ACAMS CAMS Certified Anti-Money Laundering Specialist (the 6th edition) Exam Dumps and Practice Test Questions Set 1  Q 1 – 20 

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Question 1

Which of the following best describes the primary objective of a risk-based AML program?

A) To completely eliminate all financial crime risk

B) To focus resources on areas of highest money laundering risk

C) To ensure compliance with all tax regulations

D) To identify every suspicious transaction without exception

Answer: B) To focus resources on areas of highest money laundering risk

Explanation

A) To completely eliminate all financial crime risk is incorrect. It is practically impossible for any financial institution to completely eradicate the risk of financial crime. Criminals constantly adapt, and new schemes emerge, meaning that no program, no matter how robust, can guarantee complete elimination. Risk-based AML programs are designed not to eliminate risk entirely but to prioritize the institution’s resources and focus on areas where money laundering and financial crime are most likely to occur. Attempting to eliminate all risk would be both operationally infeasible and financially inefficient. Institutions need to accept some level of residual risk, but manage it in a structured way.

B) To focus resources on areas of highest money laundering risk is correct. This is the essence of a risk-based approach. Not all customers, products, or geographic regions pose the same level of money laundering risk. By assessing risk and allocating resources accordingly, an institution can ensure that its compliance efforts are targeted where they will have the greatest impact. This approach is endorsed by international organizations such as the Financial Action Task Force (FATF) and is a core principle in the CAMS curriculum. Risk-based AML programs involve identifying high-risk customers, monitoring transactions more closely for those customers, implementing enhanced due diligence for complex transactions, and regularly reviewing the program for effectiveness. By focusing on high-risk areas, institutions can prevent criminal activity more efficiently than by applying a blanket approach across all operations.

C) To ensure compliance with all tax regulations is incorrect because AML programs are distinct from tax compliance. While there may be some overlap (such as detecting tax evasion as a predicate offense for money laundering), the primary goal of AML is to prevent, detect, and report illicit financial activity that could be linked to money laundering, terrorist financing, or other financial crimes. Tax compliance alone does not address the broader spectrum of financial crime risk, nor does it require the same specialized monitoring and reporting processes as an AML program.

D) To identify every suspicious transaction without exception is also incorrect. Financial institutions handle millions of transactions daily. Attempting to identify every single suspicious transaction would be operationally impossible and would overwhelm compliance departments, leading to inefficiency and potential oversight of genuinely high-risk activity. Instead, the focus should be on detecting patterns and transactions that are significant and indicative of money laundering or terrorist financing risk. This ensures resources are applied efficiently, and reporting obligations are met without excessive burden.

The reasoning for the correct answer rests on the principle that a risk-based AML program must strategically allocate resources. By identifying the highest-risk customers, products, or regions, the institution can maximize the effectiveness of monitoring, reporting, and investigative efforts. A program that tries to detect every transaction or eliminate all risk is neither practical nor effective. International AML standards, including FATF Recommendations, emphasize the importance of tailoring AML programs to the risk profile of the institution. This means conducting ongoing risk assessments, updating procedures as risk levels change, and ensuring that compliance personnel are trained to recognize patterns of suspicious activity. Focusing on high-risk areas also ensures that enhanced due diligence measures are applied where needed, such as with politically exposed persons, high-risk jurisdictions, or complex corporate structures.

Question 2

Which of the following is considered a predicate offense for money laundering under the USA PATRIOT Act?

A) Bank fraud

B) Tax evasion

C) Drug trafficking

D) All of the above

Answer: D) All of the above

Explanation

A) Bank fraud qualifies as a predicate offense because it generates illicit proceeds that can be laundered. The USA PATRIOT Act defines money laundering broadly to include financial crimes where the proceeds are “derived from a specified unlawful activity.” Bank fraud involves deceit or misrepresentation to gain financial benefit, producing funds that are obtained illegally. These proceeds, if moved through financial institutions to conceal their origin, meet the legal definition of money laundering.

B) Tax evasion is also considered a predicate offense under the Act. Illegally obtained funds from underreporting income or avoiding tax obligations constitute criminal proceeds. These funds can then be funneled into legitimate accounts or investments to disguise their origin. While tax evasion may seem less violent or immediately harmful than drug trafficking, it is still recognized by regulators as a source of illicit funds subject to AML controls.

C) Drug trafficking is one of the most common and internationally recognized predicate offenses for money laundering. Proceeds from the sale of illegal narcotics are inherently illicit and require laundering to be integrated into the legitimate financial system. Criminal organizations often use sophisticated methods to conceal these funds, making drug trafficking proceeds a high-risk target for AML programs.

D) All of the above is correct. The USA PATRIOT Act and related AML regulations explicitly recognize a broad range of underlying criminal activities as predicate offenses. By including fraud, tax crimes, drug trafficking, and many other illegal acts, the law ensures that institutions report any transactions involving proceeds from these activities. This broad coverage is critical because criminals can use a variety of schemes to generate illicit proceeds, and focusing on a narrow set of offenses would leave significant gaps in financial oversight.

The reasoning for selecting all of the above is based on the principle that money laundering is a secondary crime, dependent on an initial underlying criminal act. AML programs must, therefore, consider any financial crime that produces illicit proceeds as a potential predicate offense. Recognizing a wide range of predicates allows institutions to capture and report suspicious activity accurately, enabling regulators and law enforcement to trace and disrupt criminal financial networks. Effective AML compliance includes identifying customers who may be engaged in these activities, monitoring transactions for unusual patterns, and filing Suspicious Activity Reports when necessary.

Question 3

Which of the following is the MOST critical component of a customer due diligence (CDD) process?

A) Collecting customer identification information

B) Verifying the customer’s source of funds

C) Monitoring customer transactions continuously

D) Reporting suspicious transactions to the regulator

Answer: A) Collecting customer identification information

Explanation

A) Collecting customer identification information is the foundation of CDD and is correct. Without accurate and verifiable identification, an institution cannot understand who it is dealing with or properly assess the risk profile of the customer. This involves obtaining personal details, legal identification documents, corporate registration information, and, when applicable, beneficial ownership information. This initial identification ensures that subsequent AML measures, such as monitoring and enhanced due diligence, are applied to the correct individual or entity. The CAMS curriculum emphasizes that identity verification is the first and most critical step in AML compliance, forming the basis for risk assessment and regulatory reporting.

B) Verifying the customer’s source of funds is also important, particularly for high-risk customers or large transactions, but it is secondary to establishing identity. Source-of-funds verification cannot be performed accurately if the customer’s identity is unknown or uncertain. It is a key component of enhanced due diligence rather than the basic CDD requirement. While critical to detecting suspicious activity, it cannot replace initial identification.

C) Monitoring customer transactions continuously is an ongoing AML control, not the initial component. Monitoring is most effective when combined with accurate CDD. If identity information is incomplete or inaccurate, transaction monitoring may produce false positives or fail to detect genuine suspicious activity. Continuous monitoring is important but relies on the foundation of proper identification and risk assessment.

D) Reporting suspicious transactions to the regulator is a downstream compliance activity. While essential for legal compliance, it depends on having a clear understanding of the customer and the customer’s transaction profile. A SAR filing without a verified customer identity could be inaccurate or incomplete, undermining regulatory objectives.

The reasoning for selecting collecting customer identification information as the most critical component lies in the structured approach to AML compliance. CDD is the gateway to effective risk management. By starting with verified identification, institutions can categorize customers by risk level, apply enhanced due diligence where necessary, and implement appropriate monitoring. This foundational step ensures that all other AML controls are targeted, relevant, and defensible in the event of regulatory scrutiny. International standards emphasize that CDD must occur at account opening and periodically thereafter, establishing a baseline understanding of the customer and reducing exposure to illicit activity.

Question 4

Which of the following best exemplifies structuring or “smurfing” in money laundering?

A) Depositing large amounts of cash directly into a single account

B) Making multiple small deposits below reporting thresholds to avoid detection

C) Wire transferring funds internationally to a related business

D) Using cryptocurrency to hide transaction history

Answer: B) Making multiple small deposits below reporting thresholds to avoid detection

Explanation

A) Depositing large amounts of cash directly into a single account is not structuring. Large deposits typically trigger reporting requirements, such as Currency Transaction Reports (CTRs) in the United States. Criminals do not generally use this method because it immediately draws regulatory attention.

B) Making multiple small deposits below reporting thresholds is correct. Structuring, or smurfing, is a deliberate technique used to evade detection by breaking large cash amounts into smaller deposits that do not individually trigger reporting requirements. Criminals often deposit funds over time in various branches or accounts to obscure the total amount being moved, making it harder for financial institutions and regulators to detect illegal activity. Structuring is a classic money laundering technique associated with the placement stage of laundering, where illicit funds are initially introduced into the financial system.

C) Wire transferring funds internationally to a related business is more characteristic of layering rather than structuring. Layering involves creating complex transactions to obscure the source of funds, whereas structuring focuses specifically on evading reporting thresholds through smaller, repeated transactions.

D) Using cryptocurrency to hide transaction history relates to anonymity and obfuscation rather than structuring. Cryptocurrency may provide an additional layer of privacy, but structuring specifically refers to the division of cash deposits to circumvent regulatory reporting.

The reasoning for identifying structuring as multiple small deposits lies in understanding the legal thresholds and reporting obligations in financial systems. Banks are required to file CTRs for cash transactions exceeding specified amounts, and criminals have adapted by depositing funds just below those thresholds. Anti-money laundering programs focus on detecting patterns that suggest structuring, such as repeated deposits of similar amounts across multiple accounts or branches. Effective detection requires both automated transaction monitoring and trained staff capable of recognizing suspicious patterns. Regulatory guidance emphasizes that even if individual deposits do not exceed reporting limits, patterns suggesting avoidance may still constitute suspicious activity requiring SAR filing.

Question 5

Which of the following statements about Politically Exposed Persons (PEPs) is TRUE?

A) PEPs are automatically considered high-risk customers regardless of their profile

B) PEP status applies only to foreign officials, not domestic ones

C) Enhanced due diligence must be applied to PEPs due to higher risk of corruption

D) PEPs are exempt from transaction monitoring

Answer: C) Enhanced due diligence must be applied to PEPs due to higher risk of corruption

Explanation

A) PEPs are not automatically high-risk in every situation. While they often require additional scrutiny, a full risk assessment is necessary to determine the level of risk. PEPs vary widely in terms of influence, access to public funds, and exposure to bribery or corruption. Automatically categorizing them as high-risk without context may lead to inefficient allocation of compliance resources.

B) PEP status applies to both foreign and domestic officials. International AML standards, including FATF guidelines, recognize that domestic PEPs may have access to government funds and influence similar to foreign officials, making them susceptible to corruption and other financial crimes. Excluding domestic PEPs from enhanced due diligence would create a regulatory gap.

C) Enhanced due diligence must be applied to PEPs due to higher risk of corruption is correct. PEPs are individuals who are or have been entrusted with prominent public functions, and due to their position, they may be more vulnerable to bribery or misuse of public funds. Financial institutions are required to conduct additional checks, verify the source of wealth and funds, and implement ongoing monitoring for unusual or high-risk transactions. This enhanced due diligence is necessary to mitigate potential AML and reputational risks.

D) PEPs are not exempt from transaction monitoring. In fact, they require heightened monitoring due to the elevated risk associated with their profile. Regular review of account activity and scrutiny of large or unusual transactions are essential to prevent potential misuse of funds.

The reasoning behind the correct answer focuses on risk mitigation rather than blanket assumptions. Enhanced due diligence allows institutions to tailor their compliance measures based on the PEP’s risk profile, including the nature of their public role, geographic location, and transaction patterns. This approach aligns with global AML standards, which emphasize the importance of proportional controls and continuous monitoring for individuals with elevated exposure to corruption or financial crime.

Question 6

Which of the following is a primary purpose of the Suspicious Activity Report (SAR)?

A) To penalize the customer for suspicious behavior

B) To inform regulators of transactions that may indicate money laundering

C) To provide a detailed financial audit to the public

D) To close the account of any suspicious customer immediately

Answer: B) To inform regulators of transactions that may indicate money laundering

Explanation

A) Penalizing the customer for suspicious behavior is incorrect. A SAR is a reporting mechanism, not a punitive measure. Financial institutions are required to file SARs when they detect potential money laundering or suspicious activity, but they are not responsible for taking disciplinary or enforcement action against the customer. Regulatory authorities and law enforcement agencies handle investigations and penalties. Attempting to penalize a customer directly could expose the institution to legal risk, including accusations of tipping off the customer or overstepping its legal authority.

B) To inform regulators of transactions that may indicate money laundering is correct. The primary function of a SAR is to notify authorities of transactions that could be indicative of illicit activity, including money laundering, terrorist financing, fraud, or other financial crimes. SAR filings provide law enforcement with critical information for investigations and help regulatory agencies monitor trends in financial crime. Institutions are required to maintain confidentiality regarding SAR filings to avoid tipping off the subject, which could jeopardize investigations. The information reported in a SAR includes details about the transaction, the individuals or entities involved, the reasons the activity is considered suspicious, and any supporting documentation. SARs are a cornerstone of AML compliance because they allow regulators to identify emerging patterns and respond proactively to criminal activity.

C) Providing a detailed financial audit to the public is incorrect. SARs are strictly confidential and are never made public. The purpose is to facilitate regulatory oversight and criminal investigation, not to disclose private financial information. Public disclosure would violate privacy laws and compromise the effectiveness of investigations, potentially alerting criminals that they are under scrutiny. Unlike financial audits, which provide transparency for shareholders or the public, SARs are intended solely for law enforcement and regulatory review.

D) Closing the account of any suspicious customer immediately is also incorrect. While institutions may take action such as account closure based on risk assessment, the SAR itself does not mandate closure. Closing an account without proper review could disrupt legitimate business activities and could inadvertently tip off the customer, violating confidentiality requirements. SARs function as an alert system for regulators and law enforcement rather than a directive for immediate operational action by the institution.

The reasoning for the correct answer centers on the role of SARs as a communication and risk management tool. By reporting suspicious transactions, institutions help authorities track illicit financial flows, detect criminal networks, and prevent further financial crimes. Effective SAR programs require clear policies, training for employees on recognizing suspicious activity, internal reporting channels, and mechanisms for timely filing with regulators. Confidentiality is crucial to the program’s success, ensuring that the institution’s actions do not compromise ongoing investigations. Additionally, SARs help institutions demonstrate compliance with AML regulations, reducing legal and reputational risk while contributing to a broader effort to combat financial crime.

Question 7

Which method of money laundering is MOST commonly associated with casinos?

A) Smurfing

B) Structuring of currency transactions

C) Chip conversion and redemption for clean money

D) International wire transfers

Answer: C) Chip conversion and redemption for clean money

Explanation

A) Smurfing, or structuring cash deposits to evade reporting thresholds, is a common method used in banking environments, but it is not specific to casinos. While smurfing may occur in cash-intensive businesses, casinos are particularly vulnerable to another type of laundering method. The primary concern in casinos is the conversion of illicit cash into casino chips, which can then be redeemed in a way that makes the funds appear legitimate. Smurfing is more of a financial transaction tactic than a casino-specific technique.

B) Structuring of currency transactions is related to smurfing and is typically observed in banks where multiple small deposits are made to avoid triggering regulatory reporting requirements. Casinos may be indirectly involved if cash deposits are made, but structuring in the banking sense does not fully explain the typical laundering activity in a casino environment. Regulatory guidance emphasizes that casinos have unique risks due to their high volume of cash transactions and the potential for customers to “wash” illegal proceeds through gambling.

C) Chip conversion and redemption for clean money is correct. This method is highly associated with casinos. Criminals purchase chips with illicit cash, gamble minimally, and then redeem the chips for checks or cash, effectively converting the illegal funds into seemingly legitimate gambling winnings. This method allows the origin of the funds to be obscured while presenting them as lawful. The process may include multiple trips to the casino, varied denominations of chips, and sometimes multiple casinos to complicate audit trails. Casinos are required to implement AML controls, including customer identification, monitoring of large or unusual cash purchases, and reporting suspicious activity through SARs. Enhanced due diligence applies to customers engaging in high-value transactions or exhibiting patterns consistent with laundering.

D) International wire transfers can be used to launder money, but they are more common in banking and corporate environments rather than in casinos. Casinos primarily rely on physical cash and chips, so the risk is more localized within the casino environment rather than involving cross-border financial systems. International wire transfers in casinos are generally secondary concerns, such as for VIP players transferring funds to accounts offshore, but chip conversion remains the most typical laundering risk.

The reasoning for selecting chip conversion as the correct answer lies in the mechanics of laundering within cash-intensive, entertainment-based businesses. Casinos are unique because they allow the transformation of physical cash into a financial instrument (the chip) that can later be redeemed in a form that appears legitimate. Regulatory frameworks, including the Bank Secrecy Act in the U.S., specifically address casinos as “financial institutions” for AML purposes, mandating reporting thresholds, enhanced due diligence for high-risk customers, and transaction monitoring programs. Employee training, customer profiling, and internal audits are critical to detecting potential laundering through chip conversion. The high-risk nature of casino transactions, combined with the anonymity afforded to casual gamblers, makes this method particularly attractive to criminals and a major focus of AML compliance programs.

Question 8

Which of the following would be considered an example of layering in money laundering?

A) Direct deposit of illicit funds into a bank account

B) Structuring deposits to avoid reporting thresholds

C) Transferring funds through multiple accounts and jurisdictions to obscure origin

D) Converting cash into casino chips

Answer: C) Transferring funds through multiple accounts and jurisdictions to obscure origin

Explanation

A) Direct deposit of illicit funds into a bank account is part of the placement stage of money laundering. Placement involves introducing criminal proceeds into the financial system, typically through cash deposits, purchase of monetary instruments, or other straightforward methods. While critical to the laundering process, placement does not involve complex maneuvers to conceal the source of funds. It is the first step in the laundering cycle but does not constitute layering.

B) Structuring deposits to avoid reporting thresholds, also known as smurfing, is a technique used during the placement stage. It involves breaking down large cash deposits into smaller amounts to evade regulatory reporting, such as CTRs. While this may involve multiple transactions, it is not designed to obscure the source of funds beyond avoiding detection. Layering is a subsequent stage that introduces additional complexity and separation from the original criminal activity.

C) Transferring funds through multiple accounts and jurisdictions to obscure origin is correct. Layering is the stage of money laundering that aims to make the audit trail more difficult to follow. By moving funds through a network of accounts, shell companies, foreign jurisdictions, and sometimes complex investment instruments, launderers create distance between the illicit origin of the funds and their ultimate integration into the legitimate economy. Layering often involves multiple types of transactions, including international wire transfers, purchase and sale of financial instruments, and use of corporate structures that obscure beneficial ownership. The goal is to make tracing the funds extremely difficult, delaying detection and investigation. Layering is typically the most sophisticated and complex phase of laundering, requiring careful monitoring by AML professionals.

D) Converting cash into casino chips is primarily part of the placement or integration stage. While it may contribute to the overall laundering process, it does not involve the complex series of transactions that characterize layering. Layering focuses on deliberately complicating the financial trail, often using multiple financial institutions, jurisdictions, and instruments to disguise the origins of funds.

The reasoning for identifying layering correctly emphasizes its purpose in the money laundering cycle: to obscure the source and make detection challenging. Layering transactions are often international, involving multiple currencies and legal jurisdictions, which complicates regulatory oversight and investigation. Effective AML programs must implement robust transaction monitoring, identify unusual patterns, and maintain systems to detect potentially layered transactions. Institutions must also consider high-risk customers, PEPs, and cross-border flows when assessing potential layering schemes. Regulators encourage institutions to analyze transaction networks and patterns rather than isolated transactions to detect layering, highlighting the critical role of data analytics and compliance intelligence in combating sophisticated laundering operations.

Question 9

Which of the following is the MOST reliable indicator of trade-based money laundering (TBML)?

A) Transactions between unrelated domestic businesses

B) Over-invoicing or under-invoicing of goods in international trade

C) Frequent cash deposits below reporting thresholds

D) Use of multiple PEP accounts for personal transactions

Answer: B) Over-invoicing or under-invoicing of goods in international trade

Explanation

A) Transactions between unrelated domestic businesses are not necessarily indicative of TBML. Domestic trade alone does not provide sufficient evidence of laundering, as legitimate businesses routinely engage in transactions with unrelated parties. Suspicious activity may exist, but domestic trade without manipulation of pricing or volumes does not constitute TBML.

B) Over-invoicing or under-invoicing of goods in international trade is correct. TBML relies on misrepresenting the value, quantity, or quality of trade transactions to move illicit funds across borders. Over-invoicing allows funds to exit a country in excess of the true value of goods, effectively transferring illicit proceeds abroad. Under-invoicing allows importers to reduce declared payments, concealing the actual value transferred and providing excess funds to the recipient. Customs authorities and financial institutions monitor for discrepancies between invoice values, shipping documentation, and typical market prices. TBML schemes often involve multiple jurisdictions, complex corporate structures, and trade intermediaries to conceal the movement of illicit funds. Detecting these patterns requires specialized expertise, including knowledge of international trade norms, industry standards, and logistics verification.

C) Frequent cash deposits below reporting thresholds indicate structuring but are unrelated to trade-based money laundering specifically. While cash deposits can signal laundering, TBML is typically associated with international trade rather than cash manipulation. Structuring is an operational tactic but does not reflect the misrepresentation of trade documentation central to TBML.

D) Use of multiple PEP accounts for personal transactions may indicate corruption or politically related laundering but is not specific to trade-based laundering. While PEP accounts can be involved in financial crime, TBML focuses on trade mis-invoicing, shipping documentation, and cross-border payments.

The reasoning for selecting over/under-invoicing lies in understanding how trade transactions can disguise the movement of illicit funds. TBML schemes are designed to exploit gaps in customs, banking, and regulatory oversight. Financial institutions must integrate trade finance monitoring into AML programs, reviewing invoices, shipping records, payment flows, and customer profiles for anomalies. International cooperation, data sharing, and specialized detection tools are often necessary to identify and mitigate TBML risks. By focusing on invoice discrepancies, regulators and institutions can detect suspicious patterns that suggest illicit activity, helping prevent the integration of illicit proceeds into the global financial system.

Question 10

Which type of account is considered high-risk for money laundering?

A) Dormant accounts with no activity

B) Accounts with frequent international wire transfers and minimal business purpose

C) Accounts used solely for salary deposits

D) Accounts holding government bonds only

Answer: B) Accounts with frequent international wire transfers and minimal business purpose

Explanation

A) Dormant accounts with no activity are generally considered low-risk. Since these accounts are inactive, they are unlikely to be used for money laundering. Regulatory guidance classifies dormant accounts as minimal concern unless unusual activity suddenly appears. While periodic monitoring is necessary, dormant accounts do not typically present a significant laundering risk.

B) Accounts with frequent international wire transfers and minimal business purpose are correct. High-risk accounts often display transaction patterns that are inconsistent with the stated purpose or profile of the account. Frequent cross-border transfers without a legitimate business reason raise red flags because they may indicate layering, movement of illicit proceeds, or structuring across multiple jurisdictions. Such accounts require enhanced due diligence, including verifying the source and purpose of funds, monitoring transaction flows, and understanding counterparties. AML programs emphasize understanding the customer and their expected transactional behavior, so accounts deviating from that profile require closer scrutiny. International wire transfers are particularly risky because they may move funds to or from jurisdictions with weaker AML controls, increasing exposure to laundering schemes.

C) Accounts used solely for salary deposits are generally low-risk. These accounts have predictable, consistent deposits and withdrawals, reflecting legitimate income. Monitoring may be required for large one-time transactions, but salary-only accounts typically do not pose significant laundering risk.

D) Accounts holding government bonds only are considered low-risk. Transactions in government bonds are regulated, transparent, and relatively illiquid for frequent laundering purposes. While monitoring is still necessary for compliance, these accounts are not typical targets for laundering schemes due to the traceable nature of transactions and the conservative investment profile.

The reasoning for selecting accounts with frequent international transfers lies in the correlation between unusual transactional activity and laundering risk. AML frameworks emphasize understanding expected behavior and using that baseline to detect anomalies. Accounts that frequently transfer funds internationally without a legitimate reason, particularly to high-risk jurisdictions or opaque entities, represent a significant exposure for institutions. Continuous monitoring, transaction analysis, and enhanced due diligence on the parties involved are required to mitigate this risk. By identifying high-risk accounts proactively, institutions can reduce the likelihood of facilitating illicit financial activity while ensuring regulatory compliance.

Question 11

Which of the following measures BEST mitigates correspondent banking risks?

A) Conducting due diligence on respondent banks and ongoing monitoring

B) Accepting all incoming wires without review

C) Relying solely on the respondent bank’s reputation

D) Only monitoring domestic transactions

Answer: A) Conducting due diligence on respondent banks and ongoing monitoring

Explanation

A) Conducting due diligence on respondent banks and ongoing monitoring is correct. Correspondent banking relationships involve one bank providing services on behalf of another bank, often across international borders. These relationships expose the bank to significant risks because illicit funds can flow through the system via these accounts. Performing comprehensive due diligence on respondent banks allows the institution to understand the risk profile, compliance standards, ownership structure, and regulatory history of the partner bank. Ongoing monitoring ensures that any changes in risk exposure, such as regulatory sanctions, suspicious transaction patterns, or high-risk customers at the respondent bank, are identified promptly. Effective due diligence and monitoring include reviewing AML policies, screening for PEP exposure, assessing financial crime risk, and maintaining an updated record of all correspondent relationships. By implementing these measures, financial institutions reduce their exposure to money laundering, terrorist financing, and reputational risks associated with correspondent accounts.

B) Accepting all incoming wires without review is extremely risky and incorrect. This practice exposes the bank to criminal exploitation, including laundering of illicit funds and terrorist financing. Correspondent banking inherently involves risk because the bank may not directly control all transactions within the respondent bank. Ignoring this risk by failing to review incoming wires can result in regulatory violations, SAR filing obligations, and potential involvement in criminal activities. AML regulations emphasize that every correspondent relationship should be evaluated and monitored according to risk-based principles, which prevents the indiscriminate acceptance of transactions.

C) Relying solely on the respondent bank’s reputation is insufficient. While the reputation of a correspondent bank is a factor in risk assessment, it cannot replace thorough due diligence. Criminals may exploit well-regarded banks through complex structures or third-party intermediaries. A robust risk-based approach requires verification of compliance policies, ownership, transaction monitoring systems, and ongoing surveillance, rather than assuming that reputation guarantees integrity. Regulators expect banks to demonstrate independent verification of risk management practices, and reliance solely on reputation can expose institutions to enforcement actions.

D) Only monitoring domestic transactions is inadequate. Correspondent banking primarily involves cross-border activities, which are often high-risk due to varying AML standards, different regulatory environments, and complex international structures. Ignoring international transactions leaves the institution exposed to high-risk flows, including funds from sanctioned countries, shell companies, and structured transfers intended to obscure illicit activity. Effective AML programs integrate both domestic and international transaction monitoring for correspondent accounts to mitigate risk comprehensively.

The reasoning for selecting due diligence and ongoing monitoring is based on the principle that correspondent banking is a conduit through which illicit funds may flow undetected. Risk management requires understanding the structure, ownership, and regulatory adherence of respondent banks, combined with continuous transaction monitoring and screening. FATF and regulatory guidance highlight correspondent banking as a high-risk area, recommending enhanced due diligence, periodic reviews, and transaction monitoring for all correspondent relationships. Institutions must balance business needs with compliance obligations, ensuring that the correspondent network is not exploited for financial crime. Proper due diligence protects the institution from reputational damage, regulatory penalties, and potential criminal exposure, creating a defensible and effective AML framework.

Question 12

Which of the following is MOST indicative of potential terrorist financing?

A) Large, structured deposits into personal accounts

B) Donations to charities without verifiable financial reporting

C) Trade-based invoice discrepancies

D) Conversion of large amounts of cash into casino chips

Answer: B) Donations to charities without verifiable financial reporting

Explanation

A) Large, structured deposits into personal accounts are commonly associated with money laundering rather than terrorist financing. Structuring involves breaking large deposits into smaller amounts to avoid reporting thresholds. While structured deposits may also be used to finance illicit activities, the hallmark of terrorist financing is not necessarily large deposits but the movement of funds to support terrorism, which may involve seemingly legitimate sources such as charitable donations. Focusing solely on deposits into personal accounts does not capture the full scope of terrorist financing mechanisms.

B) Donations to charities without verifiable financial reporting is correct. Terrorist financing often exploits the appearance of legitimacy through donations, NGOs, or nonprofit organizations. Funds intended for charitable purposes can be diverted to support terrorist activities if financial transparency is weak. Indicators include lack of accounting records, minimal oversight, unusual patterns of donations from high-risk individuals or jurisdictions, and inconsistent use of funds relative to the stated charitable purpose. Monitoring donations and financial activities of charities is a key component of AML/CFT programs to prevent misuse of legitimate entities for terrorist financing. Regulatory frameworks emphasize scrutiny of high-risk charitable organizations and cross-border donations, which are common channels for moving funds to terrorist groups. Institutions must apply enhanced due diligence when processing donations to entities with opaque structures or histories of financial irregularities.

C) Trade-based invoice discrepancies typically indicate trade-based money laundering rather than terrorist financing. While TBML involves misrepresentation of goods, values, or services to move illicit funds, the objective is usually financial gain rather than funding terrorist operations. While there can be overlap, TBML is not the most direct indicator of terrorist financing. Focusing on invoice discrepancies would not capture the specific channels used for moving funds to support terrorism.

D) Conversion of large amounts of cash into casino chips is a common money laundering technique, particularly for integrating illicit funds into legitimate systems. However, this method is rarely associated with direct terrorist financing. Terrorist financing often involves smaller transactions, layering of charitable donations, and the use of informal value transfer systems to avoid detection. Casino-related laundering is not a primary risk in the context of terrorist financing.

The reasoning for selecting donations without verifiable financial reporting lies in understanding the unique patterns of terrorist financing. Unlike traditional money laundering, the funds may be derived from legal sources but are redirected for illegal purposes. Financial institutions must identify red flags such as donations from unusual sources, transactions inconsistent with the charity’s mission, or involvement of high-risk jurisdictions. Enhanced due diligence, monitoring of charitable accounts, and reporting suspicious activity are essential to detect potential terrorist financing. Regulators and FATF guidelines emphasize the importance of transparency in the nonprofit sector, the need for risk-based monitoring, and the identification of entities susceptible to abuse. Effective AML/CFT programs integrate charity screening, transaction monitoring, and due diligence on both donors and recipients to prevent terrorism-related financial flows.

Question 13

Which of the following actions is required when a bank identifies a transaction related to a sanctioned entity?

A) Proceed with the transaction if the amount is small

B) Immediately freeze the assets and notify regulatory authorities

C) Conduct additional due diligence and then allow the transaction

D) Notify the customer and allow voluntary compliance

Answer: B) Immediately freeze the assets and notify regulatory authorities

Explanation

A) Proceeding with the transaction if the amount is small is incorrect. Regulatory requirements for sanctions compliance are strict and apply regardless of transaction size. Even a small transfer involving a sanctioned entity violates laws, exposes the bank to penalties, and may constitute criminal liability. Financial institutions must treat all transactions involving sanctioned individuals or entities seriously and cannot selectively approve small transactions based on perceived insignificance.

B) Immediately freezing the assets and notifying regulatory authorities is correct. Sanctions programs, including OFAC in the U.S., require institutions to block any assets belonging to designated individuals, organizations, or countries. Institutions must also file a report with the appropriate authority detailing the transaction, parties involved, and any supporting information. This action prevents the transfer of prohibited funds, ensures regulatory compliance, and mitigates reputational and legal risks. The asset freeze must remain in place until guidance is received from regulators regarding further disposition. Compliance programs emphasize staff training, automated screening tools, and robust monitoring systems to ensure that sanctions violations are promptly detected and addressed.

C) Conducting additional due diligence and then allowing the transaction is incorrect. Enhanced due diligence is important for risk assessment but cannot override sanctions regulations. Transactions involving sanctioned entities must be blocked regardless of the due diligence outcome. Allowing a transaction after further review exposes the bank to severe penalties, including fines and criminal prosecution, and undermines the integrity of the sanctions regime.

D) Notifying the customer and allowing voluntary compliance is also incorrect. Tipping off the customer can violate laws, compromise investigations, and enable the circumvention of sanctions. The institution must maintain confidentiality while reporting to the regulatory authority, ensuring that the sanctioned entity cannot access or divert the assets. Regulatory guidance stresses that compliance personnel must handle sanctions-related transactions with strict confidentiality and clear internal reporting procedures.

The reasoning for the correct answer emphasizes the mandatory nature of sanctions compliance. Freezing assets and reporting ensures that financial institutions do not facilitate prohibited activities and maintain alignment with international and national regulatory frameworks. Sanctions enforcement is a cornerstone of global financial crime prevention, deterring illicit transactions and supporting international security objectives. Proper policies, automated screening, staff training, and rapid reporting are all critical components of an effective sanctions compliance program. Institutions that fail to act promptly risk substantial legal and reputational consequences.

Question 14

Which of the following best describes the integration stage of money laundering?

A) Introduction of illicit funds into the financial system

B) Layering funds through complex transactions to obscure origin

C) Re-entering laundered funds into the legitimate economy

D) Structuring deposits to avoid detection

Answer: C) Re-entering laundered funds into the legitimate economy

Explanation

A) Introduction of illicit funds into the financial system is known as the placement stage. During placement, criminal proceeds are first introduced into legitimate financial channels through cash deposits, purchase of financial instruments, or other mechanisms. Placement is the initial stage of money laundering and is distinct from integration, which involves reintroducing cleaned funds into the broader economy.

B) Layering funds through complex transactions to obscure origin is the layering stage. Layering involves multiple transfers, offshore accounts, and complex financial instruments to create distance between illicit funds and their source. While layering is critical in concealing funds, it does not constitute the integration stage, which focuses on making the funds appear legitimate for use in everyday economic activities.

C) Re-entering laundered funds into the legitimate economy is correct. Integration is the final stage of money laundering. After illicit funds have been placed and layered, they are reintroduced into the economy in a form that appears lawful. Examples include purchasing real estate, investing in businesses, buying luxury goods, or conducting transactions that generate legitimate profits. Integration completes the laundering cycle by transforming criminal proceeds into usable, seemingly legitimate assets. This stage is challenging for regulators to detect because the funds now appear legitimate. Successful integration allows criminals to enjoy the benefits of their activities without raising immediate suspicion. Financial institutions mitigate integration risks through enhanced due diligence, monitoring high-value transactions, verifying sources of wealth, and assessing unusual patterns consistent with laundering.

D) Structuring deposits to avoid detection occurs during placement, not integration. While structuring helps introduce funds into the system discreetly, it is only the first step. Integration comes after placement and layering, focusing on making funds accessible for legitimate purposes.

The reasoning for selecting re-entry into the legitimate economy focuses on the final objective of laundering: converting illicit funds into usable, seemingly lawful assets. Integration allows criminals to enjoy financial benefits while minimizing the risk of detection. AML programs must anticipate integration risks, employing monitoring, enhanced due diligence, and transaction analysis to detect funds moving from previously identified high-risk sources into legitimate markets. By understanding the laundering cycle—placement, layering, integration—institutions can implement controls at each stage, reducing the likelihood of successful laundering. Regulatory guidance emphasizes the importance of analyzing patterns, verifying customer wealth, and monitoring high-risk transactions, all aimed at preventing illicit funds from successfully entering the legitimate economy.

Question 15

Which of the following is MOST effective for detecting unusual patterns in customer transactions?

A) Manual review of random transactions

B) Automated transaction monitoring systems with risk-based parameters

C) Relying on customer complaints

D) Reviewing only accounts flagged by regulators

Answer: B) Automated transaction monitoring systems with risk-based parameters

Explanation

A) Manual review of random transactions is not effective for detecting unusual patterns at scale. Financial institutions handle thousands or millions of transactions daily. Random manual reviews are inefficient and unlikely to detect sophisticated laundering schemes or complex layering patterns. While human analysis is valuable for investigation, relying solely on manual review leaves gaps in detection capabilities.

B) Automated transaction monitoring systems with risk-based parameters is correct. These systems allow institutions to continuously analyze transactions against predefined criteria, thresholds, and behavioral patterns. Risk-based parameters ensure that monitoring efforts focus on high-risk customers, products, and jurisdictions, enabling efficient detection of suspicious activity. Automated systems can detect anomalies such as unusual transaction volumes, irregular transaction types, activity inconsistent with customer profiles, and complex layering patterns. These systems are integrated into AML programs, generating alerts for further investigation by compliance personnel. Advanced monitoring systems use data analytics, machine learning, and pattern recognition to identify subtle trends indicative of money laundering or terrorist financing. By combining automation with risk-based criteria, institutions maximize efficiency and effectiveness, ensuring that potential illicit activity is promptly identified and addressed.

C) Relying on customer complaints is reactive and insufficient. Customer complaints may occasionally identify suspicious activity but are neither timely nor comprehensive. Proactive monitoring using automated systems is far more effective in detecting emerging patterns, particularly for high-risk accounts or cross-border activity. Complaints alone cannot provide a reliable framework for AML compliance.

D) Reviewing only accounts flagged by regulators is too narrow. Institutions are responsible for monitoring all accounts based on risk assessment, not only those already identified by regulatory authorities. Focusing exclusively on pre-flagged accounts could miss emerging threats and new laundering techniques. Risk-based, institution-driven monitoring is critical to detecting suspicious patterns early and preventing illicit funds from moving through the financial system.

The reasoning for selecting automated risk-based systems is grounded in efficiency, scalability, and accuracy. AML programs require continuous monitoring of all relevant transactions, with automated systems designed to detect deviations from normal behavior. By applying risk-based parameters, institutions focus resources on areas most likely to involve illicit activity, while maintaining compliance with regulatory reporting obligations. These systems also support investigations, SAR filings, and regulatory audits, providing a defensible and proactive approach to combating financial crime. Integration of technology with human expertise ensures comprehensive detection and mitigation of money laundering and terrorist financing risks, enhancing the institution’s overall AML framework.

Question 16

Which of the following is MOST likely to indicate high-risk customer behavior?

A) Customer maintains a single low-balance account with routine deposits

B) Customer frequently transfers funds to high-risk jurisdictions with no clear business purpose

C) Customer makes standard utility payments regularly

D) Customer deposits salary checks into an account and makes regular bill payments

Answer: B) Customer frequently transfers funds to high-risk jurisdictions with no clear business purpose

Explanation

A) Maintaining a single low-balance account with routine deposits is not high-risk behavior. This type of activity is consistent with ordinary banking behavior, including personal savings or expense management. Such accounts generally involve predictable deposits and withdrawals, and the funds are transparent and traceable. These accounts typically do not raise AML concerns because there is no unusual pattern, high transaction volume, or cross-border complexity. Monitoring of low-risk accounts is still necessary but does not require enhanced due diligence or immediate investigative action.

B) Frequent transfers to high-risk jurisdictions with no clear business purpose is correct. High-risk jurisdictions are defined as those with weak AML controls, history of corruption, high terrorist financing exposure, or limited regulatory oversight. When a customer conducts frequent transactions with entities in these jurisdictions without providing a legitimate business explanation, it raises red flags for potential money laundering or terrorist financing. AML frameworks emphasize the importance of understanding both the nature and purpose of transactions. Financial institutions are expected to identify unusual activity patterns that deviate from the customer’s profile. High-risk behavior includes not only the volume and frequency of transfers but also inconsistencies between stated business purposes and the actual transaction history. The lack of a legitimate explanation combined with high-risk destinations signals the need for enhanced due diligence, potentially including verification of counterparties, documentation of the funds’ purpose, and continuous monitoring. Compliance programs integrate technology and human analysis to detect these high-risk behaviors proactively, allowing institutions to file SARs or escalate issues to regulators when appropriate.

C) Making standard utility payments regularly is not high-risk behavior. Routine utility or household payments are consistent with legitimate personal or business financial activity. Such transactions are predictable, low-risk, and aligned with expected behavior patterns. Monitoring of these transactions is important for general oversight but they do not indicate potential laundering or terrorist financing risks.

D) Depositing salary checks and making regular bill payments is also low-risk behavior. These are typical account activities for personal accounts and do not suggest unusual patterns, high-volume transfers, or international risk exposure. Accounts with this type of activity are considered baseline low-risk accounts under AML frameworks.

The reasoning for identifying transfers to high-risk jurisdictions without clear business purpose as high-risk behavior is grounded in the principle that financial crime often exploits weak regulatory systems and opaque jurisdictions. High-risk jurisdictions may have inadequate reporting standards, limited oversight, or weak anti-money laundering controls. Frequent transfers to such locations increase exposure to laundering schemes, terrorist financing, and illicit fund flows. AML programs require institutions to adopt a risk-based approach, assessing not just the amount of money transferred but also the origin, destination, purpose, and consistency with the customer’s profile. Effective compliance measures include screening transactions against lists of high-risk jurisdictions, monitoring for unusual patterns, documenting customer explanations, and escalating suspicious activity to the compliance team for review. By detecting high-risk behavior early, institutions can mitigate exposure to criminal activity, regulatory penalties, and reputational damage.

Question 17

Which of the following BEST demonstrates the use of a shell company in money laundering?

A) A company with legitimate sales operations and transparent ownership

B) A company established only to move funds between accounts without real business activity

C) A retail store that reports accurate revenue and taxes

D) A charity registered and audited annually

Answer: B) A company established only to move funds between accounts without real business activity

Explanation

A) A company with legitimate sales operations and transparent ownership is not indicative of a shell company used for laundering. Legitimate businesses have real economic activity, accurate financial reporting, and verified ownership structures. While these companies may conduct international transactions, they are not inherently vehicles for laundering because their operations are traceable and verifiable.

B) A company established only to move funds between accounts without real business activity is correct. Shell companies are legal entities with no significant operations, staff, or assets. Their primary purpose is to obscure ownership, facilitate the movement of illicit funds, and complicate tracing for regulators. Criminals use shell companies to layer and integrate illicit proceeds into the financial system. These companies may be located in offshore jurisdictions with limited disclosure requirements. Transactions may involve multiple accounts, international transfers, and intercompany loans or payments that appear legitimate but are designed solely to conceal the origin and destination of funds. AML programs focus on identifying shell companies through enhanced due diligence, monitoring unusual account activity, verifying beneficial ownership, and examining the legitimacy of transactions relative to the stated business purpose. Financial institutions often rely on KYC, ownership registries, and independent verification to detect shell company usage in laundering schemes.

C) A retail store that reports accurate revenue and taxes is a legitimate business and is not indicative of a shell company. While businesses can be misused for laundering through trade-based schemes or over-invoicing, a properly documented retail store with accurate reporting does not fit the shell company definition. Effective AML programs distinguish between operational businesses and entities primarily created for fund concealment.

D) A charity registered and audited annually is also legitimate. While terrorist financing may exploit charities, a well-audited and regulated nonprofit is not considered a shell company. AML frameworks focus on charities with weak governance, lack of transparency, or unusual financial activity as higher risk for abuse. Properly audited organizations provide accountability and reduce exposure to illicit fund diversion.

The reasoning for identifying shell companies lies in their function as instruments of concealment. Criminals create shell companies to layer and integrate illicit proceeds, often routing funds through multiple accounts, jurisdictions, or corporate structures. By appearing as legitimate entities, shell companies obscure the source, ownership, and ultimate beneficiary of funds. Effective detection requires analyzing ownership structures, monitoring unusual transactions, verifying the existence of economic activity, and cross-referencing public registries. Compliance programs combine technology, legal research, and transaction monitoring to flag entities that exhibit characteristics of shell companies. Recognizing shell companies as high-risk entities is essential for preventing the integration of illicit proceeds into the legitimate economy, supporting both regulatory compliance and law enforcement objectives.

Question 18

Which of the following is the MOST significant AML risk associated with private banking?

A) High-volume low-value transactions

B) Politically exposed persons (PEPs) and complex wealth structures

C) Routine payroll accounts

D) Government bond investments only

Answer: B) Politically exposed persons (PEPs) and complex wealth structures

Explanation

A) High-volume low-value transactions are generally associated with retail banking. While monitoring is necessary, these transactions typically do not represent the highest AML risk in private banking. Retail accounts have predictable patterns and lower exposure to cross-border or politically sensitive activity.

B) Politically exposed persons (PEPs) and complex wealth structures are correct. Private banking often serves high-net-worth clients, including PEPs, who are at elevated risk for corruption, bribery, and misuse of public funds. Complex wealth structures, including trusts, foundations, offshore accounts, and multiple entities, can obscure beneficial ownership and the origin of funds. Criminals may exploit private banking to launder illicit proceeds or hide wealth obtained through corruption. Enhanced due diligence is mandatory for PEPs and high-risk clients in private banking, including verifying sources of wealth, understanding transaction patterns, ongoing monitoring, and documenting the rationale for financial activity. Private banking institutions must apply rigorous KYC procedures, regularly review complex structures, and maintain comprehensive monitoring to mitigate AML risks. FATF and regulatory guidance emphasize private banking as a high-risk sector due to the potential for sophisticated laundering schemes and politically sensitive exposures.

C) Routine payroll accounts are low-risk in private banking. These accounts generally have predictable deposit and withdrawal patterns and do not involve complex international flows or politically exposed customers. While monitoring is still required, these accounts are not the most significant risk in private banking.

D) Government bond investments only are also low-risk. Bonds are highly regulated, transparent, and unlikely to be used for illicit laundering. While monitoring is necessary, these accounts do not present the same risk as private banking accounts involving PEPs or complex ownership structures.

The reasoning for selecting PEPs and complex wealth structures is grounded in the understanding that private banking clients often have resources, influence, and international reach that create AML vulnerabilities. Enhanced due diligence, risk-based monitoring, and transaction analysis are essential to detect and prevent money laundering, corruption, or misappropriation of public funds. Institutions must document the source of wealth, assess ownership structures, and monitor for unusual patterns consistent with layering or integration of illicit funds. Regulatory agencies expect private banking institutions to adopt a robust risk-based framework, providing evidence of compliance and effective management of high-risk relationships.

Question 19

Which of the following is MOST indicative of trade-based money laundering (TBML)?

A) Frequent small cash deposits below reporting thresholds

B) Transactions with unrelated international entities that over- or under-invoice goods

C) Transfers between family members’ domestic accounts

D) Regular payment of utility bills

Answer: B) Transactions with unrelated international entities that over- or under-invoice goods

Explanation

A) Frequent small cash deposits below reporting thresholds relate to structuring rather than trade-based money laundering. Structuring is a cash-placement tactic to evade reporting, whereas TBML specifically manipulates international trade documentation to disguise illicit proceeds.

B) Transactions with unrelated international entities that over- or under-invoice goods are correct. TBML involves deliberately misrepresenting the value, quantity, or type of goods in international trade transactions to move illicit funds across borders. Over-invoicing allows excess funds to exit a country, while under-invoicing conceals excess value entering a country. TBML often involves shell companies, intermediaries, and complex supply chains to obscure ownership and fund origin. Detecting TBML requires analysis of trade documentation, comparison to market prices, scrutiny of shipping records, and investigation of counterparties. AML programs include trade finance monitoring, document verification, and risk-based analysis of international transactions to identify potential TBML schemes. Regulators and FATF highlight TBML as a high-risk area due to its potential to facilitate money laundering on a large scale, particularly in sectors such as commodities, oil, and electronics.

C) Transfers between family members’ domestic accounts are generally low-risk and unrelated to TBML. While these transactions may require basic monitoring, they do not involve misrepresentation of trade documentation or international flows and are unlikely to indicate laundering activity.

D) Regular payment of utility bills is low-risk. These transactions are consistent with normal personal or household financial activity and are not indicative of TBML or sophisticated laundering.

The reasoning for selecting over- or under-invoicing in international trade as the hallmark of TBML is based on the mechanism’s ability to conceal illicit funds while appearing legitimate. By exploiting trade documentation and complex supply chains, criminals can move large sums across borders with minimal scrutiny. AML programs focus on risk-based trade finance monitoring, customer verification, and cross-border transaction analysis to detect potential TBML schemes. Identification of TBML requires expertise in trade norms, valuation, shipping, and corporate structures, combined with robust monitoring technology and human analysis. Detecting TBML helps prevent integration of illicit proceeds into the legitimate economy and supports global efforts to combat money laundering.

Question 20

Which of the following is a key element of an effective AML compliance program?

A) Written policies and procedures, risk assessment, and independent testing

B) Monitoring only high-value accounts without documented policies

C) Filing SARs only when requested by regulators

D) Applying the same procedures to all customers regardless of risk

Answer: A) Written policies and procedures, risk assessment, and independent testing

Explanation

A) Written policies and procedures, risk assessment, and independent testing is correct. An effective AML compliance program is structured, comprehensive, and proactive. Written policies provide a framework for employees, defining roles, responsibilities, and procedures. Risk assessment identifies the areas of greatest money laundering exposure, including customers, products, services, and jurisdictions. Independent testing ensures that controls are functioning effectively and identifies gaps or weaknesses for remediation. These three elements—policies, risk assessment, and independent testing—form the backbone of a risk-based AML program. Policies guide the institution, risk assessments prioritize resources, and independent testing verifies compliance. Regulatory frameworks, including the Bank Secrecy Act and FATF Recommendations, emphasize these elements as mandatory for institutions to maintain a defensible AML program. Effective implementation also requires employee training, reporting mechanisms, transaction monitoring, enhanced due diligence, and management oversight, all integrated to create a cohesive compliance culture.

B) Monitoring only high-value accounts without documented policies is incorrect. While monitoring high-value accounts is important, a lack of formal policies creates inconsistency and regulatory exposure. A robust AML program must include documentation, risk assessment, and structured monitoring across all relevant areas to ensure compliance and defensibility.

C) Filing SARs only when requested by regulators is inadequate. Institutions are required to proactively identify and report suspicious activity, regardless of regulatory requests. Reactive SAR filing undermines compliance and may lead to penalties. Effective AML programs include proactive monitoring, detection, and timely reporting to authorities.

D) Applying the same procedures to all customers regardless of risk is inefficient and inconsistent with risk-based principles. A risk-based approach tailors due diligence, monitoring, and reporting to the specific risk level of each customer, ensuring resources are allocated efficiently and regulatory expectations are met. Uniform treatment ignores high-risk exposures and fails to mitigate financial crime effectively.

The reasoning for selecting written policies, risk assessment, and independent testing is grounded in the principle that AML compliance must be structured, risk-based, and verifiable. Comprehensive policies provide guidance, risk assessment prioritizes focus areas, and independent testing validates effectiveness. Combined with training, monitoring, and reporting, these elements form the core of a defensible and effective AML compliance program, ensuring regulatory adherence, mitigating risk, and supporting the institution’s integrity in financial crime prevention.