Bank Compliance: Identifying Red Flags

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Questions and Answers

Why do governments and multi-national bodies impose economic sanctions?

To impede kleptocracy (correct)

To prevent fraudulent international trade transactions (correct)

To enforce foreign policy objectives (correct)

To combat an imminent terrorist threat (correct)

Which aspect of the USA PATRIOT Act impacts foreign financial institutions?

Expanding the anti-money laundering program requirements to all foreign financial institutions (correct)

Requiring enhanced due diligence for foreign shell banks

Expanding sanctions requirements to a U.S. financial institution's foreign branches

Providing authority to impose special measures on institutions that are of primary money-laundering concern

Which supporting documentation might a law enforcement agency request from a financial institution to facilitate its investigation after reviewing a suspicious transaction report (STR) on a client's account?

A copy of the institution's STR policy and procedures

Copies of promotional materials sent to the customer

Previously filed STRs on the same customer

Account opening documents and account statements (correct)

What should an institution located in a jurisdiction with new anti-money laundering laws do to ensure compliance?

Change procedures and systems, providing employee training Signup and view all the answers

What red flag should stop a U.K. real estate agent from discussing a potential purchase further where the clients want anonymity?

The clients are not willing to provide their names to the bank Signup and view all the answers

What must a vice president at a large United States bank acquire under the USA PATRIOT Act when a foreign bank with an offshore license wants to open a correspondent account?

Information about the foreign bank's anti-money laundering program Signup and view all the answers

What is true regarding the disclosure to a law enforcement agency by a financial institution of supporting documentation for a suspicious transaction report?

Confirm request origin from a representative of the law enforcement agency Signup and view all the answers

What should countries do to help prevent non-profit organizations from being abused for the financing of terrorism according to the FATF 40 Recommendations?

Require all non-profit organizations to register with the country's financial intelligence unit Signup and view all the answers

Which three methods are commonly used by an accountant to launder money?

Understating income to take a tax loss Signup and view all the answers

What are two requirements for monitoring and reporting suspicious activity for correspondent banking according to the Wolfsberg Principles?

Incorporate due diligence results such as customer risk ratings Signup and view all the answers

Which customer action indicates potential money laundering for a bank maintaining a relationship with a small bakery business owner?

Customer wired a large sum to a foreign jurisdiction where family resides Signup and view all the answers

What are the regulatory risks to a bank employee who willfully violates anti-money laundering laws?

Enforcement actions including fines against the financial institution Signup and view all the answers

Which red flag identifies a heightened money laundering risk?

Expected activity was advised to include cash letter and money orders Signup and view all the answers

The Wolfsberg Anti-Money Laundering Principles for Private Banking require new clients to be approved by whom?

At least one person other than the private banker Signup and view all the answers

Which requirement is included in the Fourth European Union Directive on money laundering?

It requires member countries to maintain registries of the beneficial owners of legal entities Signup and view all the answers

Which type of scenario is helpful in mitigating the weakness of an automated surveillance system that doesn't generate alerts for consistently abnormal activity over time?

Peer Signup and view all the answers

Which method do terrorist financiers use to move funds without leaving an audit trail?

Cash couriers Signup and view all the answers

Which insurance product is particularly vulnerable to money laundering?

Annuity Signup and view all the answers

In the context of monitoring new crowdfunding projects, which red flag indicates the highest anti-money laundering risk?

Projects that start and close and are fully funded within a very short period Signup and view all the answers

In the scenario of a new business customer with principals living abroad and little online presence, what warrants enhanced due diligence?

Money laundering through real estate Signup and view all the answers

Which two aspects should be included in the policy on dealing with intermediaries to align with Wolfsberg Anti-Money Laundering Principles for Private Banking?

Where an intermediary manages assets and arranges accounts for clients, the bank must perform due diligence on the intermediary's clients. Signup and view all the answers

In a review of a restaurant's financial activities, which red flag should trigger additional investigation?

Privately-owned ATM Signup and view all the answers

During the correction phase following an anti-money laundering audit identifying weaknesses in transaction monitoring alert clearance, what is the role of the auditor?

Validating successful remediation post-management indication Signup and view all the answers

In a loan application scenario, which aspect indicates the potential for money laundering?

The LLC's ownership is not disclosed to the bank Signup and view all the answers

What action should an employee take upon overhearing a colleague giving advice on avoiding suspicious transaction reports?

Report the conversation to the compliance officer Signup and view all the answers

A new compliance officer notices changes in internal operations. What factor necessitates the update of the bank's risk assessment?

Acquisition of another institution Signup and view all the answers

Who are ordinarily beneficial owners of a private banking account as per Wolfsberg Anti-Money Laundering Principles?

Those with ultimate control over funds Signup and view all the answers

What represents the integration stage of money laundering involving a deposit-taking institution?

Wiring illicit funds between different bank accounts Signup and view all the answers

In a casino scenario, what should raise concerns about potential money laundering?

Requesting wire transfer to an unrelated party Signup and view all the answers

A compliance officer's enhanced monitoring identifies unusual activity possibly related to human trafficking. What indicates additional review is warranted?

Cash deposits in cities not related to customer followed by same-day withdrawals Signup and view all the answers

What legal risks arise from inadequate privacy policies and procedures?

Diminished reputation Signup and view all the answers

In a P2P funds transfer product launch, which actions present the highest anti-money laundering risk?

Servicing under-banked populations Signup and view all the answers

Upon discovering customers remitting the same amount more frequently, how should a money transmitter respond?

Implement enhanced due diligence for customers Signup and view all the answers

Which two steps should be taken to trace funds through the bank to assist law enforcement in their investigation? (Choose two)

Identify deposits by casas de cambio that include third-party items including sequentially numbered monetary instruments Signup and view all the answers

How should the branch manager respond to the activity of customers and a teller from the same ethnic group processing deposits together?

Conduct further investigation before taking any action Signup and view all the answers

What is a key objective of the Egmont Group?

To provide best practices for financial institutions on how to report suspicious activity Signup and view all the answers

What should the compliance officer do when the branch manager reports a law enforcement officer's visit?

File a suspicious transaction report Signup and view all the answers

In which two ways does a government Financial Intelligence Unit interact with public and private sectors?

It disseminates information and the results of its analysis to competent authorities Signup and view all the answers

What do Financial Action Task Force (FATF)-style regional bodies do to help combat money laundering and terrorist financing?

They provide technical assistance to members in implementing FATF recommendations Signup and view all the answers

How should a bank respond to small deposits followed by ATM withdrawals from a country bordering a conflict zone?

File a suspicious transaction report Signup and view all the answers

To whom should a situation involving a politically exposed person's account activity be escalated?

The bank's anti-money laundering officer Signup and view all the answers

What must a foreign bank provide to a U.S. bank under the USA PATRIOT Act when opening a correspondent account?

The person in the United States who can receive service of legal process for the correspondent bank Signup and view all the answers

Which two transaction types warrant investigation based on anti-money laundering concerns regarding a customer's account activity? (Choose two)

The wires to foreign countries Signup and view all the answers

Which two red flags should prompt the firm's compliance officer to take action regarding a customer's account activity?

The customer's stated investment goal is not reflective of account activity Signup and view all the answers

What should be the focus of a suspicious transaction report when a customer transfers almost all funds out of an account?

The customer transfers almost all of the funds out of the account Signup and view all the answers

What action by a charity may indicate possible terrorist financing?

The charity frequently withdraws cash from the bank Signup and view all the answers

Which transaction is considered a red flag for potential money laundering according to a compliance officer at an insurance company?

A client paid the quarterly life insurance premium using money orders from two different banks Signup and view all the answers

How should a request from a foreign politically exposed person (PEP) to add a beneficiary to a life insurance policy be processed to mitigate risk?

Perform due diligence on the beneficiary Signup and view all the answers

How should a bank respond to a law enforcement official inquiring about a customer under investigation?

Request a formal letter be submitted to verify the validity of the request Signup and view all the answers

Is the bank's existing anti-money laundering training adequate to be delivered to employees of the newly acquired credit card business?

No, anti-money laundering training needs to be tailored and focused on the risks specific to the business Signup and view all the answers

What are two reasons physical certificates present a money laundering risk to broker-dealers?

The trade information on a physical certificate can be easily altered Signup and view all the answers

What is a major economic consequence of money laundering through the use of front companies?

Weakening of the legitimate private sector Signup and view all the answers

What should the auditor do if a policy exception identified during an audit is found to violate a regulatory requirement?

Include the regulatory violation in the audit report and report it to the board of directors Signup and view all the answers

What is the goal of the Egmont Group in providing a forum for Financial Intelligence Units (FIUs) around the world?

To provide a forum for FIUs to improve cooperation against money laundering and terrorism financing Signup and view all the answers

Which two statements in the Wolfsberg Group's 'Suppression of the Financing of Terrorism' define the role financial institutions should play in the fight against terrorism? (Choose two)

Financial institutions should apply extra due diligence whenever they see suspicious or irregular activities, especially when customers are engaged in sectors or activities that have been identified by competent authorities Signup and view all the answers

Which two factors should increase the risk of a correspondent bank customer and require additional due diligence according to the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking? (Choose two)

The customer is located in a Financial Action Task Force member country and provides services to other correspondent banks in neighboring countries Signup and view all the answers

Which method to launder money through deposit-taking institutions is closely associated with international trade?

Using Black Market Peso Exchange Signup and view all the answers

To whom should a money laundering investigator escalate concerns about large wire transfers originating from a financial secrecy haven?

The bank anti-money laundering officer Signup and view all the answers

What are two sources for maintaining up-to-date sanctions information? (Choose two)

Financial Action Task Force's list of High Risk and Non-Cooperative Jurisdictions Signup and view all the answers

What information must a non-U.S. bank provide to its U.S. correspondent under the USA PATRIOT Act?

The name and address of all beneficial owners who own 25% or more of the bank Signup and view all the answers

What is a key risk associated with Correspondent Accounts according to the Basel Customer Due Diligence paper?

The volume and value of transactions passing through the account may not be in line with the original correspondent agreement Signup and view all the answers

What are two red flags that indicate how trade-based money laundering could be occurring?

The type of commodity being shipped appears inconsistent with the exporter or importer's regular business activities Signup and view all the answers

What are two requirements regarding supporting documentation used to identify potentially suspicious activity?

It must be retained for at least seven years Signup and view all the answers

Which information must Bank A obtain under the USA PATRIOT Act when a non-U.S. bank wants to open an account?

The identity of owners and percentage of ownership of the non-U.S. bank Signup and view all the answers

What is an essential element of Know Your Customer (KYC) standards, according to the Basel Committee's Customer Due Diligence for Banks paper?

Review of all completed KYC documents by a senior manager not involved in account opening Signup and view all the answers

When should the anti-money laundering risk assessment be updated?

After a merger or acquisition Signup and view all the answers

What are two red flags that may indicate money laundering for a customer making large cash deposits and small wire transfers?

Wire transfers are to high-risk jurisdictions Signup and view all the answers

Which two factors assist in a money laundering investigation involving multiple countries?

Authorities should have access to pertinent financial information Signup and view all the answers

What is the appropriate compliance control for identifying politically exposed persons (PEPs) according to the Basel Committee's paper on Customer Due Diligence for Banks?

Reviewing relationships at account opening and on a periodic basis Signup and view all the answers

What is a primary consideration an institution should keep in mind when deciding whether to agree to a law enforcement agency's request to keep an account open for monitoring during an investigation?

The potential risks associated with keeping the account open Signup and view all the answers

What is the correct course of action for a compliance officer learning about a potential new financial service?

Gather information to assess risks and prepare a report for the head of marketing Signup and view all the answers

Study Notes

Here are the study notes for the text:

Money Laundering Risks and Red Flags

On-boarding documents: Inability to verify beneficial owners of a company, only nominee owners provided, and addresses not local, indicates a heightened money laundering risk.
Cash-intensive businesses: Activities such as cash letters, money orders, and international remittance transfers may indicate a heightened money laundering risk.

AML Principles and Regulations

Wolfsberg Anti-Money Laundering Principles: New clients must be approved by at least one person other than the private banker, including the board of directors.
Fourth European Union Directive: Obliged entities must consider politically exposed persons as high risk for life, and maintain registries of beneficial owners of legal entities.

Surveillance and Monitoring

Automated surveillance systems: Systems should generate alerts for consistently abnormal activity over a long period, and scenarios should be evaluated to address weaknesses.
Transaction monitoring: Systems should identify potentially suspicious activity, and alerts should be cleared with sufficient risk-based documentation.

Customer Due Diligence and Risk Assessment

Beneficial ownership: The Wolfsberg Principles identify beneficial owners of a private banking account as those who have legal title, are the ultimate source of funds, or have ultimate control.
Risk assessment: Factors such as the nature of the business, country risk, and customer risk should be considered when assessing the risk of a customer.

Anti-Money Laundering Programs

Private banking: The Wolfsberg Principles require private banks to deal with intermediaries in a way that aligns with anti-money laundering regulations.
Transaction monitoring: Anti-money laundering programs should include procedures for monitoring and reporting suspicious transactions.

Money Laundering Schemes and Methods

Integration stage: Involves using illicit funds to purchase a luxury item or to obscure the source of funds.
Smurfing: Involves breaking large amounts of cash into smaller amounts to avoid detection.
Human tracking: Involves using individuals to transport or transfer funds.

Financial Intelligence Units

Egmont Group: Provides a platform for Financial Intelligence Units (FIUs) to share information and best practices in the fight against money laundering and terrorist financing.
FIU objectives: Include safeguarding the financial system, combating money laundering and terrorist financing, and promoting national security.

Correspondent Banking and Money Laundering Risks

Correspondent banking: Involves providing payable-through account services to foreign banks, which can pose a higher risk of money laundering.
USA PATRIOT Act: Requires foreign banks to provide information about their customers and employees to the U.S. bank.

Terrorist Financing and Sanctions

Terrorist financing risks: Involves providing financial services to charities or organizations that may be linked to terrorist organizations.
Sanctions risks: Involves providing financial services to individuals or organizations subject to economic sanctions.

Auditing and Compliance

Audit findings: Should include regulatory violations and policy exceptions, and should be reported to the board of directors.
Compliance officer role: Includes advising on how to respond to policy exceptions and reporting regulatory violations.

Financial Institutions and Money Laundering Risks

Broker-dealers: Physical certificates present a money laundering risk, including the ability to alter trade information and the lack of expiration dates.
Banks and credit unions: Should implement anti-money laundering programs, including customer due diligence, transaction monitoring, and reporting suspicious transactions.

Let me know if you have any questions or if you'd like me to clarify anything!### Anti-Money Laundering (AML) and Combating Terrorist Financing (CFT)

A wire transfer originating from a country with poor anti-money laundering controls and no legitimate business purpose is a red flag for suspicious activity.
The USA PATRIOT Act requires US financial institutions to collect certain information from non-US banks that hold a correspondent account.

Know Your Customer (KYC) Standards

According to the Basel Committee's Customer Due Diligence for Banks, a customer acceptance policy is an essential element of KYC standards.
KYC standards require that the same procedures are applied in all cases.

Suspicious Transactions

A customer living in a high-risk jurisdiction making frequent, large cash deposits and sending small wire transfers to unrelated parties in other high-risk jurisdictions is a red flag for money laundering.
A suspicious transaction report should be filed for transactions with no apparent business relationship.

Financial Action Task Force (FATF)

FATF-style regional bodies provide technical assistance to members in implementing FATF recommendations to combat money laundering and terrorist financing.
FATF recommends that financial institutions have access to financial information pertinent to an investigation.

Politically Exposed Persons (PEPs)

A PEP is a person who has been entrusted with a prominent public function, and their accounts are subject to enhanced due diligence.
A PEP's family members and close associates are also considered PEPs.

Correspondent Banking

Correspondent banking relationships are high-risk and require additional due diligence.
A key risk associated with correspondent accounts is that the respondent bank's customer acceptance and KYC policies are ineffective.

Sanctions

Governments and multi-national bodies impose economic sanctions to enforce foreign policy objectives, combat terrorist financing, and prevent money laundering.
Financial institutions must obtain certain information from customers to comply with sanctions requirements.

Other Key Points

A compliance officer should be involved in the development of new financial products and services to ensure AML/CFT risks are considered.
A financial institution's AML/CFT risk assessment should be updated after a merger or acquisition, or when there are changes in the business environment.
Law enforcement agencies may request that a financial institution keep an account open to continue monitoring suspicious activity.### Law Enforcement Requests
A law enforcement agency's request for documentation must be confirmed to ensure it originated from a legitimate representative.
Documentation should be provided as quickly as possible via email.

Non-Profit Organizations and Terrorism Financing

The Financial Action Task Force recommends that countries require non-profit organizations to register with the country's financial intelligence unit to prevent financing of terrorism.
Countries should also allow for freezing assets of non-profit organizations and ensure they cannot be used to conceal or obscure the diversion of funds intended for legitimate purposes to terrorists' organizations.

Money Laundering Methods

Common methods used by accountants to launder money include understating income to take a tax loss, overstating income to hide excess cash, and acting as a conduit for transferring cash between accounts.

Monitoring and Reporting Suspicious Activity

According to the Wolfsberg Principles, two requirements for monitoring and reporting suspicious activity for correspondent banking are: incorporating suspicious activity monitoring into periodic reviews, and incorporating due diligence results such as customer risk ratings.

Indicators of Money Laundering

Customer actions that may indicate potential money laundering include wiring a large amount to a foreign jurisdiction, especially if the customer has family located there.
Other indicators include purchasing property insurance that is significantly higher than the value of the business, making regular cash deposits, and having multiple bank accounts at several locations.

Regulatory Risks for Bank Employees

Bank employees who willfully violate anti-money laundering laws face various regulatory risks, including:
- Criminal investigation and imprisonment
- Fines and suspension from the industry
- Enforcement actions, including fines against the financial institution, leading to reputational damage

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Description

Determine the red flag that indicates a heightened risk of money laundering in a business account setup. The compliance officer is unable to verify the identity of beneficial owners and only has information on nominee owners.