CHAPTER 1-5.docx

**[CHAPTER 1 - The International Regulatory Environment]** **1. State two of the objectives of regulation.** - **Answer:** - \"To protect investors and maintain confidence in the financial system.\" - \"To reduce financial crime and ensure that markets are fair, eff...

**[CHAPTER 1 - The International Regulatory Environment]** **1. State two of the objectives of regulation.** - **Answer:** - \"To protect investors and maintain confidence in the financial system.\" - \"To reduce financial crime and ensure that markets are fair, efficient, and transparent.\" **2. State the main differences between rules-based and principles-based approaches to regulation.** - **Answer:** - \"Rules-based regulation relies on detailed rules and regulations that prescribe specific behaviors and outcomes that firms must follow.\" - \"Principles-based regulation relies on broader principles that set out high-level standards for firms to achieve, allowing them flexibility in how they meet these standards.\" **3. What is the mission of the Islamic Financial Services Board (IFSB)?** - **Answer:** - \"The mission of the Islamic Financial Services Board (IFSB) is to promote and enhance the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles.\" **4. What are the penalties for breach of the General Data Protection Regulation (GDPR)?** - **Answer:** - \"Penalties for breach of the GDPR can be severe, with fines of up to 4% of annual global turnover or €20 million (whichever is greater) for serious infringements. Lesser infringements can attract fines of up to 2% of annual global turnover or €10 million (whichever is greater).\" **5. List the data subject rights.** - **Answer:** - \"The right to be informed about the collection and use of their personal data.\" - \"The right of access to their personal data and supplementary information.\" - \"The right to rectification of inaccurate or incomplete personal data.\" - \"The right to erasure (also known as \'the right to be forgotten\').\" - \"The right to restrict processing of their personal data.\" - \"The right to data portability.\" - \"The right to object to the processing of their personal data in certain circumstances.\" - \"Rights in relation to automated decision-making and profiling.\" **6. State the objective of the Dodd-Frank Act.** - **Answer:** - \"The Dodd-Frank Act aims to promote the financial stability of the United States by improving accountability and transparency in the financial system, ending \'too big to fail,\' protecting consumers from abusive financial services practices, and ending bailouts.\" **7. Name three investment services that can be subject to passporting under the Markets in Financial Instruments Directive (MiFID).** - **Answer:** - \"Receipt and transmission of orders in relation to one or more financial instruments.\" - \"Execution of orders on behalf of clients.\" - \"Portfolio management.\" **8. What does Section 404 of the Sarbanes-Oxley (SOX) Act require publicly registered US companies to do?** - **Answer:** - \"Section 404 of the Sarbanes-Oxley Act requires management to assess and report on the effectiveness of the company\'s internal control over financial reporting. It also requires the company\'s external auditor to audit and report on management\'s assessment.\" **9. What is the definition of payment services?** - **Answer:** - \"Payment services are defined as services that enable cash to be placed on a payment account and all of the operations required for operating a payment account, as well as services that allow cash withdrawals from a payment account and the execution of payment transactions, including transfers of funds on a payment account with the user\'s payment service provider or with another payment service provider.\" **10. As required in SOX, how often should a company produce an 'internal controls report'?** - **Answer:** - \"A company is required to produce an internal controls report annually. This report must include an assessment of the effectiveness of the company\'s internal control over financial reporting and an attestation from the company\'s external auditor on the assessment.\" **11. What is the punishment for defrauding securities investors?** **Answer reference: Section 1.5.3** The punishment for defrauding securities investors can include severe penalties such as fines, imprisonment, and other legal actions depending on the jurisdiction. Specific penalties vary, but they generally aim to deter fraudulent activities and ensure the integrity of financial markets. **12. List the steps in the settlement process.** **Answer reference: Section 1.5.3** The steps in the settlement process typically include: 1. Trade execution. 2. Clearing, where the details of the trade are confirmed. 3. Settlement, involving the actual exchange of securities and payment. 4. Reconciliation to ensure all details match between the trading parties. **13. What extraterritorial reach does the UK Bribery Act provide?** **Answer reference: Section 1.5.4** The UK Bribery Act provides extraterritorial reach by covering bribery offenses committed outside the UK if they involve UK companies or individuals. This means that UK businesses and citizens can be prosecuted for bribery offenses committed anywhere in the world, ensuring broad compliance with anti-bribery standards. **14. What are the additional changes made to 5AMLD that have come into force in June 2021?** **Answer reference: Section 1.5.4** The additional changes made to the 5th Anti-Money Laundering Directive (5AMLD) that came into force in June 2021 include: 1. Enhanced transparency on the real ownership of companies. 2. Stricter regulation of virtual currencies. 3. Broader scope for monitoring financial activities. 4. Improved cooperation and information sharing among financial intelligence units. **15. What are the four forms of disciplinary action that exchange operators can take against any person registered by the exchange?** **Answer reference: Section 1.6.1** The four forms of disciplinary action that exchange operators can take against any person registered by the exchange include: 1. Fines. 2. Suspension of trading privileges. 3. Expulsion from the exchange. 4. Censure or formal reprimands. **16. What is counterparty risk?** **Answer reference: Section 1.7** Counterparty risk is the risk that the other party in a financial transaction may default on their obligations. This risk is inherent in trading, lending, and derivative transactions and can lead to significant financial losses if the counterparty fails to meet their commitments. **17. How do regulators approach Fintech?** **Answer reference: Section 1.8** Regulators approach Fintech by promoting innovation while ensuring consumer protection, financial stability, and market integrity. They may implement regulatory sandboxes, provide guidance on compliance, and establish frameworks that support the growth of Fintech while mitigating potential risks. **18. What are the possible applications of artificial intelligence (AI)?** **Answer reference: Section 1.8.3** Possible applications of artificial intelligence (AI) in financial services include: 1. Fraud detection and prevention. 2. Risk management. 3. Customer service through chatbots. 4. Algorithmic trading. 5. Credit scoring and underwriting. **19. List the expectations of regulators in relation to Fintech and corporate governance.** **Answer reference: Section 1.8.4** Regulators\' expectations in relation to Fintech and corporate governance include: 1. Ensuring robust risk management frameworks. 2. Maintaining transparency and accountability in operations. 3. Protecting customer data and privacy. 4. Implementing effective internal controls and compliance mechanisms. **20. Which types of regulators typically cover insurance markets and investment services at a national level?** **Answer reference: Section 2.1** At a national level, regulators that typically cover insurance markets and investment services include: 1. Financial Conduct Authorities (or their equivalents). 2. Central Banks. 3. Specific insurance regulatory bodies. 4. Securities and Exchange Commissions (or their equivalents). **21. What does the Basel Consultative Group provide?** **Answer reference: Section 2.2.1** The Basel Consultative Group provides a forum for deepening the Basel Committee on Banking Supervision\'s (BCBS) engagement with supervisors around the world on banking supervisory issues. It facilitates broad supervisory dialogue with non-member countries on new BCBS initiatives, promotes the adoption of BCBS standards, and fosters cooperation among banking supervisors globally. **22. What are the three objectives of securities regulation that the International Organization of Securities Commissions (IOSCO) aims to achieve?** **Answer reference: Section 2.2.3** The three objectives of securities regulation that IOSCO aims to achieve are: 1. Protecting investors. 2. Ensuring that markets are fair, efficient, and transparent. 3. Reducing systemic risk. **23. Describe the main responsibility of the US Securities and Exchange Commission (SEC).** **Answer reference: Section 2.2.5** The main responsibility of the US Securities and Exchange Commission (SEC) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC enforces securities laws, oversees securities exchanges and other market participants, and works to prevent fraud and abuse in the securities markets. **24. What are diagnostic tools used in thematic-based supervision?** **Answer reference: Section 2.3.4** Diagnostic tools used in thematic-based supervision include: 1. Surveys and questionnaires. 2. On-site visits and inspections. 3. Data analysis and benchmarking. 4. Risk assessments and stress testing. These tools help regulators identify trends, assess compliance with regulatory requirements, and evaluate the effectiveness of firms\' risk management practices. **25. State IOSCO\'s eight Principles Relating to the Regulator.** **Answer reference: Section 2.4** IOSCO\'s eight Principles Relating to the Regulator are: 1. The responsibilities of the regulator should be clear and objectively stated. 2. The regulator should be operationally independent and accountable in the exercise of its functions and powers. 3. The regulator should have adequate powers, proper resources, and the capacity to perform its functions and exercise its powers. 4. The regulator should adopt clear and consistent regulatory processes. 5. The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality. 6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, and to the extent appropriate to the size and complexity of the markets. 7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. 8. The regulator should have comprehensive inspection, investigation, and surveillance powers. **26. What four categories can UK-regulated activities be split into?** **Answer reference: Section 2.6** The four categories that UK-regulated activities can be split into are: 1. Deposit-taking. 2. Insurance. 3. Investments. 4. Home finance. **27. Why does regulation require that firms have adequate capital standards?** **Answer reference: Section 2.7.2** Regulation requires that firms have adequate capital standards to ensure they have sufficient financial resources to absorb losses, promote financial stability, protect consumers, and reduce the risk of firm failure which could have systemic consequences for the financial system. **28. Explain the difference between home and host state regulations.** **Answer reference: Section 2.8.1** The difference between home and host state regulations is: - Home state regulations refer to the regulatory framework and requirements imposed by the regulator in the country where a financial institution is headquartered. - Host state regulations refer to the regulatory framework and requirements imposed by the regulator in the country where a financial institution operates but is not headquartered. These regulations ensure that financial institutions comply with local laws and standards while operating across different jurisdictions. **[Chapter 2 - The Compliance Function]** **Section 1.1.1** **Question:** State the two responsibilities of an effective compliance function, irrespective of the organisational structure.\ **Answer:** An effective compliance function is responsible for: 1. Assisting the senior management in managing the firm\'s compliance risk. 2. Supporting the business areas to help them comply with applicable rules and regulations. **Section 1.1.3** **Question:** Who is responsible for establishing a written compliance policy containing the basic principles followed by management and staff?\ **Answer:** The board of directors is responsible for establishing a written compliance policy containing the basic principles followed by management and staff. **Section 1.2** **Question:** What does the Bank for International Settlements (BIS) Principle 6 require of a firm's compliance function?\ **Answer:** The BIS Principle 6 requires that a firm's compliance function is independent, adequately resourced, and has access to the board of directors. **Section 1.3.1** **Question:** What is the purpose of the compliance manual?\ **Answer:** The purpose of the compliance manual is to provide guidance on compliance policies and procedures, and to outline the responsibilities of employees in ensuring that the firm adheres to applicable laws and regulations. **Section 1.5** **Question:** What are the three key stages involved in a risk-based approach to a monitoring programme?\ **Answer:** The three key stages involved in a risk-based approach to a monitoring programme are: 1. Identification of risks. 2. Assessment of the likelihood and impact of these risks. 3. Implementation of controls to mitigate the identified risks. **Section 2.1.1** **Question:** What are the most common methods used to monitor whether a business is in compliance with regulations, internal policies, and procedures?\ **Answer:** The most common methods used to monitor compliance include regular audits, risk assessments, and the review of business processes and transactions. **Section 2.1.4** **Question:** To which types of people might compliance staff provide individual training?\ **Answer:** Compliance staff might provide individual training to new employees, existing staff, and members of the board of directors. **Section 2.1.6** **Question:** What role might compliance play in the development of new business?\ **Answer:** Compliance might play a role in the development of new business by advising on regulatory requirements and ensuring that new products and services comply with applicable laws and regulations. **Section 3.1.1** **Question:** What two factors do regulators use to assess risks?\ **Answer:** Regulators use the likelihood of occurrence and the potential impact of the risk to assess risks. **Section 3.1.5** **Question:** What type of information can be withheld when providing information?\ **Answer:** Confidential or privileged information, such as client data or proprietary business information, can be withheld when providing information. **Section 3.1.7** **Question:** What is an SAR?\ **Answer:** An SAR is a Suspicious Activity Report, which is a document that financial institutions must file with the Financial Intelligence Unit to report any suspicious transactions that may be related to money laundering or other financial crimes. Money Laundering, Terrorist Financing, and Financial Crime Prevention 1\. \*\*Q:\*\* What is the primary purpose of financial services firms regarding money laundering and terrorist financing? \*\*A:\*\* To reduce the risk that their services are used for terrorist financing or money laundering purposes. 2\. \*\*Q:\*\* Define money laundering. \*\*A:\*\* Money laundering involves turning money derived from criminal activities (\'dirty money\') into money that appears to have been legitimately acquired (\'clean money\'). 3\. \*\*Q:\*\* What is terrorist financing? \*\*A:\*\* Terrorist financing relates to the financial support of organizations or groups that perform terrorist acts and includes any financial transactions undertaken to facilitate such acts. 4\. \*\*Q:\*\* Name two key differences between terrorist financing and other money laundering activities. \*\*A:\*\* Terrorist financing often involves smaller amounts of money and the source of funds may be legitimate, making identification and tracking more difficult. 5\. \*\*Q:\*\* What is the role of the Financial Action Task Force (FATF)? \*\*A:\*\* FATF issues recommendations to set minimum standards for action in different countries to ensure consistent international efforts against money laundering and terrorist financing. 6\. \*\*Q:\*\* What are the three stages of the money laundering process? \*\*A:\*\* Placement, layering, and integration. 7\. \*\*Q:\*\* What happens during the placement stage of money laundering? \*\*A:\*\* Criminally derived cash is introduced into the financial system. 8\. \*\*Q:\*\* Describe the layering stage in money laundering. \*\*A:\*\* The money is moved around to make it difficult for authorities to link the placed funds with the ultimate beneficiary. 9\. \*\*Q:\*\* What occurs during the integration stage of money laundering? \*\*A:\*\* The laundered money is integrated into the legitimate financial system, making it appear as clean money. 10\. \*\*Q:\*\* Why is the layering stage considered the biggest risk for financial services firms? \*\*A:\*\* Because any transaction that exchanges one asset for another or changes the registered owners of an asset could be part of layering. 11\. \*\*Q:\*\* What is the main function of the United Nations Office on Drugs and Crime (UNODC) in combating money laundering? \*\*A:\*\* To assist member states in combating illicit drugs, crime, and terrorism by implementing measures against money laundering and the financing of terrorism. 12\. \*\*Q:\*\* How does the International Monetary Fund (IMF) contribute to the fight against money laundering? \*\*A:\*\* By sharing information, developing common approaches to issues, promoting desirable policies and standards, and conducting AML/CFT assessments. 13\. \*\*Q:\*\* What is the purpose of the World Bank\'s Stolen Asset Recovery Initiative (StAR)? \*\*A:\*\* To support international efforts to end safe havens for corrupt funds and facilitate the return of stolen assets to their country of origin. 14\. \*\*Q:\*\* What are the FATF\'s 40 Recommendations? \*\*A:\*\* A set of international standards aimed at combating money laundering and terrorist financing. 15\. \*\*Q:\*\* Give an example of a predicate offence in financial crime. \*\*A:\*\* Fraud, embezzlement, bribery, or corruption. 16\. \*\*Q:\*\* What is securities fraud? \*\*A:\*\* A type of fraud where investors are encouraged to enter into investment transactions based on untrue statements about the assets being traded. 17\. \*\*Q:\*\* Define embezzlement. \*\*A:\*\* The act of dishonestly appropriating or secreting assets by individuals to whom such assets have been entrusted. 18\. \*\*Q:\*\* How does the FATF monitor members\' progress? \*\*A:\*\* By assessing and monitoring compliance with FATF standards and providing a list of non-cooperative countries. 19\. \*\*Q:\*\* What role do enhanced due diligence measures play in AML efforts? \*\*A:\*\* They involve more rigorous checks for high-risk customers, including politically exposed persons (PEPs). 20\. \*\*Q:\*\* What is the impact of the cross-border nature of money laundering? \*\*A:\*\* It necessitates international coordination to ensure countries have legislation and regulatory processes in place to identify and prosecute those involved. 21\. \*\*Q:\*\* How does the FATF address new and emerging threats? \*\*A:\*\* By conducting studies of money laundering and terrorist financing methods, trends, and techniques and responding to these threats. 22\. \*\*Q:\*\* What are some examples of international bodies involved in AML efforts? \*\*A:\*\* The Financial Action Task Force (FATF), United Nations (UN), and the European Union (EU). 23\. \*\*Q:\*\* What is the significance of customer due diligence (CDD)? \*\*A:\*\* It helps financial institutions verify the identity of their customers and assess the risk they may pose in terms of money laundering or terrorist financing. 24\. \*\*Q:\*\* What does the term \'proliferation financing\' refer to? \*\*A:\*\* Providing funds or financial services used for the manufacture, acquisition, or use of nuclear, chemical, or biological weapons. 25\. \*\*Q:\*\* What does Recommendation 21 of the FATF entail? \*\*A:\*\* It advises financial institutions to give special attention to business relationships and transactions with persons from countries that do not comply with FATF recommendations. 26\. \*\*Q:\*\* What is transaction laundering? \*\*A:\*\* When illicit funds are processed through the merchant accounts of legitimate businesses, often through the sale of goods and services. 27\. \*\*Q:\*\* What is the role of the Wolfsberg Group? \*\*A:\*\* To provide guidance on managing financial crime risks in private banking, correspondent banking, and other banking activities. 28\. \*\*Q:\*\* How does technology impact money laundering prevention? \*\*A:\*\* It raises new challenges, such as the use of electronic currencies, but also provides tools for detecting suspicious activities through data analysis. 29\. \*\*Q:\*\* What are some methods criminals use in the layering stage? \*\*A:\*\* Buying and selling foreign currencies, shares, bonds, investing in collective investment schemes, or moving money between countries. 30\. \*\*Q:\*\* What is the purpose of sanctions issued by the UN and EU? \*\*A:\*\* To deny access to the financial services sector for individuals and organizations from certain countries involved in illegal activities. 31\. \*\*Q:\*\* Describe the concept of beneficial ownership. \*\*A:\*\* The true ownership or control of an entity, often concealed through layers of legal entities or arrangements. 32\. \*\*Q:\*\* What is the FATF\'s role in policy development? \*\*A:\*\* To set international standards, assess compliance, and provide guidance on combating money laundering and terrorist financing. 33\. \*\*Q:\*\* What is the significance of the FATF\'s 2012 update to its recommendations? \*\*A:\*\* It combined money laundering and terrorist financing standards, adding requirements like tax crimes as predicate offences and enhanced due diligence. 34\. \*\*Q:\*\* How does the IMF support AML/CFT regimes? \*\*A:\*\* Through technical assistance, training, and assessments to help countries improve their AML/CFT frameworks. 35\. \*\*Q:\*\* What is the challenge of jurisdictional differences in AML efforts? \*\*A:\*\* Different countries have varying levels of compliance and enforcement, complicating international AML/CFT efforts. 36\. \*\*Q:\*\* What are \'predicate offences\' in the context of financial crime? \*\*A:\*\* Crimes that generate proceeds which can then be laundered, such as fraud, embezzlement, and corruption. 37\. \*\*Q:\*\* What is the role of the IMF\'s trust fund for AML/CFT? \*\*A:\*\* To finance technical assistance projects aimed at strengthening global AML/CFT regimes. 38\. \*\*Q:\*\* How do financial institutions detect money laundering activities? \*\*A:\*\* Through systems and procedures that look for patterns or unusual activities within transactional data. 39\. \*\*Q:\*\* What are some indicators of potential money laundering? \*\*A:\*\* Large cash transactions, frequent international transfers, and complex company structures. 40\. \*\*Q:\*\* What is a politically exposed person (PEP)? \*\*A:\*\* An individual who holds a prominent public position, posing a higher risk for involvement in bribery and corruption. 41\. \*\*Q:\*\* How does the FATF assess compliance with its recommendations? \*\*A:\*\* By conducting mutual evaluations and peer reviews of member countries. 42\. \*\*Q:\*\* What is the purpose of the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances? \*\*A:\*\* To combat the global drug problem and associated money laundering activities. 43\. \*\*Q:\*\* How do international standards on customer identification help prevent money laundering? \*\*A:\*\* By ensuring that financial institutions can verify the identity and assess the risk of their customers. 44\. \*\*Q:\*\* What is the IMF\'s Financial Sector Assessment Program (FSAP)? \*\*A:\*\* A program that evaluates the stability and soundness of countries\' financial sectors, including AML/CFT measures. 45\. \*\*Q:\*\* What is the impact of tax crimes being included as predicate offences? \*\*A:\*\* It broadens the scope of AML efforts to include illegal activities related to tax evasion. 46\. \*\*Q:\*\* How does the FATF promote global AML/CFT standards? \*\*A:\*\* By issuing recommendations, monitoring compliance, and providing guidance and best practices. 47\. \*\*Q:\*\* What is the role of due diligence in AML efforts? \*\*A:\*\* To verify the identity of customers, assess their risk level, and monitor their activities for suspicious transactions. 48\. \*\*Q:\*\* What are the consequences of non-compliance with FATF recommendations? \*\*A:\*\* Countries may face sanctions or other countermeasures from the international community. 49\. \*\*Q:\*\* How do financial institutions manage the risk of terrorist financing? \*\*A:\*\* By implementing enhanced due diligence, monitoring transactions, and reporting suspicious activities. 50\. \*\*Q:\*\* What is the significance of international cooperation in AML efforts? \*\*A:\*\* It ensures a coordinated approach