Money laundering

Question 0

What are the two main reasons correspondent banking is vulnerable to money laundering

Answer 0

• by their nature, correspondent banking relationships create a situation in which a financial institution carries out financial transactions on behalf of customers of another institution. This indirect relationship means that the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained any first-hand knowledge, and
• the amount of money that flows through correspondent accounts can pose a significant threat to financial institutions, as they process large volumes of transactions for their customers’ customers. This makes it more difficult to identify the suspect transactions, as the financial institution generally does not have the information on the actual parties conducting the transaction to know whether they are unusual.

Question 1

Describe the three phases of money laundering

Answer 1

Placement is the physical disposal of cash or other assets derived from criminal activity.

Layering is the separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds.

Integration is supplying apparently legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transaction.

Question 2

According to the Basel Committee on Banking Supervision’s paper entitled “Customer Due Diligence for Banks”, how are sound KYC procedures relevant to the safety and soundness of banks?

Answer 2

• they help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle of or a victim of financial crime and suffering consequential reputational damage, and
• they constitute an essential part of sound risk management (e.g. by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management).

Question 3

Describe four types of risk associated with money laundering faced by a financial institution

Answer 3

• Reputational risk is described as the potential that adverse publicity regarding an organization’s business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the
organization.
• Operational risk is described as the potential for loss resulting from inadequate internal processes, personnel or systems or from external events.
• Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an
organization, or even the closure of the organization.
• Concentration risk is the potential for loss resulting from
too much credit or loan exposure to one borrower or
group of borrowers.

Question 4

Describe a cross-border transfer.

Answer 4

A cross- border transfer is any wire transfer in which the originator and beneficiary institution are located in different jurisdictions. A cross-border transfer also refer to any chain of wire transfers that has at least one cross-border element.

Question 5

Describe Know Your Customer (KYC)

Answer 5

Know Your Customer (KYC) refers to anti-money laundering policies and procedures used to determine the true identity of a customer and the type of activity that is “normal and expected”, and to detect activity that is “unusual” for a particular customer. Many experts believe that a sound KYC program is one of the best tools in an effective anti-money laundering program.

Question 6

Define a red flag

Answer 6

A warning signal that should bring attention to a potentially suspicious situation, transaction or activity.

Question 7

What is tipping off?

Answer 7

The improper or illegal act of notifying a suspect that he or she is the subject of a Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities

Question 8

Describe an intermediary financial institution

Answer 8

An intermediary financial institution received funds from a wire transfer transmitter’s financial institution and relays or transmits the order of payment to the recipient’s financial institution. In an international funds transmission, intermediary financial institutions are usually located in different countries

Question 9

Deceive a nostro account

Answer 9

Nostro and vostro accounts are mirror correspondent accounts maintained by two banks in different jurisdictions to facilitate transactions in each other’s local currency - essentially, clearing accounts that balance foreign currency transactions between the two institutions. For example, bank x from Brazil might open a U.S. Dollar account at bank Y in the U.S., called a “nostro” (literally “our”) account; Bank Y might open a mirror account in Brazilian reals with Bank X in Brazil - a “vostro” (“your”) account. Financial regulators have expressed concern over the transparency of nostro and vostro account relationships, especially when there are multiple layers of accounts within primary relationship

Question 10

Define smurfing

Answer 10

A commonly used money laundering method, smurfing involves the use of multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold.

Question 11

What is the broad objective of the UNODC model legislation on money laundering and financing of terrorism?

Answer 11

The broad objective of the Global Programme is to strengthen the ability of Member States to implement measures against money-laundering and the financing of terrorism and to assist them in detecting, seizing and confiscating illicit proceeds, as required pursuant to United Nations instruments and other globally accepted standards, by providing relevant and appropriate technical assistance upon request.

Question 12

What is an exempt account?

Answer 12

In some countries, a distinction is granted to certain customers of a financial institution permitting the institution to waive its responsibility to report certain transactions that are otherwise required. Exempt accounts must be documented and the financial institutions that secure the exemptions must still monitor their transactions.

Question 13

Describe a lockbox

Answer 13

A service offered by banks to companies in which the company received payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company’s account, and notifies the company of the deposits. The service enables the company to put the money to work as soon as it is received, but the amounts must be large in order for the value obtained to exceed the cost of the service. In the insurance industry there is also widespread use of “lock boxes” for payment of life insurance and annuities products.

Question 14

What are remittance services?

Answer 14

Remittance services are also referred to as giro houses or casas de cambio. Remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient.

Question 15

Describe a trustee

Answer 15

A trustee may be a paid professional or company or unpaid person that holds the assets in a trust fund separate from the trustee’s own assets. The trustee invests and disposes of the assets in accordance with the settlor’s trust deed, taking into consideration any letter of wishes

Question 16

According to FATF’s paper called “Risk-Based Approach Guidance for Casinos”, what are the potential transaction risks for land-based and Internet casinos?

Answer 16

According to FATF’s paper called “Risked-Based Approach Guidance for Casinos,” casinos should consider operational aspects (i.e. Products, services, games, and accounts/account activities) that can be used to facilitate money laundering and terrorist financing activities. In addition, land-based and Internet casinos have the following potential transaction risks:

• Proceeds of crime
• Cash
• Transfers between customers
• Loan sharking
• Use of casino deposit accounts, and
• Redemption of chips, tickets, or tokens for currency

Question 17

Describe a typical suspicious or unusual transaction reporting process within a financial institution

Answer 17

While reporting procedures vary from country to country, a typical suspicious or unusual transaction reporting process within a financial institution includes:

• Procedures to identify potential suspicious transactions or activity
• A formal evaluation of each instance, and continuation of unusual transaction or activity
• documentation of the suspicious transaction reporting decision, whether or not filed with the authorities
• procedures to periodically notify senior management or the board of directors of suspicious transaction filings and
• employee training on detecting suspicious transactions or activities

Question 18

ABC bank is served with a search warrant. What next steps should the Bank consider?

Answer 18

1. Call the financial institution’s in-house or outside counsel
2. Review the warrant to understand its scope.
3. Ask for and obtain a copy of the warrant.
4. Ask for a copy of the affidavit that supports the search warrant (the agents are not obligated to provide a copy of the affidavit, but, if a financial institution is allowed to see the affidavit, the financial institution can learn more about the purpose of the investigation)
5. Remain present while the agents record an inventory of all items they seize and remove from the premises. Keep track of the records taken by the agents
6. Ask for a copy of law enforcement’s inventory of what they have seized and
7. Write down the names and agency affiliations of the agents who conduct the search.

Question 19

If an institution decides to file an STR, what should they do as soon as possible

Answer 19

Notify the investigator or prosecutors

Question 20

Identify the three gateways that assist with the AML cooperation between countries

Answer 20

• mutual legal assistance treaties
• Financial Intelligence Unit and
• the supervisory channel

Question 21

What factors may contribute to the vulnerabilities of private banking with regard to money laundering?

Answer 21

• Perceived high profitability,
• Intense competition,
• Powerful clientele,
• The high level of confidentiality associated with private banking,
• The close relationship of trust developed between relationship managers and their clients,
• Commission‐based compensation for relationship managers,
• A culture of secrecy and discretion developed by the relationship managers for their clients, and
• The relationship managers becoming client advocates to protect their clients.

Question 22

What is one of the most important aspects of
due diligence for a bank when establishing a
relationship with a money remitter?

Answer 22

Ensuring the money remitter is properly licensed.

Question 23

Describe microstructuring.

Answer 23

Designing a transaction to evade triggering a reporting or recordkeeping requirement is called “structuring.”
Microstructuring is essentially the same as structuring, except that it is done at a much smaller level. Instead of taking $18,000 and breaking it into two deposits, the microstructurer might break it into 20 deposits of approximately $900 each. This level of structuring makes it extremely difficult to detect.

Question 24

How can the free‐look period be used to launder money?

Answer 24

A free‐look period is a feature that allows investors, for a short period of time after the policy is signed and the premium paid, to back out of a policy without penalty. This process allows the money launderer to get an insurance check, which represents cleaned
funds. However, as more insurance companies are subject to AML program requirements, this type of money laundering is more readily detected and reported.

Question 25

According to FATF, what three circumstances should

be kept in mind when dealing with possible cuckoo smurfing activity?

Answer 25

• The existence of these deposits is not necessarily grounds to reconsider the relationship with a customer.
• It could be the indicator of laundering, therefore it should be examined carefully.
• Law enforcement will need information on the depositor, so banks should seek to identify cash deposits made by third parties and should retain surveillance footage.

Question 26

How can the early redemption method on insurance policies be used to launder money?

Answer 26

One indicator of possible money laundering is when a potential policyholder is more interested in the cancellation terms of a policy than the benefits of the policy. The launderer buys a policy with illicit money and then tells the insurance company that he has
changed his mind and does not need the policy. After paying a penalty, the launderer redeems the policy and receives a clean check from a respected insurer.

Question 27

How can art and antiques dealers and auctioneers

mitigate their money laundering risks?

Answer 27

• Require all art vendors to provide names and addresses. Ask that they sign and date a form that states that the item was not stolen and that they are authorized to sell it.
• Verify the identities and addresses of new vendors and
customers.
• If there is reason to believe an item might be stolen, immediately contact the Art Loss Register (www. artloss.com), the world’s largest private database of stolen art.
• Look critically when a customer asks to pay in cash.
• Be aware of money laundering regulations.
• Appoint a senior staff member to whom employees can
report suspicious activities.

Question 28

Describe the type of services to third parties that
any person or business provides on a professional basis
to participate in the creation, administration, or management of corporate vehicles.

Answer 28

Trust and company service providers (TCSP) include those persons and entities that, on a professional basis, participate in the creation, administration or management of corporate vehicles. They refer to
any person or business that provides any of the following services to third parties:
• Acting as a formation agent of legal persons,
• Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons,
• Providing a registered office, business address or correspondence for a company, a partnership or any other legal person or arrangement,
• Acting as (or arranging for another person to act as) a trustee of an express trust, and
• Acting as (or arranging for another person to act as) a nominee shareholder for another person.

Question 29

Identify three ways money laundering can occur

through vehicle sellers.

Answer 29

The industry defined as “vehicle sellers” includes sellers and brokers of new vehicles, such as automobiles, trucks, and motorcycles; new aircraft, including fixed wing airplanes and helicopters; new boats and ships, and
used vehicles. Laundering risks and ways laundering can occur through vehicle sellers include:
• Structuring cash deposits below the reporting threshold, or purchasing vehicles with sequentially numbered checks or money orders,
• Trading in vehicles and conducting successive transactions of buying and selling new and used vehicles to produce complex layers of transactions,
• Accepting third‐party payments, particularly from jurisdictions with ineffective money laundering controls.

Question 30

According to a 2001 report, “Money Laundering in Canada: An Analysis of RCMP Cases,” what are the four related reasons to establish or control a shell company for money laundering purposes?

Answer 30

• Shell companies accomplish the objective of converting the cash proceeds of crime into alternative assets,
• Through the use of shell companies, the launderer can
create the perception that illicit funds have been generated from a legitimate source,
• Once a shell company is established, a wide range of
legitimate and/or bogus business transactions can be used to further the laundering process, and
• Shell companies can also be effective in concealing criminal ownership. Nominees can be used as owners, directors, officers or shareholders.

Question 31

Describe several ways commodity futures and options

accounts may be susceptible to money laundering

Answer 31

There are several ways commodity and futures accounts are susceptible to money laundering, including:
• Withdrawal of assets through transfers to unrelated accounts or to high‐risk countries,
• Frequent additions to or withdrawals from accounts,
• Checks drawn on, or wire transfers from, accounts of third parties with no relation to the client,
• Clients who request custodial arrangements that allow them to remain anonymous,
• Transfers of funds to the adviser for management followed by transfers to accounts at other institutions in a layering scheme,
• Investing illegal proceeds for a client, and
• Movement of funds to disguise their origin.

Question 32

What is the significance of a trust account, whether offshore or onshore, in the context of money laundering?

Answer 32

The significance of a trust account — whether onshore or
offshore — in the context of money laundering cannot be
understated: It can be used as part of the first step in
converting illicit cash into less suspicious assets; it can help hide criminal ownership of funds or other assets; and it is often an essential link between different money laundering vehicles and techniques, such as real estate, shell and active companies, nominees and the deposit and transfer of criminal proceeds.

Question 33

How does having a lawyer as a trustee on an account
at a financial institution create vulnerabilities to
money laundering at an institution?

Answer 33

Lawyers often serve as trustees by holding money or
assets “in trust” for clients. This enables lawyers to
conduct transactions and to administer the affairs of a client.
Sometimes, the illicit money is placed in a law firm’s general trust account in a file set up in the name of the client, a nominee, or a company controlled by the client.

Question 34

What is the difference in the money trail between

terrorist financing and money laundering?

Answer 34

The money trail for money laundering is circular with money eventually ending up with the person who generated it. On the other hand, the money trail for terrorist financing is linear with the money generated
being used to propagate terrorist groups and activities.

Question 35

Why are bearer bonds and bearer stock certificates

prime vehicles for money laundering

Answer 35

Bearer bonds and bearer stock certificates, or “bearer
shares,” are prime money laundering vehicles because they belong, on the surface, to the “bearer.” When bearer
securities are transferred, because there is no registry of
owners, the transfer takes place by physically handing over the bonds or share certificates. Bearer shares offer lots of opportunities to disguise their legitimate ownership.

Question 36

What general characteristics of terrorist financing can
a financial institution look at to avoid becoming
conduits for terrorist financing?

Answer 36

FATF’s report entitled “Guidance for Financial Institutions in Detecting Terrorist Financing” published April 24, 2002
describes general characteristics of terrorist financing that a financial institution can look at to avoid becoming conduits for terrorist financing, including: (a) Use of an account as a front for a person with suspected terrorist links, (b) Appearance of an accountholder’s name on a list of suspected terrorists, (c) Frequent large cash deposits in accounts of non‐profit organizations, (d) High volume of transactions in the account, and (e) Lack of a clear relationship between the banking activity and the
nature of the accountholder’s business.

Question 37

What is the most basic difference between terrorist

financing and money laundering?

Answer 37

The most basic difference between terrorist financing and money laundering involves the origin of the funds. Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds. On the other hand, money laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the
money to be used legally.

Question 38

Why are hawalas attractive to terrorist financiers?

Answer 38

Hawalas are attractive to terrorist financiers because they, unlike formal financial institutions, are not subject to formal government oversight and do not keep detailed records in a standard form. Although some hawaladars do keep ledgers, their records are often written in idiosyncratic shorthand and are maintained only briefly.

Question 39

What characteristics of charities or non‐profit organizations make them particularly vulnerable to misuse for terrorist financing?

Answer 39

Enjoying the public trust,
• Having access to considerable sources of funds,
• Being cash‐intensive,
• Frequently having a global presence, often in or next to
those areas that are exposed to terrorist activity, and
• Often being subject to little or no regulation and/or having few obstacles to their creation.

Question 40

Identify the seven topics of international standards

incorporated into the FATF 40 Recommendations (2012).

Answer 40

• AML/CFT policies and procedures [Recommendations 1‐2],
• Money laundering and confiscation [Recommendations 3‐4],
•Terrorist financing and financing of proliferation
[Recommendations 5‐8],
• Financial and non‐financial institution preventative measures [Recommendations 9‐23],
• Transparency and beneficial ownership of legal persons and arrangements [Recommendations 24‐25],
• Powers and responsibilities of competent authorities and other institutional measures [Recommendations 26‐35], and
• International cooperation [Recommendations 36‐40].

Question 41

Identify the three important tasks that FATF focuses on.

Answer 41

Spreading the anti‐money laundering message worldwide,
• Monitoring implementation of the FATF Recommendations among FATF members, and
• Reviewing money laundering trends and countermeasures.

Question 42

Describe FATF’s Recommendation 1 (2012)

on the risk‐based approach.

Answer 42

Countries should start by identifying, assessing and
understanding the money laundering and terrorist
financing risks they face. Then they should take appropriate measures to mitigate the identified risks.
The risk‐based approach allows countries to target their
limited resources in a targeted manner to their own
particular circumstances, thereby increasing the
efficiency of the preventative measures. Financial institutions should also use the risk‐based approach
to identify and mitigate the risks they face.

Question 43

According to the FATF 40 Recommendations, the complete set of countermeasures against money laundering and terrorist financing covers what 5 elements?

Answer 43

• The identification of risks and development of appropriate policies,
• The criminal justice system and law enforcement,
• The financial system and its regulation,
• The transparency of legal persons and arrangements, and
• International cooperation.

Question 44

Describe FATF’s Recommendation 15 (2012) on new

technologies.

Answer 44

Countries and financial institutions should assess the risks associated with developments of new products, business practices, delivery mechanisms and technology. Financial institutions should assess these risks prior to launching new products; they should also take appropriate measures to mitigate the risks identified.

Question 45

Describe FATF’s Recommendations 20‐21 (2012) on

suspicious transaction reporting and liability.

Answer 45

The Recommendations say that financial institutions must
report to the Financial Intelligence Unit where they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to terrorist financing. The financial institutions and the employees reporting such suspicions should be protected from liability for reporting and should be prohibited from disclosing that they have reported such activity.

Question 46

What are six principles set forth in the Basel Committee’s Statement of Principles called “Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering”?

Answer 46

In 1988, the Basel Committee issued a Statement of Principles called “Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering” in recognition of the vulnerability of the financial
sector to misuse by criminals. This was a step toward preventing the use of the banking sector for money laundering, and it set out principles with
respect to:
• Customer identification,
• Compliance with laws,
• Conformity with high ethical standards and local laws and regulations,
• Full cooperation with national law enforcement to the extent permitted
without breaching customer confidentiality,
• Staff training, and
• Record keeping and audits.

Question 47

According to FATF’s Recommendations (2012), what are the designated thresholds for transactions under
Recommendations 10, 22, and 23?

Answer 47

FATF also designated specific thresholds that trigger AML scrutiny. For example, the threshold that financial institutions should monitor for occasional customers is €15,000 [Recommendation 10];
for casinos, including Internet casinos, it is €3,000 [Recommendation 22]; and
for dealers in precious metals, when engaged in any
cash transaction, it is €15,000 [Recommendation 22‐23].

Question 48

Identify the seven specific customer identification issues
as identified in the Basel Committee’s October 2001
paper called “Customer Due Diligence for Banks.”

Answer 48

• Trust, nominee and fiduciary accounts,
• Corporate vehicles, particularly companies with nominee shareholders or entities with shares in bearer form,
• Introduced businesses,
• Client accounts opened by professional intermediaries, such as “pooled” accounts managed by professional intermediaries on behalf of entities such
as mutual funds, pension funds and money funds,
• Politically exposed persons,
• Non‐face‐to‐face customers, i.e., customers who do not present themselves for a personal interview, and
• Correspondent banking.

Question 49

In 2009, FATF began to publicly identify
high risk jurisdictions. What made the named
jurisdictions high risk?

Answer 49

The named countries had strategic deficiencies in their

AML/CFT regimes

Question 50

What are the four key elements of Know Your Customer (KYC) as identified in the Basel Committee’s October 2001 paper called “Customer Due Diligence for Banks?”

Answer 50

• Customer identification,
• Risk management,
• Customer acceptance, and
• Monitoring.

Question 51

Describe the elements that should be addressed in a
global approach to KYC identified in the Basel
Committee’s October 2004 paper called
“Consolidated KYC Risk Management.”

Answer 51

The Basel Committee’s October 2004 paper called
“Consolidated KYC Risk Management” addresses the need for banks to adopt a global approach and to apply the elements necessary for a sound KYC program to both the parent bank or head office and all of its branches and subsidiaries. These elements consist of:
• Risk management,
• Customer acceptance and identification policies, and
• Ongoing monitoring of higher‐risk accounts.

Question 52

How does the Caribbean Financial Action Task Force (CFATF) monitor member’s implementation of the
anti‐money laundering recommendations?

Answer 52

The CFATF monitors members’ implementation of the
anti‐money laundering recommendations identified in the
Kingston Declaration through the following activities:
• Self‐assessment of the implementation of the
recommendations,
• An ongoing program of mutual evaluation of members,
• Coordination of, and participation in, training and technical
assistance programs,
• Biennial plenary meetings for technical representatives, and
• Annual ministerial meetings.

Question 53

How did the European Union’s Second Directive on
Prevention on the Use of the Financial System for the
Purpose of Money Laundering (2001) expand the
scope of the First Directive?

Answer 53

The European Union’s Second Directive on Preventation on the Use of the Financial System for the Purpose of Money Laundering (2001) extended the scope of the First Directive beyond drug‐related crimes. The definition of “criminal activity” was expanded to cover not just drug trafficking, but all serious crimes, including corruption and fraud against the financial interests of the European Community.

Question 54

According to the Egmont Group, what is the definition

of a Financial Intelligence Unit (FIU)?

Answer 54

In 1996, based on the work of its Legal Working Group,
Egmont approved a definition of an FIU. It was amended in 2004 to reflect the FIUs’ role in combating terrorism financing as follows: (a) A central, national agency responsible for receiving (and, as permitted, requesting), analyzing and disseminating to the competent authorities, disclosures of financial information, (b) Concerning suspected proceeds of crime and potential financing of terrorism, and (c) Required
by national legislation or regulation, in order to combat
money laundering and terrorism financing

Question 55

How does the scope of the European Union’s Third Money Laundering Directive differ from the Second Money Laundering Directive?

Answer 55

• It specifically includes the category of trust and company service providers,
• It covers all dealers trading in goods who trade in cash over 15,000 Euros, and
• The definition of financial institution includes certain
insurance intermediaries

Question 56

According to the Wolfsberg Anti‐Money Laundering Principles for Private Banking (2000), what are situations for private banking that require further due diligence?

Answer 56

• Public officials, including individuals holding, or having held, positions of public trust, as well as their families and close associates,
• High‐risk countries, including countries “identified by
credible sources as having inadequate anti‐money laundering standards or representing high‐risk for crime and corruption, ” and
• High‐risk activities, involving clients and beneficial owners whose source of wealth “emanates from activities known to be susceptible to money laundering.