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AML > Basics of AML > Flashcards

Basics of AML Flashcards

1
Q

History/ Origination of Money laundering

A

The term “money laundering” originated with Mafia ownership of Laundromats in the United States. Since Laundromats are cash-based businesses they were a favorite of the Mafia to use as a front to legitimize their criminal proceeds.

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2
Q

Definition of Money Laundering

A

The term “money laundering” is generally regarded as the practice of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin.

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3
Q

Stages of money laundering

A
  1. Placement
  2. Layering
  3. Integration
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4
Q

Define Stage 1. Placement

A

During placement, “dirty” money derived from criminal activities is placed in the financial system.

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5
Q

Define Stage 2. Layering

A

To conceal the illegal origin of the placed funds and thereby make them more useful to criminals, the funds must be moved, dispersed, and disguised. Layering is the process of disguising the source of the funds through layers of financial transactions.

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6
Q

Define Stage 3. Integration

A

Once the funds are layered and can no longer be traced back to their criminal origins, they are integrated into the financial system and now appear “clean” and available for use by criminals.

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7
Q

United States Government efforts against money laundering

A

(1970) Bank Secrecy Act
(2001) The USA Patriot Act

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8
Q

1970- Bank Secrecy Act

A

Requires Financial Institutions to:

A system of internal controls to ensure continuous compliance
• Testing of compliance by an independent method
• Have an individual designated as responsible for monitoring compliance
• Ongoing training for personnel

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9
Q

2001- USA Patriot Act

A

• 2001 September 11
• Attack on World Trade Center
• Protect American Citizens and Financial institutions
1. 314A
• Information Sharing: Agency investigates terrorism or requests information from banks (FBI is alerted, bank accounts frozen)
2. 314B
• Information Sharing: Optional information sharing with 2 banks

The intent of the USA Patriot Act is to identify and track terrorist and persons or entities using U.S. financial institutions to further their causes and to prevent money laundering by terrorists or other criminal organizations

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10
Q

OFAC

A

Office of Foreign Asset Control

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11
Q

SDN

A

Specially Designated Nationals

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12
Q

FINCEN

A

Financial Crimes Enforcement Network

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13
Q

FATFA

A

Financial Action Task Force

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14
Q

SAR

A

Suspicious Activity Report

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15
Q

Definition of Terrorism Financing (TF)

A

Terrorist financing involves dealing with money or property that may be used for financing terrorist activities. The funds and property may be from either legitimate or criminal sources.

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16
Q

Traditional Financial Institutions

A

Financial institutions are vulnerable to abuse by terrorists. Despite doing all that is required with respect to CDD, transactions related to the financing of terrorism may fail to set off any alarms or “red flags.” For example, accounts can be opened, and small withdrawals and deposits which are less than any legal reporting requirements can be made.

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17
Q

Alternate remittance systems

A

Unregulated remittance systems such as hawala and hundi. These systems often have traditional roots or ethnic ties and operate in places where the formal finance sector is less established; funds can be transferred without any documentation.

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18
Q

Cash Couriers

A

Cash is smuggled across borders, for example through land crossings and sea shipments where borders are uncontrolled.

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19
Q

False invoicing

A

False trade invoicing provides a means to transfer money between jurisdictions by overstating the value of the goods or services for which payment is due.

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20
Q

High Value Commodities

A

Commodities like gold and diamonds can also be used to transfer value across borders as both are easy to convert into cash.

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21
Q

Correspondent Banking

A

Correpondent bank: Providing service
Respondent Bank: Receiving the service

Correspondent banking can be defined, in general terms as “an arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks”.

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22
Q

Negative News or Adverse Media

A

Adverse Media or negative news is any bad and negative information about the customer or business discovered in various sources, and this information can also expose someone to be involved in crime.

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23
Q

Why it’s important to use adverse media

A

Adverse Media has great benefits for your company. For instance, Adverse Media affects the degree of risk that leads to a customer filing a Suspicious Activity Report (SAR). Adverse Media is provided in real- time with resources that enable support by providing high-precision results. Adverse Media for high-risk customers supports a robust risk management strategy.

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24
Q

What is Negative News or Adverse media screening and monitoring?

A

Adverse Media Screening is a service that allows you to search for adverse media and negative news about a person or a business. Adverse Media Screening, an important part of Know your Customer and Anti- Money Laundering processes, enables businesses to identify and protect them from risks.

This is the process of screening financial institutions, customers or clients.
- News articles
- Legal prosecutions
- Money Laundering
- Terrorism
- Fraud
- Tax evasion or other crimes

Sources used for Adverse Media Screening
-Social Media
- Legal Prosecutors
- Internet
- Custom feeds
- Blogs
- Online Forums

Search Process
1. Identify relevant parties to be screened
2. Perform external searches and negative news searches
3. Review potential matches
4. Document and retain records

25
Q

Adverse Media screening and monitoring categories

A

Terrorism
2. Financial crimes
3. Violence
4. Narcotics
5. Cybercrime
6. Fraud
7. Ownership
8. Sexual crimes
9. Legislation
10. Trafficking in human beings

26
Q

What is KYC

A

KYC or “Know Your Customer” is a process of obtaining information about your customers for identification purposes. The KYC process is usually carried out by companies and other financial institutions when opening accounts with them.

27
Q

HOW TO CREATE AND RUN AN EFFECTIVE KYC PROGRAM REQUIRES THE FOLLOWING ELEMENTS:

A
  1. Customer Identification Program (CIP)
  2. Customer Due Diligence
  3. Ongoing Monitoring
28
Q

4.2 Mobile KYC

A

While you have an array of verification methods and data available to you, accessing mobile data and leveraging it to ensure that specific criteria are met by legitimate customers adds an extra layer of protection. Simply put, it’s another tool to help reduce fraud risk, improve KYC standards, and just as important, secure an effortless experience for your mobile-minded customers.

29
Q

4.3 WHAT IS ENHANCED DUE DILIGENCE | EDD?

A

Enhanced Due Diligence is a KYC process that provides a greater level of scrutiny of potential business partnerships and highlights risks that cannot be detected by Customer Due Diligence.

30
Q

4.4 WHAT IS THE DIFFERENCE BETWEEN CDD AND EDD?

A

The difference between Customer Due Diligence and Enhanced Due Diligence is that CDD is a less strict verification procedure where you obtain the customer’s identity, address and evaluate the risk category of the customer. While Enhanced Due Diligence is required for customers who are classified under the high-risk category based on a KYC risk rating system.

31
Q

Enhanced Due Diligence Procedure

A

Steps by step

  1. Customer risk factors
  2. Geographical risk factors
  3. Other risk factors
  4. Ongoing Transactions Monitoring
  5. Adverse Media and Negative Check
  6. Conduct an On-site Visit
  7. Draft Your Report for Further Review
  8. Develop an Ongoing Risk-Based Monitoring Strategy
32
Q

KYC
1. Customer Identification Program (CIP)

A

In the US, the CIP mandates that any individual conducting financial transactions needs to have their identity verified.

The minimum requirements to open an individual financial account are clearly delimited in the CIP:
1. Name
2. Date of birth
3. Address
4. Identification number
While gathering this information during account opening is sufficient, the institution must verify the identity of the account holder “within a reasonable time.” Procedures for identity verification include documents, non-documentary methods (these may include comparing the information provided by the customer with consumer reporting agencies, public databases, among other due diligence measures), or a combination of both.

33
Q

KYC
2. Customer Due Diligence

A

For any financial institution, one of the first analysis made is to determine if you can trust a potential client. You need to make sure a potential customer is trustworthy; customer due diligence (CDD) is a critical element of effectively managing your risks and protecting yourself against criminals, terrorists, and Politically Exposed Persons (PEPs) who might present a risk.

3 Levels of Due Diligence
1. Simplified Due Diligence
2. Basic Due Diligence
3. Enhanced Due Diligence

34
Q

KYC
3. Ongoing monitoring

A

The ongoing monitoring function includes oversight of financial transactions and accounts based on thresholds developed as part of a customer’s risk profile.
Depending on the customer and your risk mitigation strategy, some other factors to monitor may include:
1. Spikes in activities
2. Out of area or unusual cross-border activities
3. Inclusion of people on sanction lists
4. Adverse media mentions
There may be a requirement to file a Suspicious Activity Report (SAR) if the account activity is deemed unusual.
Periodical reviews of the account and the associated risk are also considered best practices:
5. Is the account record up-to-date?
6. Do the type and amount of transactions match the stated purpose of the account?
7. Is the risk-level appropriate for the type and amount of transactions?

35
Q

Enhanced Due Diligence Factor (1)

A
  1. Customer risk factors

The bulk of its clients are foreigners or non-residents;
Legal persons are personal asset-holding vehicles;
If the customer is a Politically Exposed Person (PEP), their family members or known associates;
Presence of nominee shareholders or shares in the company’s bearer form;
Cash-intensive businesses.

36
Q

Enhanced Due Diligence Factor (2)

A
  1. Geographical risks

Countries without adequate AML/CFT systems as identified by credible sources. For example North Korea and Iran by the FATF;
Countries under sanctions and embargoes or similar measures: Russia, Iran, and North Korea (US Department of State);
27

Countries notorious for prevalent levels of corruption as identified by credible sources. For example Venezuela, Yemen on the transparency index list;
Countries blocklisted for financing or supporting terrorist activities. According to the State Sponsors of Terrorism list: Iran, Syria, and Sudan;
Locations that have designated terrorist organisations operating within their country. Good examples are Syria, Iraq, and Somalia; Countries that are not members of the FATF and its partners.

37
Q

Enhanced Due Diligence Factors (3)

A
  1. Other risk factors

Private and correspondent banking. These banks are revenue-driven and maintain a high level of confidentiality. Hence they are naturally prone to money laundering.

Step 1: Employ a Risk-Based Approach
Step 2: Obtain Additional Identifying Information
Step 3: Analyze the Source of Funds / Wealth and Ultimate Beneficial Ownership (UBO)

38
Q

How to Conduct Enhanced Due Diligence: A Guideline

A

Step 1: Employ a Risk-Based Approach

Step 2: Obtain Additional Identifying Information

Step 3: Analyze the Source of Funds / Wealth and Ultimate Beneficial Ownership (UBO)

Step 4: Ongoing Transactions Monitoring

Step 5: Adverse Media and Negative Check

Step 6: Conduct an On-site Visit

Step 7: Draft Your Report for Further Review

Step 8: Develop an Ongoing Risk-Based Monitoring Strategy

39
Q

Enhanced Due Diligence Step 1: Employ a Risk-Based Approach

A

The risk-based approach gives you a full understanding of the High-Risk Customers in your business, and other cases that merit High-Risk status. Accurately judging the customer’s risk level is an important measure for this approach. Another one is establishing a duration for the Due Diligence procedure. All these factors should be reflected in your AML compliance policy.

40
Q

Enhanced Due Diligence Step 2: Obtain Additional Identifying Information

A

Provide a questionnaire suited to your risk-based policies to the high- risk customer. This questionnaire should provide both basic and in-depth information about your customer. Collect additional information from the customer and possibly, third parties.
For Businesses and other legal entities:
Official corporate records from company’s management;
Registration documents from the local Registrar of Companies;
Articles of incorporation, partnership agreements, and business certificates;
Names and locations of its customers and suppliers;
Banking information and relationships with other financial institutions; Identity of board members and beneficiaries.
For Politically exposed persons (PEP):
Title and details on the position the PEP holds or held. This includes the level of influence of the position;
If the PEP is a close associate or family member, their identity, title, role, and level of proximity to public office should be established.

41
Q

Enhanced Due
Diligence Step 3: Analyze the Source of Funds / Wealth and Ultimate Beneficial Ownership (UBO)

A

Analyze the Source of Funds / Wealth and Ultimate Beneficial Ownership (UBO)

The rationale behind this step is to understand the origin and legitimacy of the customer’s wealth:
Collect basic details on corporate history and structure. This can be done through the services of a professional lawyer;
29

You can value both private and public companies by systematically searching company filings and business articles for financial and shareholding data;

Note that an individual’s net worth must include all legitimate assets that can be confirmed;
Highlight any discrepancies between income, source of wealth, and overall net worth;
Standard documents, which confirm the sale of property, inheritance, salary, etc.
According to the EU’s Fourth Money Laundering Directive (MLD4), legal entities must keep current UBO information in a registry that is accessible to authorities and other persons with a legitimate interest.
When determining UBOs, check the company’s shareholdings and subsidiaries for corporate groups or companies with the same UBO as the subject company.

42
Q

Enhanced Due Diligence Step 4: Ongoing Transactions Monitoring

A

Gain access to transaction details such as its background, purpose, and nature. Extra details like the duration of the transaction and which parties are involved should not be overlooked. In cases of crypto transactions, we need to understand the nature of that cryptocurrency and its history.
30

Check if transactions are in line with the stated purpose and if they are in the usual or expected threshold. If everything is in order, the next step should be taken.

43
Q

Enhanced Due Diligence Step 5: Adverse Media and Negative Check

A

You need to thoroughly review related press articles and analyze all relevant information in order to build a full profile of your customer and his reputation. Overwhelmingly negative results are a strong indication that they are too risky for business. If results are positive, the next step of due diligence should be taken.

44
Q

Enhanced Due Diligence Step 6: Conduct an On-site Visit

A

An on-site visit to the physical address is essential for all legal entities including banks and companies. Documents that cannot be provided digitally can be verified physically. A risk-based threshold is breached if the physical address does not correspond with the address stated on official documents.

45
Q

Enhanced Due Diligence Step 7: Draft Your Report for Further Review

A

Make the decision of onboarding while taking into account the success of the previous EDD steps. You can make a score-based ranking system and high scorers should be onboarded. Compile your Due Diligence report for internal and future regulatory reviews.
The EDD report can be stored on a secure server with the information obtained. They should be made readily available for regulators when necessary.
31

Processing and storing client’s personal data digitally must be done according to the General Data Protection Regulation (GDPR). For more information, we have provided a guide on how to stay compliant.

46
Q

Enhanced Due Diligence Step 8: Develop an Ongoing Risk-Based Monitoring Strategy

A

Ongoing monitoring of High-Risk customers is time-consuming and requires a lot of effort, so employing a risk-based monitoring strategy is optimal. Under risk-based monitoring, we mean:
Understanding essential parameters to monitor High-Risk clients;
Knowing how often you need to monitor these clients;
Applying human or software EDD approach and creating a process of alerts and swift decision making.

47
Q

5.0 AML FINANCIAL REGULATORS/WATCH DOGS

(FFOFF)

A

(FFOFF)

• Financial Crimes Enforcement Network (FINCEN)
• Financial Action Taskforce (FATF)
• Office of the Foreign Assets control (OFAC)
• Financial Industry Regulatory Authority (FIRA)
• Federal Reserve Board (FRB)

48
Q

HRC vs Sanctioned Countries

A

5 Sanctioned Countries
1. North Korea
2. Syria
3. Crimea
4. Iran
5. Cuba

** If a person is on a OFAC list, you are prohibited to do business with them as any USA affiliated entity. **

HRC - High Risk Customers
-You can do business with HRC, but they are under continuous monitoring.

* FINCEN determines deficiency levels in AML program of all countries to determine the RISK levels of High Risk Customers.*

Www. Know your country.com

49
Q

5 Money Laundering indicators

A
  1. Structuring: Any transaction over $10,000, you are required to fill out a Currency Transaction Report (CTR).
    In order to avoid completing the CTR form, the act of structuring the funds in a way that smaller amounts are deposited over time to avoid being suspected.
  2. Rapid Movement of funds: The rate at which money comes in and out of account. Most employers pay on a scheduled scale such as weekly, biweekly or monthly.
  3. Altering: Changing the purchased item
  4. Trade based
    • Disguising the origination of funds
    • Over- invoicing by using pricing inflation (Over charging)
    • Under-invoicing by giving added
    value to the buyer. (Under charging)
    • Over Shipment of purchased goods. (Smuggling)
    • Short Shipment of purchased goods. (Reduced ration of products)
    • Ghost Shipping is when goods are ordered but no goods are shipped.
  5. Funnel Accounts: When two individuals that work in same company move funds illegally between their accounts.
50
Q

ML indicator: Structuring

A

Structuring: Any transaction over $10,000, you are required to fill out a Currency Transaction Report (CTR).

51
Q

ML Indicator: Rapid movement of funds

A

Rapid Movement of funds: The rate at which money comes in and out of account. Most employers pay on a scheduled scale such as weekly, biweekly or monthly.

52
Q

ML Indicator: Altering

A

Altering: Changing the purchased item

53
Q

ML Indicator: Trade Based

A

Trade based
• Disguising the origination of funds
• Over- invoicing by using pricing inflation (Over charging)
• Under-invoicing by giving added
value to the buyer. (Under charging)
• Over Shipment of purchased goods. (Smuggling)
• Short Shipment of purchased goods. (Reduced ration of products)
• Ghost Shipping is when goods are ordered but no goods are shipped.

54
Q

ML Indicator: Funnel Account

A

Funnel Accounts: When two individuals that work in same company move funds illegally between their accounts.

55
Q

What are sources of Adverse media/Negative news

A

• Social Media
• Legal Prosecutions
• Internet
• Custom feeds
• Blogs
• Online Forums

56
Q

What are the steps of conducting a Negative news/Adverse media search

A
  1. Identify the relevant parties that should be screened and tools to use
  2. Perform the Negative News searches by using the tools identified
  3. Review the potential matches
  4. Document and retain your records
57
Q

OFAC list

A

Office of Foreign Asset Control gives Sanctions to individuals, countries or Entities. The OFAC list contains:

• People that are high risk individuals
• Banned individuals
• Sanctioned countries
• Banned ports
• Banned Airports
• Banned Vessels

58
Q

5 OFAC Sanctioned Countries: (NSCIC)

A

N: North Korea
S: Syria
C: Crimea
I: Iran
C: Cuba

59
Q

What is the major difference between ML and TF

A

The source of funds

ML- trying to legitimize illegal funds through (P,L, I).
TF- trying to move illegal funds through the financial systems to support terrorism

AML (6 decks)

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