AML and Financial Crime Flashcards
what is a customer risk rating model used for
to measure the potential money laundering and terrorist financing risk of a customer
what are the 5 steps in model development
- scope and data collection
- preliminary hypothesis model
- review and refine
- model validation and approval
- implementation
what are the 5 steps in creating the preliminary hypothesis model
- model construction
- profile data to understand distribution and data quality
- features
- build a hypothesis model with scores assigned judgementally.
- generate sample cases that are statistically significant using the hypothesis model.
what are the 9 aspects of data quality
- complete
- coherent
- consistent
- current
- accurate
- unique
- legally valid
- traceable
- bias
what are two phases of the feature step in the preliminary model hypothesis and what do they entail
- feature engineering: include and engineer all possible features that could improve model accuracy
- feature selection: reduce the number of features as much as possible without compromising predictive ability.
what are 3 techniques that can be used in feature selection
- judgment based scorecard
- logistical regression
- advanced regression
what are the five types of bias
selection
exclusion
reporting
recall
observer
what is selection bias and how can it be fixed
a certain individual is more likely to be selected than another
fix: probabilistic sampling methods
what is exclusion bias and how can it be fixed
certain individuals are systematically excluded
fix: weighting to adjust for misrepresentation, supplementary data
what is reporting bias and how can it be fixed
certain types of observations are more likely to be reported
fix: reweighing, probabilistic sampling methods
what is recall bias and how can it be fixed
difference in the accuracy of participants recollection in events
fix: using a case-control study
what is observer bias and how can it be fixed?
the researcher subconsciously influences the data collection
fix: ensure the modellers are objective
what are 3 characteristics of sex trafficking detection
- Complex and traditional rule-based monitoring doesn’t work.
- No single red flag, usually a combination.
- Red flags can be related to cash, credit card transactions and EMT.
what is money laundering
taking criminal proceeds and disguising their illegal sources.
what are the 3 steps to money laundering
- Placement
- Layering
- Integration
define placement in the context of money laundering
adding the dirty money to the financial system through legitimate businesses.
define layering in the context of money laundering
converting the dirty money into another form and creating complex layers of financial transactions to muddy the water.
define integration in the context of money laundering
re-introducing the money into the economy through normal business transactions.
what are 4 risks of money laundering to a bank
- Reputational risk
- Operational risk
- Legal
- Concentration risk
what is concentration risk
loss resulting from too much exposure to one borrower/group of borrowers.
what are sanctions
tools used by governments to achieve objectives relating to national security, foreign policy, human rights or the prevention of illegal activity
what are 3 types of sanctions
targeted
sectoral
comprehensive
compare money laundering and terrorist financing in terms of:
motive
intention
legality funds
transaction amounts
money trail
money laundering:
motive: profit
intention: to clean illegal money so that it appears legitimate
legality funds: illegal
transaction amounts: large amounts
money trail: cyclical
terrorist financing:
motive: ideological
intention: support terrorist activities
legality funds: partly legal, partly illegal
transaction amounts: small amounts
money trail: linear
what are the 4 pillars of the AML framework and define each
- First line of defence: system of internal policies, procedures and controls.
- Second line of defence: designated compliance function.
- Ongoing training program
- Third line of defence: an independent audit function to test the overall effectiveness of the AML program.
