balance is a snapshot of funds, while source of wealth examines how total wealth was accumulated over time.
Question 51
What is de-risking?
A) The practice of terminating business relationships with customers or categories of customers to avoid regulatory risk
B) Reducing interest rates on loans
C) Decreasing credit limits for customers
D) Eliminating physical security risks at branches
Answer: A
Explanation:
De-risking is the practice by financial institutions of terminating or restricting business relationships with customers or entire categories of customers, correspondent banks, or jurisdictions to avoid rather than manage perceived regulatory or reputational risks associated with providing financial services to those parties. This phenomenon has become increasingly common as institutions face heightened regulatory scrutiny, significant penalties for anti-money laundering failures, and resource constraints in managing compliance programs. De-risking typically affects money service businesses, non-profit organizations, customers from high-risk jurisdictions, correspondent banks in developing countries, and industries perceived as high-risk such as cannabis-related businesses in some jurisdictions. Financial institutions engaging in de-risking often cite concerns about the costs and difficulties of conducting adequate due diligence, transaction monitoring, and compliance for certain customer categories, along with fears of regulatory criticism or enforcement actions if problems occur. While individual institutions may view de-risking as prudent risk management, the practice has generated significant international concern because wholesale termination of services can have serious consequences. De-risking can push legitimate businesses and populations toward unregulated channels, reduce financial inclusion, impede remittances to developing countries, increase costs for affected parties, and undermine anti-money laundering goals by driving activity into less transparent channels. Regulators and international organizations including the Financial Action Task Force have expressed concerns about indiscriminate de-risking and emphasized that risk-based approaches should involve managing risks appropriately rather than avoiding entire customer categories. Guidance emphasizes that institutions should make individualized risk-based decisions rather than blanket exclusions. However, balancing compliance obligations, resource constraints, and business viability remains challenging. The de-risking debate reflects tensions between financial crime prevention, financial inclusion, and the practicalities of implementing risk-based compliance programs.
Why other options are incorrect: B is incorrect because de-risking relates to customer relationships and regulatory risk, not interest rate adjustments. C is incorrect because this describes credit risk management, not the compliance concept of de-risking. D is incorrect because de-risking concerns regulatory and reputational risk from customer relationships, not physical security risks.
Question 52
What is a non-profit organization’s (NPO) vulnerability to terrorist financing?
A) NPOs can be exploited to raise, move, or obscure funds for terrorist purposes while appearing legitimate
B) NPOs are immune to any terrorist financing risks
C) NPOs only face money laundering risks, not terrorist financing
D) Terrorist financing never involves charitable organizations
Answer: A
Explanation:
Non-profit organizations, also called charities, are vulnerable to terrorist financing because they operate in an environment of trust, have access to significant funding sources, enjoy tax-exempt status in many jurisdictions, and often work in regions affected by terrorism or conflict where oversight may be limited. Terrorists exploit these characteristics to raise funds through donations solicited for ostensibly charitable purposes, to move money internationally under the guise of humanitarian aid, and to provide support to terrorist organizations while maintaining the appearance of legitimate charitable activity. The Financial Action Task Force has identified NPOs as particularly at risk because a subset of the NPO sector, while relatively small, can be abused for terrorist financing. Terrorists establish front organizations that pose as legitimate charities while primarily serving to finance terrorism, they infiltrate legitimate charities by placing operatives in positions where they can divert funds, they exploit charities by deceiving well-meaning donors whose contributions are redirected to terrorists, and they use charities to provide material support to terrorist groups through services, equipment, or personnel. The international nature of many NPOs, combined with the ease of cross-border fund transfers for humanitarian purposes, creates opportunities for moving money to terrorist groups operating in conflict zones. Additionally, the goodwill associated with charitable work can reduce scrutiny of NPO transactions. Legitimate NPOs vastly outnumber those exploited for terrorist financing, and the sector provides critical humanitarian services worldwide. However, financial institutions must conduct appropriate due diligence on NPO customers, regulators supervise NPO activities in many jurisdictions, and NPOs themselves should implement governance measures including verifying end-use of funds, screening personnel, maintaining transparent accounting, and implementing controls to prevent abuse. The challenge is implementing protective measures that prevent terrorist financing exploitation without unduly hindering legitimate charitable work or financial access for NPOs.
Why other options are incorrect: B is incorrect because NPOs face documented terrorist financing risks that must be addressed. C is incorrect because NPOs are particularly vulnerable to terrorist financing abuse, not only money laundering. D is incorrect because terrorist financing has historically involved exploitation of charitable organizations in numerous documented cases.
Question 53
What is smurfing?
A) Breaking large amounts of money into smaller transactions to evade reporting requirements
B) A type of investment strategy
C) A legitimate banking service for small businesses
D) An employee training program
Answer: A
Explanation:
Smurfing, also known as structuring, is a money laundering technique that involves breaking large amounts of money into multiple smaller transactions specifically designed to fall below regulatory reporting thresholds in order to avoid triggering Currency Transaction Reports or other mandatory reports that would draw attention to the funds. The term smurfing comes from the practice of using multiple people, called smurfs, to conduct these smaller transactions on behalf of the money launderer. In a typical smurfing operation, a money launderer recruits several individuals who each deposit, exchange, or transfer amounts just below the reporting threshold at various financial institutions or branches. For example, if the reporting threshold is ten thousand dollars, each smurf might conduct transactions of nine thousand dollars or split deposits over multiple days to avoid aggregation rules. The coordination of many small transactions accomplishes the same goal as a single large transaction but attempts to evade the reporting that would occur with the large transaction. Smurfing primarily occurs during the placement stage of money laundering when criminals need to introduce bulk cash into the financial system. Financial institutions combat smurfing through automated monitoring systems that aggregate transactions by the same individual or related parties over specified time periods to identify structuring patterns. Many jurisdictions make structuring itself a crime regardless of whether the underlying funds are from illegal sources, recognizing that deliberately evading reporting requirements indicates consciousness of guilt. Red flags for smurfing include multiple individuals making similar deposits into the same account, customers making frequent deposits just below reporting thresholds, customers inquiring about reporting requirements before conducting transactions, deposits at multiple branches on the same day, and explanations for transaction amounts that appear contrived. When structuring is detected, institutions must file Suspicious Activity Reports even though individual transactions fell below reporting thresholds.
Why other options are incorrect: B is incorrect because smurfing is a criminal money laundering technique, not an investment strategy. C is incorrect because smurfing is illegal structuring, not a legitimate service. D is incorrect because smurfing relates to transaction structuring, not employee training programs.
Question 54
What is a suspicious activity report (SAR) narrative?
A) A detailed description of suspicious activity including facts, analysis, and reasons for suspicion
B) A creative story used for marketing purposes
C) A customer complaint letter
D) A transaction receipt
Answer: A
Explanation:
The suspicious activity report narrative is a critical component of the SAR filing that provides a detailed written description of the suspicious activity, including relevant facts, analysis of why the activity is suspicious, the customer’s explanation if obtained, and the institution’s assessment of potential money laundering or financial crime. The narrative is where compliance professionals explain the suspicious activity in a way that enables financial intelligence units and law enforcement to understand what occurred, why it raised concerns, and how it might relate to criminal activity. An effective SAR narrative is comprehensive yet concise, presenting information in a clear, logical manner that tells the story of the suspicious activity chronologically. The narrative should include identifying information about involved parties, description of suspicious transactions with dates, amounts, and patterns, explanation of how the activity was detected, relevant background about the customer’s profile and expected activity, the customer’s explanation for the activity if available and why that explanation is insufficient, description of any red flags or typology indicators observed, analysis connecting the facts to potential money laundering or specific crimes, and actions taken by the institution. The narrative should be fact-based rather than speculative but should include the institution’s reasoned assessment of suspicion. Quality narratives provide context that raw transaction data cannot convey, helping investigators understand the significance of activity. Common problems with SAR narratives include insufficient detail that leaves investigators with unanswered questions, failure to explain why activity is suspicious rather than unusual but legitimate, excessive length that obscures key points, conclusions without supporting facts, and failure to connect disparate activities into coherent patterns. Financial intelligence units have emphasized that high-quality narratives significantly enhance the value of SARs for investigations. Institutions should train staff on effective SAR writing, provide templates and examples, and review narratives before filing to ensure clarity and completeness.
Why other options are incorrect: B is incorrect because SAR narratives are regulatory filings describing potential crimes, not marketing content. C is incorrect because SARs report suspicious activity to authorities, not customer service complaints. D is incorrect because the SAR narrative is a detailed analytical report, not a transaction receipt.
Question 55
What is the purpose of sanctions screening?
A) To check customers and transactions against lists of prohibited individuals, entities, and countries
B) To screen job applicants for employment
C) To review architectural plans for buildings
D) To test product quality before sale
Answer: A
Explanation:
Sanctions screening is the process by which financial institutions check their customers, transactions, and business relationships against lists of individuals, entities, countries, vessels, and other parties subject to economic sanctions imposed by governments or international organizations such as the United Nations, Office of Foreign Assets Control, European Union, and others. The purpose of sanctions screening is to prevent the institution from violating sanctions laws by ensuring it does not facilitate transactions involving sanctioned parties, does not provide financial services to designated terrorists or other prohibited persons, and does not conduct business with sanctioned countries or regions. Sanctions programs aim to achieve foreign policy and national security objectives by applying economic pressure to targeted governments, terrorist organizations, proliferators of weapons of mass destruction, drug cartels, and others. Financial institutions must screen customers at onboarding before establishing relationships, screen transactions in real-time before processing payments to identify any involvement of sanctioned parties, continuously screen existing customers against updated sanctions lists as designations change, and screen other business relationships such as vendors or correspondents. Sanctions screening systems use sophisticated name-matching algorithms that account for variations in spelling, transliterations between alphabets, use of aliases, and partial name matches. Geographic screening identifies transactions involving sanctioned countries. Because many names are common and not all individuals with similar names are sanctioned parties, screening generates false positives requiring manual review by sanctions analysts who investigate matches to determine whether they represent true hits against sanctioned parties or innocent parties with similar names. True sanctions hits must be handled according to sanctions requirements which typically involve blocking assets, rejecting transactions, and reporting to authorities. Maintaining current sanctions lists from multiple sources, implementing effective screening technology, training staff, and documenting screening and investigative decisions are critical compliance requirements.
Why other options are incorrect: B is incorrect because sanctions screening relates to compliance with government sanctions, not employment screening processes. C is incorrect because screening in the compliance context refers to checking against prohibited parties lists, not architectural review. D is incorrect because sanctions screening concerns compliance with economic sanctions, not product quality control.
Question 56
What is the primary purpose of the Bank Secrecy Act (BSA)?
A) To require financial institutions to maintain records and file reports assisting in detecting and preventing money laundering
B) To ensure all banking transactions remain completely confidential
C) To provide insurance for bank deposits
D) To regulate stock trading activities
Answer: A
Explanation:
The Bank Secrecy Act, enacted in 1970, is the foundational anti-money laundering law in the United States that requires financial institutions to maintain records of cash purchases of negotiable instruments, file reports of cash transactions exceeding ten thousand dollars, and report suspicious activity that might indicate money laundering, tax evasion, or other criminal activity. The primary purpose of the BSA is to create transparency in financial transactions that enables law enforcement to detect and investigate money laundering, terrorist financing, and other financial crimes by ensuring that records exist and that large or suspicious transactions are reported to authorities. Despite its name suggesting secrecy, the BSA actually requires disclosure of certain financial information to the government, effectively piercing bank secrecy for law enforcement purposes. Key BSA requirements include Currency Transaction Reports for cash transactions over ten thousand dollars, Suspicious Activity Reports for transactions that may involve money laundering or other crimes, maintenance of records for wire transfers and monetary instrument purchases, customer identification programs to verify customer identities, and designation of compliance officers responsible for BSA programs. The BSA has been amended and expanded multiple times, most significantly by the USA PATRIOT Act in 2001 which added counter-terrorist financing provisions and enhanced due diligence requirements. The Financial Crimes Enforcement Network within the Treasury Department administers the BSA and receives reports filed under its authority. Violations of BSA requirements can result in civil and criminal penalties for both institutions and individuals. The BSA regulatory framework has become increasingly comprehensive over decades, extending coverage beyond banks to money service businesses, securities firms, insurance companies, casinos, and other financial institutions. The BSA established the foundation for the modern anti-money laundering regime in the United States and influenced development of AML frameworks internationally. Compliance with BSA requirements demands significant resources from financial institutions including technology systems, compliance staff, training programs, and ongoing monitoring. However, the transparency created by BSA reporting provides critical intelligence that supports thousands of money laundering, terrorist financing, and other financial crime investigations annually.
Why other options are incorrect: B is incorrect because despite its name, the BSA requires disclosure of financial information to authorities rather than maintaining secrecy. C is incorrect because deposit insurance is provided by the FDIC under separate legislation, not the BSA. D is incorrect because securities regulation is handled primarily by the SEC and securities laws, though securities firms are subject to BSA requirements.
Question 57
What is the role of a financial intelligence unit (FIU)?
A) To receive, analyze, and disseminate financial intelligence related to money laundering and terrorist financing
B) To provide investment advice to customers
C) To manage the central bank’s monetary policy
D) To approve loan applications
Answer: A
Explanation:
A financial intelligence unit is a national agency responsible for receiving, analyzing, and disseminating to law enforcement and other competent authorities financial intelligence concerning suspected money laundering, terrorist financing, and related financial crimes. FIUs serve as the central point in countries for receiving suspicious activity reports from financial institutions and other reporting entities, processing and analyzing this information along with data from other sources, and providing intelligence products to support investigations and prosecutions. The FIU concept was endorsed by the Financial Action Task Force and FIUs now exist in most countries worldwide, though their specific structures, authorities, and placements within government vary. FIUs typically perform several core functions including receiving SARs, currency transaction reports, and other mandatory filings from reporting entities, conducting operational analysis of individual cases to support specific investigations by tracing funds and identifying suspects, performing strategic analysis to identify trends, patterns, and emerging money laundering typologies, maintaining databases of financial intelligence, disseminating intelligence to domestic law enforcement agencies, sharing information with foreign FIUs through the Egmont Secure Web and other channels, and providing feedback to reporting institutions. Different FIU models exist including administrative FIUs located in financial regulatory agencies, law enforcement FIUs within police or investigative agencies, prosecutorial FIUs under prosecutor offices, and hybrid models. The Egmont Group establishes standards for FIUs and facilitates international cooperation. FIUs play critical roles in connecting the private sector which detects and reports suspicious activity with law enforcement which investigates and prosecutes crimes. By analyzing suspicious activity reports from across the financial sector, FIUs can identify patterns and connections that individual institutions cannot see, developing comprehensive intelligence pictures of criminal networks. FIUs protect the confidentiality of sensitive financial intelligence while ensuring it reaches appropriate authorities for action.
Why other options are incorrect: B is incorrect because FIUs analyze financial crime intelligence, they do not provide investment advice which is a commercial financial service. C is incorrect because monetary policy is the function of central banks, not FIUs which focus on financial crime intelligence. D is incorrect because loan approval is a commercial banking function, while FIUs analyze suspicious activity for law enforcement purposes.
Question 58
What is a wire transfer?
A) An electronic transfer of funds between financial institutions on behalf of customers
B) A physical transfer of cash by armored vehicle
C) A telephone conversation between bankers
D) A type of investment account
Answer: A
Explanation:
A wire transfer is an electronic method of transferring funds between financial institutions on behalf of originating and beneficiary customers, enabling rapid movement of money domestically and internationally. Wire transfers are processed through various payment systems including the Fedwire system in the United States, the SWIFT network for international transfers, and other national and regional payment networks. Wire transfers are attractive to money launderers because they move large amounts quickly across borders, can be layered through multiple transfers to obscure audit trails, and historically had limited information requirements about parties involved. Recognizing these risks, international standards and regulations impose specific requirements on financial institutions for wire transfers. The Financial Action Task Force Travel Rule requires that wire transfers include complete originator information including name, address, and account number that travels with the payment through the entire payment chain, and beneficiary information for the recipient. Institutions must screen wire transfers against sanctions lists, monitor for suspicious patterns, maintain records of wire transfer information, and verify customer information. Red flags for suspicious wire transfers include transfers to or from high-risk jurisdictions, round-dollar amounts suggesting structuring, transfers immediately followed by outgoing transfers suggesting layering, wires inconsistent with customer business profile, use of multiple intermediary banks without clear purpose, transactions involving parties on sanctions lists, and transfers to or from jurisdictions known for terrorism or drug trafficking. Cross-border wire transfers present particular challenges for monitoring because complete payment information may not always be available to all institutions in the payment chain. SWIFT messages contain structured fields for originator and beneficiary information, but incomplete data or truncation can occur. Institutions must have policies for handling wires with incomplete information. The speed and global reach of wire transfers make them both essential for international commerce and vulnerable to exploitation for money laundering and terrorist financing.
Why other options are incorrect: B is incorrect because wire transfers are electronic, not physical movement of cash which is called cash-in-transit services. C is incorrect because wire transfers are electronic payment transactions, not telephone communications. D is incorrect because wire transfers are payment transactions, not investment account types.
Question 59
What is the Travel Rule?
A) A requirement to include originator and beneficiary information with wire transfers and other funds transfers
B) Rules for international business travel expenses
C) Requirements for customer travel documentation
D) Regulations governing armored car services
Answer: A
Explanation:
The Travel Rule is an anti-money laundering requirement, established in FATF Recommendation 16, that financial institutions must include complete originator information including name, address, and account number and beneficiary information with wire transfers and certain other funds transfers, and that this information must travel with the transfer through the entire payment chain. The rule aims to ensure transparency in funds transfers so that law enforcement can identify parties involved in suspicious transactions and so that institutions throughout the payment chain can screen transfers for sanctions and detect suspicious patterns. Under the Travel Rule, the originating institution must obtain and verify originator information, include this information with the transfer message, and screen to ensure no sanctioned parties are involved. Intermediary institutions in the payment chain must ensure required information accompanies transfers and conduct sanctions screening. Beneficiary institutions must screen beneficiary customers against sanctions lists and use the originator information for transaction monitoring and suspicious activity detection. The threshold for when the Travel Rule applies varies by jurisdiction but often covers transfers of one thousand dollars or more, or applies to all transfers in some jurisdictions. Challenges implementing the Travel Rule include technical limitations in payment systems that may truncate information, international transfers where standards vary across jurisdictions, and ensuring data quality so that information is accurate and complete. The rise of virtual assets and cryptocurrency transfers has extended Travel Rule discussions to digital asset service providers, with FATF recommending similar information-sharing requirements for virtual asset transfers. However, the decentralized and pseudonymous nature of blockchain technology makes Travel Rule implementation for virtual assets technically and practically challenging. Financial institutions must have systems to capture required information, include it in payment messages using appropriate formats, handle incoming transfers with incomplete information according to risk-based policies, and use the information for monitoring and screening.
Why other options are incorrect: B is incorrect because the Travel Rule concerns payment information requirements, not business travel expense regulations. C is incorrect because the rule addresses financial transfer information, not customer identification documents for travel. D is incorrect because the Travel Rule applies to electronic funds transfers, not physical cash transportation services.
Question 60
What is a high-risk customer in anti-money laundering?
A) A customer presenting elevated money laundering or terrorist financing risks requiring enhanced due diligence
B) A customer with poor credit scores
C) A customer who frequently overdrafts their account
D) A customer who lives in a remote area
Answer: A
Explanation:
A high-risk customer in anti-money laundering terms is an individual or entity that presents elevated money laundering, terrorist financing, or other financial crime risks based on an assessment of various risk factors, and who therefore requires enhanced due diligence measures beyond standard customer due diligence. The determination of whether a customer is high-risk should result from a comprehensive risk assessment considering multiple dimensions of risk rather than any single factor. Customer types commonly classified as high-risk include politically exposed persons due to corruption risks, customers from high-risk jurisdictions identified by FATF or national authorities as having weak AML controls or high levels of financial crime, customers with complex ownership structures particularly involving multiple offshore entities that could obscure beneficial ownership, cash-intensive businesses that present greater opportunities for commingling illicit and legitimate funds, money service businesses and other non-bank financial institutions that may have weaker AML controls, customers dealing in high-value goods like precious metals or art, customers involved in industries associated with money laundering such as casinos or real estate, non-profit organizations particularly those operating in high-risk regions, and customers exhibiting suspicious behavior or providing inconsistent information. Additional risk factors include non-face-to-face relationships where customer verification is more difficult, customers requesting unusual products or services, high transaction volumes or complex transaction patterns, involvement of third parties whose relationship to the customer is unclear, and customers unwilling to provide information or documentation. High-risk customers require enhanced due diligence including obtaining additional information about source of wealth and source of funds, obtaining senior management approval for establishing or continuing relationships, conducting more frequent reviews of the relationship, applying lower thresholds for investigating transactions, and maintaining more extensive documentation. The specific EDD measures should be tailored to the particular risks presented. Risk ratings should be reviewed periodically and updated when circumstances change.
Why other options are incorrect: B is incorrect because credit risk and AML risk are different concepts; poor credit does not necessarily indicate money laundering risk. C is incorrect because overdrafts relate to credit and account management, not specifically to money laundering risk. D is incorrect because geographic remoteness alone does not make someone high-risk for money laundering purposes unless associated with other risk factors.
