AML and Financial Crime

Question 1

what is a customer risk rating model used for

Answer 1

to measure the potential money laundering and terrorist financing risk of a customer

Question 2

what are the 5 steps in model development

Answer 2

1. scope and data collection
2. preliminary hypothesis model
3. review and refine
4. model validation and approval
5. implementation

Question 3

what are the 5 steps in creating the preliminary hypothesis model

Answer 3

1. model construction
2. profile data to understand distribution and data quality
3. features
4. build a hypothesis model with scores assigned judgementally.
5. generate sample cases that are statistically significant using the hypothesis model.

Question 4

what are the 9 aspects of data quality

Answer 4

1. complete
2. coherent
3. consistent
4. current
5. accurate
6. unique
7. legally valid
8. traceable
9. bias

Question 5

what are two phases of the feature step in the preliminary model hypothesis and what do they entail

Answer 5

1. feature engineering: include and engineer all possible features that could improve model accuracy
2. feature selection: reduce the number of features as much as possible without compromising predictive ability.

Question 6

what are 3 techniques that can be used in feature selection

Answer 6

1. judgment based scorecard
2. logistical regression
3. advanced regression

Question 7

what are the five types of bias

Answer 7

selection
exclusion
reporting
recall
observer

Question 8

what is selection bias and how can it be fixed

Answer 8

a certain individual is more likely to be selected than another

fix: probabilistic sampling methods

Question 9

what is exclusion bias and how can it be fixed

Answer 9

certain individuals are systematically excluded

fix: weighting to adjust for misrepresentation, supplementary data

Question 10

what is reporting bias and how can it be fixed

Answer 10

certain types of observations are more likely to be reported

fix: reweighing, probabilistic sampling methods

Question 11

what is recall bias and how can it be fixed

Answer 11

difference in the accuracy of participants recollection in events

fix: using a case-control study

Question 12

what is observer bias and how can it be fixed?

Answer 12

the researcher subconsciously influences the data collection

fix: ensure the modellers are objective

Question 13

what are 3 characteristics of sex trafficking detection

Answer 13

• 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.

Question 14

what is money laundering

Answer 14

taking criminal proceeds and disguising their illegal sources.

Question 15

what are the 3 steps to money laundering

Answer 15

1. Placement
2. Layering
3. Integration

Question 16

define placement in the context of money laundering

Answer 16

adding the dirty money to the financial system through legitimate businesses.

Question 17

define layering in the context of money laundering

Answer 17

converting the dirty money into another form and creating complex layers of financial transactions to muddy the water.

Question 18

define integration in the context of money laundering

Answer 18

re-introducing the money into the economy through normal business transactions.

Question 19

what are 4 risks of money laundering to a bank

Answer 19

• Reputational risk
• Operational risk
• Legal
• Concentration risk

Question 20

what is concentration risk

Answer 20

loss resulting from too much exposure to one borrower/group of borrowers.

Question 21

what are sanctions

Answer 21

tools used by governments to achieve objectives relating to national security, foreign policy, human rights or the prevention of illegal activity

Question 22

what are 3 types of sanctions

Answer 22

targeted
sectoral
comprehensive

Question 23

compare money laundering and terrorist financing in terms of:
motive
intention
legality funds
transaction amounts
money trail

Answer 23

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

Question 24

what are the 4 pillars of the AML framework and define each

Answer 24

1. First line of defence: system of internal policies, procedures and controls.
2. Second line of defence: designated compliance function.
3. Ongoing training program
4. Third line of defence: an independent audit function to test the overall effectiveness of the AML program.