Financial Crime Flashcards
What is financial crime?
Activities exploiting the financial system for illegal gains, such as fraud, money laundering, and terrorist financing.
Why are banks particularly vulnerable to financial crime?
Their role in processing financial transactions makes them susceptible to exploitation by criminals for money laundering and terrorist financing.
How does technology impact financial crime?
Technology aids criminals in exploiting systems but also helps regulators detect and prevent illegal activities.
What are the goals of conduct regulation in financial crime?
To deter misconduct, protect customer interests, and ensure market integrity.
What is the purpose of the Proceeds of Crime Act 2002 (POCA)?
To criminalize the handling of ‘criminal property’ through the stages of money laundering: placement, layering, and integration.
What does the Terrorism Act 2000 address?
It criminalizes terrorist financing, including activities that support or conceal funds for terrorism.
What is the Money Laundering Regulations 2017 designed for?
To implement EU standards, requiring customer due diligence (CDD) and risk-based approaches for financial institutions.
What is SYSC in FCA regulations?
A set of rules requiring firms to have effective systems and controls to counter financial crime risks.
What is the first stage of money laundering, placement?
Introducing illicit funds into the financial system, such as through deposits or cash-based businesses.
What happens during the layering stage of money laundering?
Complex transactions are used to obscure the origin of funds.
What is the integration stage of money laundering?
‘Cleaned’ money is re-entered into the legitimate economy through investments or purchases.
What is terrorist financing?
Providing or collecting funds with the intention of supporting terrorist activities, irrespective of whether acts occur.
What regulatory focus exists for terrorist financing?
Preventing misuse of financial systems to transfer funds for terrorism.
What is the role of UN conventions in combating terrorist financing?
Establishing international frameworks, such as the 1999 UN Suppression of Terrorism Financing Convention.
What is the role of the Financial Conduct Authority (FCA)?
To oversee AML compliance, impose fines, and ensure financial institutions meet their obligations.
What does the National Crime Agency (NCA) do?
It handles enforcement and intelligence gathering, with powers under the Criminal Finances Act 2017.
What is Customer Due Diligence (CDD)?
The process of identifying and verifying customers and beneficial owners.
When is Enhanced Due Diligence (EDD) required?
For high-risk customers, such as politically exposed persons (PEPs) or those in high-risk jurisdictions.
What is Simplified Due Diligence (SDD)?
A reduced level of CDD applied to low-risk customers, such as government entities.
How does the Senior Managers Regime address financial crime?
By making the monitoring of AML/CTF compliance a senior management responsibility.
What are the responsibilities of the Money Laundering Reporting Officer (MLRO)?
To ensure the proper design and implementation of anti-money laundering policies.
What is a ‘prescribed responsibility’ under the Senior Managers Regime?
A senior manager must ensure the firm complies with financial crime obligations.
What systemic risks does financial crime pose?
It undermines market stability and public trust.
What is the moral hazard in financial crime prevention?
The risk that reliance on systemic safeguards reduces diligence in preventing financial crime.
How do cultural deficiencies exacerbate financial crime?
A compliance-focused culture often fails to proactively promote ethical behavior.
What is the Financial Action Task Force (FATF)?
An international body that sets standards for AML and CTF, including 40 Recommendations.
How do EU directives contribute to AML/CTF efforts?
They harmonize AML/CTF standards across member states, based on FATF guidelines.
What is a risk-based approach in financial crime prevention?
Tailoring measures based on customer and transaction risk levels.
What is a Suspicious Activity Report (SAR)?
A report filed when transactions are suspected of involving financial crime.
Why is staff training important in financial crime prevention?
To help employees identify and mitigate financial crime risks effectively.
What was established in R v Loizou (2005)?
The need to establish ‘criminal property’ under POCA.
Why is the Standard Bank (2014) case significant?
It was the first UK deferred prosecution agreement for AML failures.
What are Unexplained Wealth Orders (UWOs), introduced in 2017?
Tools that allow the investigation of assets where ownership legitimacy is unclear.
What is the importance of cultural reforms in banking ethics?
They help rebuild trust and emphasize self-regulation alongside compliance.
What does the Group of Thirty Report advocate for?
Transparent practices, ethics-driven leadership, and self-regulation in banking.
How do remuneration incentives impact ethical behavior?
Aligning pay with ethical behavior discourages financial crime.
What is transaction monitoring?
Real-time tracking of transactions to identify anomalies.
How does screening software help in AML?
By flagging high-risk customers or politically exposed persons (PEPs).
Why are periodic audits important for AML/CTF?
They ensure that policies and systems meet regulatory standards.
What are the emerging risks in financial crime prevention?
New challenges like cryptocurrency laundering and evolving regulatory requirements.
What does the Proceeds of Crime Act 2002 (POCA) regulate?
Criminalizes money laundering activities, including concealing or transferring criminal property.
What does the Terrorism Act 2000 regulate?
Criminalizes the financing of terrorism.
What are the obligations under the Money Laundering Regulations 2017?
Requires Customer Due Diligence (CDD) for new accounts and transactions.
What precedent was set in R v Loizou (2005)?
Funds must be proven as ‘criminal property’ to establish money laundering offences.
What was the significance of K v National Westminster Bank Plc (2006)?
Banks are obligated to report suspicious transactions, overriding contractual duties.
What was the outcome of the HSBC AML failure case (2012)?
HSBC was fined $1.9 billion for facilitating money laundering, including drug trafficking funds.
What principle was emphasized in the Standard Chartered Iranian Transactions case (2012)?
Banks must avoid transactions linked to sanctioned entities or jurisdictions.
What is Customer Due Diligence (CDD)?
Verifying customer identities, understanding the nature of their business, and monitoring transactions.
When is Enhanced Due Diligence (EDD) required?
For high-risk customers such as Politically Exposed Persons (PEPs) or those in high-risk jurisdictions.
What role does the Money Laundering Reporting Officer (MLRO) play?
Oversees AML compliance, including monitoring and reporting suspicious activities.
What is the purpose of a Suspicious Activity Report (SAR)?
A formal report submitted to the National Crime Agency (NCA) to flag potentially illicit activities.
What responsibility does SM&CR impose on senior managers?
Personal accountability for ensuring that the institution complies with AML obligations.
How does SM&CR complement AML regulations?
Enhances the accountability of senior managers and emphasizes proactive oversight of compliance systems.
Why are banks considered gatekeepers in financial crime prevention?
They monitor, identify, and report suspicious transactions to disrupt money laundering activities.
What are the three stages of money laundering?
Placement: Introducing illicit funds into the financial system. Layering: Obscuring the origin of funds through complex transactions. Integration: Reintroducing ‘cleaned’ money into the legitimate economy.
What role does the Financial Action Task Force (FATF) play?
Establishes global standards for AML and Counter-Terrorist Financing (CTF) through its 40 Recommendations.
What is the importance of international cooperation in AML?
Prevents jurisdictional loopholes that criminals exploit for cross-border money laundering.
What penalties can banks face for AML breaches under POCA?
Criminal charges, fines, and reputational damage for facilitating money laundering.
How are fines used as a deterrent in AML enforcement?
Fines incentivize banks to adopt rigorous internal controls to prevent financial crime.
Why is personal liability for managers significant in AML enforcement?
Ensures that individuals in leadership positions are directly accountable for compliance failures.
What challenges do banks face in implementing AML regulations?
Balancing compliance obligations with customer service and operational efficiency.
What is the risk of over-reliance on automated systems for AML?
Potential complacency, with less emphasis on human judgment and active monitoring.
What ethical considerations underpin AML regulations?
Preventing banks from being complicit in facilitating crimes and protecting the integrity of financial markets.
How does remuneration affect compliance culture in banks?
Aligning bonuses and rewards with compliance goals discourages unethical behavior.
What new challenges does cryptocurrency pose to AML efforts?
Anonymity and decentralized transactions make monitoring and regulation more difficult.
How might FinTech innovations impact AML enforcement?
Improved monitoring tools but also increased opportunities for criminal exploitation of new systems.
What is Cranston’s view on AML enforcement?
Fines are effective deterrents but can create conflicts between compliance and operational goals.
What does Amao argue about reliance on fines?
Fines alone are insufficient; personal liability for senior management is necessary for true accountability.
What is the ultimate goal of AML regulations?
To protect the financial system’s integrity and prevent its misuse for criminal purposes.
How do AML laws balance deterrence and operational flexibility?
By imposing strict compliance measures while encouraging efficient processes and ethical culture.
How does the FCA contribute to AML enforcement?
The FCA supervises regulated firms to ensure they have robust systems to prevent money laundering.
What is the role of the National Crime Agency (NCA) in AML?
The NCA receives and investigates Suspicious Activity Reports (SARs).
What are the primary goals of a Suspicious Activity Report (SAR)?
To flag potential money laundering activities to the NCA.
How do banks use transaction monitoring systems?
Identifying unusual patterns of behavior or transactions.
What did Barclays Bank v Quincecare Ltd (1992) establish?
Banks have a duty to question transactions when they suspect fraud or improper activity.
What did R v Griffiths (2013) clarify about AML compliance?
Reinforced that failing to report suspicious activities can result in criminal charges for negligence or willful blindness.
How does the EU Securitisation Regulation 2017/2402 support AML efforts?
Introduces transparency and risk assessment requirements for financial products.
What is the Wolfsberg Group, and how does it relate to AML?
A global association of banks that develops frameworks and guidance for effective AML practices.
What are the key elements of an effective AML risk assessment?
Identifying high-risk clients or jurisdictions.
What industries outside banking are subject to AML regulations?
Real estate agents, legal professionals, casinos, and high-value goods dealers.
How do cryptocurrencies challenge traditional AML measures?
Provide anonymity in transactions, making tracing difficult.
What is blockchain analytics, and how can it aid AML?
Tools used to trace cryptocurrency transactions on public ledgers.
What responsibilities does the Senior Managers Regime (SM&CR) impose regarding AML?
Personal accountability for implementing effective AML controls.
How does clawback in remuneration relate to AML compliance?
Allows financial institutions to reclaim bonuses from senior managers if AML failings emerge.
Why is an ethical culture critical for AML compliance?
Encourages proactive identification and reporting of risks.
How does treating customers fairly (TCF) integrate with AML practices?
Ensures financial products are not used for illegal purposes.
What sanctions can be imposed for AML non-compliance?
Fines, criminal charges, suspension of licenses, and reputational damage.
How do international sanctions impact AML efforts?
Restrict transactions with certain countries, individuals, or entities.
What trends are shaping the future of AML regulations?
Increased use of AI and machine learning for transaction monitoring.
How might FinTech disrupt traditional AML practices?
Creates opportunities for innovative compliance solutions.
