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Certificate in Retail and Digital Banking (Cert RDB) > 21. Due Diligence > Flashcards

21. Due Diligence Flashcards

1
Q

True or false - banks only need to carry out due diligence during the onboarding process

A

False, required both when onboarding and when selling to existing customers

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2
Q

What is due dilligence?

A

Action that is considered REASONABLE to take to ensure themselves/others and their property are kept SAFE

i.e. banks need to protect both their own interest and the interest of others

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3
Q

Describe the two parts of the onboarding process. (2)

A
  1. First Part = screen led
    (can be face-to-face, phone or digital)
    Checks are carried out on:
    - electoral roll
    - credit referencing agencies (check for CCJs)
    - credit scoring

If you pass these checks/meet criteria, you then get given advise based upon your credit score

  1. IDENTIFY the account holder and VERIFY they are who they say they are
    - applies to individuals, companies and agents
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4
Q

What are the main onboarding challenges faced by banks? (3)

What is the main solution to these challenges?

A
  1. EFFICIENCY
    - Onboarding steps are time consuming
  2. COST
    - Staff training to carry out processes or hiring specialist staff
    - bank does not earn anything whilst due diligence steps are being carried out (only when complete)
  3. CUSTOMER SERVICE
    - possible customer frustration due to delays between sign up and accessing products

Main solution = SPEED UP PROCESS by LIMITING HUMAN INTERVENTION and making as much as possible DIGITAL

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5
Q

What is an account mandate?

A

The contract of how the account should be used and includes signing instructions

If bank thinks funds are being misappropriated/mandate not being followed correctly, they can refuse to debit the account

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6
Q

What documents can be used to identify and verify the following examples of legal person:

  1. John Harvey
  2. John Harvey t/a Harvey’s Butchers
  3. John Harvey LTD
  4. John Harvey LTD Sports and Social Club
  5. Trustees/Executors of John Harvey (deceased)
A
  1. INDIVIDUAL
    ID = passport/driving licence
    Verify = utility bill/bank statement (address)
  2. SOLE TRADER
    ID = letter/invoice on sole trader letterhead (must show address)
    Verify = staff visit premises to look for a sign above the door

3.PRIVATE LIMITED COMPANY (PLC)
ID = Certificate of Incorporation
Verify = Searching Companies House for full company details

  1. SOCIETY/CLUB
    ID = Rule book detailing who the committee member are
    Verify = Invoice issued by club/society
  2. TRUSTEES/EXECUTORS
    ID = passport/driving licence
    Verify = will/trust deed
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7
Q

What is a credit assessment?

A

How lender analyse whether customers have both the INTENTION and CAPABILITY to repay according to the terms of the loan

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8
Q

In credit scoring, what are the main areas looked are when awarding points? (4)

A
  1. AGE
  2. EMPLOYMENT
  3. HOME OWNERSHIP
  4. CREDIT REFERENCE AGENCIES - file info e.g. CCJs
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9
Q

In which ways do credit scoring processes differ between banks? (2)

A
  1. Pass mark can differ
  2. Different risk appetites re: certain factors, e.g. some banks believe people in a certain age group are more likely to meet repayments and this will be reflected in score weightings
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10
Q

Are credit assessments usually carried out digitally or by underwriters?

A

They are usually technology led.

Underwriters only tend to look at:
1. Marginal propositions
2. Cases that fall outside of lending criteria

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11
Q

True or false - the amount of surplus income you have is the most important thing taken into consideration by credit scoring. Why/why not?

A

False - this type of information is SUBJECTIVE and can be interpreted in many different ways

Credit scoring uses OBJECTIVE information - data that is easy to check, e.g. whether you have a telephone line

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12
Q

Why do banks check whether you have a telephone line as part of their credit scoring processes?

A

It evidences both PERMANENT RESIDENCE and proves that a FINANCIAL OBLIGATION IS BEING MET (phone bill paid)

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13
Q

What are the main advantages of using credit scoring? (8)

A
  1. LESS SUBJECTIVE - human element removed
  2. FASTER - human element removed, leads to greater customer satisfaction
  3. REDUCED COSTS - staff
  4. STANDARD SET OF CRITERIA
    - quick to roll out, changes can be automated using tech
  5. NO NEED FOR EXISTING TRACK RECORD WITH LENDER
  6. RISK-BASED PRICING - depending on score results
  7. LINKS TO DATA SOURCES - CRA data, accounts with other banks. More accurate.
  8. CONTINUAL IMPROVEMENT - scoring models become more robust all the time as more customer data becomes available to compare
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14
Q

What are the main disadvantages of using credit scoring? (8)

A
  1. REASONS FOR REJECTION - customers have a right to request reason for rejection and must be given a single reason, but this has its limits as sometimes they just didn’t average enough across the board
  2. LESS PERSONABLE - people feel computer isn’t qualified enough to judge them/feel rejected
  3. EXCLUSION - certain groups of people less likely to fit scoring model, e.g. self-employed, part-time workers, those with breaks in employment
  4. INFLEXIBLE/NOT SUITED TO SPECIALIST LENDING - underwriters can be better at assessing
  5. MANIPULATION OF RESPONSES - customers can learn to guess ‘right answers’. Needs to be verified by external sources
  6. CREDIT FOOTPRINTS - shopping around negatively impacting scores unless ‘soft checking’
  7. DANGER OF OVER-RELIANCE - unable to understand nuance, only common characteristics
  8. BORROWER BEHAVIOUR CAN CHANGE - unless quickly identified, inappropriate lending could be approved
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15
Q

What is behavioural scoring? What type of customer is this used for? Is it usually a technology driven process or one led by humans?

A

Used by lenders when deciding whether to lend to existing customers

Tech-based process that assesses current behaviours of the customer e.g. spending and repayment habits

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16
Q

What are the further advantages that behavioural scoring has compared with credit scoring? (4)

A
  1. FIRST-HAND INFORMATION - from lender’s own database, possibly more reliable than external data
  2. UP-TO-DATE INFO - compared with credit scoring where external info could take some time to come from external sources and could change
  3. ASSESSES LIKELIHOOD OF ACCOUNTS BECOMING INACTIVE OR CLOSING
  4. HELPS TO SELECT BEST REPAYMENT SCHEDULE - for accounts in default
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17
Q

What is a credit bureau?

A

Another name for a credit reference agency (CRA)

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18
Q

What are the top 3 Credit Reference Agencies in the UK?

A
  1. Equifax
  2. Experian
  3. Transunion (formerly call credit)
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19
Q

Which sources do Credit Reference Agencies collect their information from? (5)

A
  1. Electoral Rolls
  2. CCJ records
  3. Lenders (directly)
  4. Debt found on searches carried out by other lenders
  5. Shared industry databases covering fraud & goneaways
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20
Q

What are good things that credit reference agencies look for with regards to the customer’s address? (3) What are things that may be flagged that would negatively impact their credit score? (3)

A

Positive:
1. Resident for 6+ years
2. Owned property & up-to-date mortgage repayments
3. No repossessions

Negative:
1. Resident for only 6 months & frequently changed address on numerous occasions before this
2. Rented properties & missed rental payments
3. No evidence of property ownership

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21
Q

Would a personal loan be looked upon favourably/negatively when credit scoring?

A

If payments are up to date on a regular personal loan, this would be looked upon favourably.

But if loan was for debt consolidation purposes and/or payments have been missed, then this would be looked upon negatively

22
Q

True or False - customers are entitled to request information held on them by credit reference agencies?

A

True. CRA’s are data controllers under GDPR guidelines & must release this info upon request

23
Q

What is a budget and when is it needed for borrowing applications? When is it not needed?

A

Used to find whether the customer would be able to meet the loan repayments

Needed unless credit scoring has been carried out - not need then only because budgeting is built in to the credit scoring system

24
Q

What is KYC / Know Your Customer?

A

The process of identifying customers

25
Q

When is evidence of ID required under KYC guidelines? (2)

A
  1. Entering into a NEW BUSINESS RELATIONSHIP
  2. When a TRANSACTION or SERIES OF LINKED TRANSACTIONS is > €10,000.00 (equivalent in £s in UK) and when the customer’s ID has NOT BEEN PREVIOUSLY VERIFIED
26
Q

True or false, when a customer has been introduced by an intermediary, the firm does not need to carry out KYC ID requirements?

A

True - they can accept a written statement from the introducer instead stating that they have checked their ID

27
Q

What forms of ID are considered acceptable under KYC? (5)

A
  1. Current Passport
  2. National Identity Card
  3. Photo Driving Licence
  4. Electoral Roll Entry
  5. Utility/Council Tax bill from last 3 months
28
Q

Under KYC guidelines, what must advisors do before any recommendation is made? (5)

A

Gather & record details in relation to the following:

  1. ADVICE
    - do adviser and customer have a COMMON UNDERSTANDING of type of advice which will be give?
    - has customer been warned of RISKS/LIMITATIONS if they DONT PROVIDE ADVICE ON ALL NEEDS
  2. CUSTOMER DETAILS
    - NEEDS/OBJECTIVES
    - ATTITUDES TOWARDS RISK
    - AFFORDABILITY
    - TAX STATUS
    - STATE BENEFIT ENTITLEMENT
  3. RISK
    - has this been explored ACROSS ALL OBJECTIVES
    - do they understand WHAT THIS MEANS
    - has advisor considered ALL TYPES OF RISK
  4. CUSTOMER NEEDS
    - is customer asking for a product that DOES NOT SUIT THEIR NEEDS (tell them if so)
    - are the needs SIGNIFICANT
    - do they need a NEW or DIFFERENT product
  5. CHANGES IN CIRCUMSTANCES
    - Advisor must consider whether advice REMAINS SUITABLE if circumstances change e.g. income, employment, residence, health
29
Q

Under KYC, what information must banks collect with regards to Business Customers? (3)

At what stage do they need to collect this information? Why?

A
  1. What they do
  2. Who are the key stakeholders/directors?
  3. What transactional activity is the business wanting to take?

When = ONBOARDING but also needs to be KEPT UP TO DATE for business customers.

Why = Businesses are more susceptible to money laundering, because high-value criminal transactions are harder to spot. Higher risk.

30
Q

Banks must have policies in place to identify, assess and manage money laundering. What must these policies be/do? (6)

A
  1. Be COMPREHENSIVE
  2. Be PROPORTIONATE to the nature, scale and complexity of the bank’s activities
  3. Help to identify the RISKS ASSOCIATED with DIFFERENT TYPES OF CUSTOMERS
  4. INFORM the level of DUE DILLIGENCE MEASURES BANKS APPLY (e.g. base actions upon policies)
  5. INFORM DECISIONS about MAINTAINING INDIVIDUAL BUSINESS RELATIONSHIPS
  6. Use JUDGEMENT & COMMON SENSE
31
Q

What should banks do if they don’t think they can effectively manage money laundering risks associated with a business?

A

Don’t enter into a business relationship with the company

32
Q

Define Money Laundering.

A

PROCESSING CRIMINAL PROCEEDS to DISGUISE THEIR ILLEGAL ORIGIN

33
Q

What are the different types of crime involved within money laundering? (7)

A
  1. Illegal ARMS SALES
  2. SMUGGLING
  3. ORGANISED CRIME
  4. EMBEZZLEMENT
  5. INSIDER TRADING
  6. BRIBERY
  7. COMPUTER FRAUD
34
Q

What are the main ways in which criminals try to “legitimise” funds obtained through money laundering? (3)

A
  1. Disguising the source
  2. Changing the form
  3. Moving funds to a place less likely to attract attention
35
Q

Within money laundering, define the following roles:

  1. Criminal
  2. Terrorist
  3. Tax Evader
A
  1. Someone who makes the proceeds of crime appear legitimate
  2. Involved in secretly moving money which is used to fund terrorism
  3. Spends money without leaving a trail showing who owns it
36
Q

According to the Financial Action Task Force (FATF), what are the 3 steps involved in ‘dirty money’ being converted into ‘clean money? (3)

A
  1. PLACEMENT
    - dirty funds enter the financial system
  2. LAYERING
    - layers of financial transactions to distance the funds from their original origins
  3. INTEGRATION
    - funds re-enter the legitimate commerce system looking ‘clean’
37
Q

What is the Financial Action Task Force (FATF)? Who are its members? How does it describe itself? What does it do?

A

International body co-ordinating the fight against financial crime/money laundering

describes itself as “terrorist financing watchdog” & an “intergovernmental body”

39 members = countries and international bodies

  1. Maintains a list of “high risk and other monitored jurisdictions” (areas which don’t have adequate AML measures)
  2. GENERATE POLITICAL WILL to bring about legislative reforms
  3. Sets INTERNATIONAL STANDARDS
  4. Reviews AML techniques to STRENGTHEN them and ADDRESS NEW RISKS
38
Q

Does the Financial Action Task Force (FATF) have any law enforcement powers?

A

No. In the UK, law enforcement regarding financial crime is the responsibility of the NATIONAL CRIME AGENCY (NCA)

39
Q

Under the Proceeds of Crime Act (2002), if you have any suspicion of there being any criminal proceeds, who should you report these suspicion to?

A

The National Crime Agency (NCA)

40
Q

Under the Proceeds of Crime Act (2002), what are the Three Principles of Money Laundering Offences? (3)

A
  1. CONCEALING CRIMINAL PROPERTY
    (concealing, disguising, transferring & converting = all criminal offences)
  2. ARRANGING
  3. AQUIRING
41
Q

Under the Proceeds of Crime Act (2002), it became an offence to fail to disclose information about money laundering if you have reasonable grounds for knowing/suspecting that money laundering has taken place.

What constitutes as ‘reasonable grounds’ for knowledge?

A

This is determined by the regulator but is based upon what a professional should have known - obviously relies on staff receiving sufficient training

42
Q

The Money Laundering Regulations (2007) introduced some amendments to the laws which had previously come into force under the proceeds of crime act (2002). What were these amendments? (7)

A

Introduced enhanced responsibilities for banks, including:

  1. CHECKS, CONTROLS AND PROCEDURES - must be put in place to prevent money laundering
  2. STAFF EDUCATION/REGULAR TRAINING
  3. DUE DILLIGENCE PROCESSES (e.g ID & assess & keep records of level of risk customer poses)
  4. REPORT SUSPICIOUS CIRCUMSTANCES
  5. REFRAIN FROM TIPPING OFF
  6. APPOINT A MONEY LAUNDERING REPORTING OFFICER (MLRO)
  7. JOINT MONEY LAUNDERING STEERING GROUP & FATF - guidance/procedures will be taken into account by the regulator when assessing a firm’s compliance with AML
43
Q

Who can act as a firm’s Money Laundering Reporting Officer (MLRO)? How often do they need to report to the regulator? What should these reports include?

A

Who = someone with appropriate seniority

HOW OFTEN = At least once each calendar year

What = reports made by staff re: suspected money laundering.

Not enough to just report these incidents though, actions should be put in place to address any deficiencies on the firm’s behalf and strengthen controls

44
Q

The Money Laundering, Terrorist Financing and Transfer of Funds (Information of the Payer) Regulations (2017), brought about further changes to the law with regards to money laundering.

What was the new offence outlined within this regulation?

What were the new set of enhanced responsibilities for banks introduced within this set of regulations? (4)

A

Made it an offence to make a STATEMENT in the context of money laundering that is FALSE OR MISLEADING

Further enhanced responsibilities:

  1. WRITTEN RISK ASSESSMENTS (consider customer circumstances, countries operated in, products/services, transaction types & delivery channels)
  2. IMPLEMENT SYSTEMS, POLICIES & PROCEDURES
  3. COMPLY WITH NEW CUSTOMER DUE DILLIGENCE REQUIREMENTS - CDD(e.g. for corporate bodies)
  4. COMPLY WITH NEW ENHANCED DUE DILLIGENCE REQUIREMENTS - EDD (e.g. for high-risk countries or Politically Exposed Persons (PEPs)
45
Q

What is a Politically Exposed Person (PEP)? (2)

If a bank wishes to establish/continue a relationship with a PEP, who must this decision be approved by?

A

WHO =
1. Someone who has been in a PROMINENT PUBLIC FUNCTION
or
2. A member of another PUBLIC BODY (domestic or international), e.g. CENTRAL BANKS, COURT OR INTERNATIONAL ORGANISATION

46
Q

What is the difference between Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)?

A

CDD = Verifying the IDENTITY of customers & assessing RISKS ASSOCIATED with them. The aim is to PREDICT TYPES OF TRANSACTIONS they they are likely to make, so you can determine when transactions are potentially SUSPICIOUS.

EDD = HIGHER LEVEL due diligence required to MITIGATE INCREASED RISK. Needed when the PRODUCT/SERVICE is deemed to be at GREATER RISK OF BEING INVOLVED IN MONEY LAUNDERING/TERRORIST FINANCING

47
Q

What is SARs? What does the acronym stand for and what is it used for?

A

Suspicious Activity Reports

The system used for when a firm’s Money Laundering Reporting Officers need to report to the NCA (National Crime Agency)

48
Q

What is the maximum penalty that can be given for the following offences:

  1. Failing to report knowledge/suspicion of money laundering
  2. Assisting money laundering
A
  1. 5-14 years imprisonment
  2. 14 years imprisonment and an unlimited fine
49
Q

True or False - if you are investigating someone under the suspicion that they are involved in money laundering, you must inform them that they are being investigated.

A

False, this is known as ‘tipping off’ and is a criminal offence

50
Q

Under The Money Laundering and Terrorist Financing Regulations (2019), what is a ‘relevant person’ in general and which new classifications of relevant persons were added under this new piece of legislature? (4)

A

What = A firm or appointed representative of a firm who must comply with customer due diligence

  1. Crypto Asset Dealers
  2. Custodian Wallet providers
  3. Art market participants w/ transactions >€10,000.00
  4. Letting agent with monthly rental income >€10,000.00
51
Q

Can electronic forms of identification be used for customer due diligence?

A

Yes, so long as it is capable of providing an appropriate level of assurance and is independent from the person being verified

52
Q

What should a firm do if it notices there is a discrepancy between the information they have gathered within their due diligence processes in relation to a company and the information held on Companies House?

A

Report the discrepancy to Companies House immediately.

Certificate in Retail and Digital Banking (Cert RDB) (23 decks)

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