ACAMS CAMS Certified Anti-Money Laundering Specialist (the 6th edition) Exam Dumps and Practice Test Questions Set 4 Q 61- 80

Visit here for our full ACAMS CAMS exam dumps and practice test questions.

Question 61

Which of the following BEST indicates suspicious behavior in a customer who frequently wires funds internationally?

A) Sending small, predictable payments to suppliers for documented business operations

B) Transferring large sums to high-risk jurisdictions without apparent business or personal reason

C) Paying international invoices with documented contracts and verifiable counterparties

D) Sending occasional family remittances consistent with previous behavior

Answer: B) Transferring large sums to high-risk jurisdictions without apparent business or personal reason

Explanation

A) Sending small, predictable payments to suppliers for documented business operations is low-risk. Routine business transactions that match contractual obligations and documented activity align with standard financial behavior. Predictable payments to verified suppliers are generally transparent, traceable, and not indicative of suspicious activity. Monitoring such transactions is part of normal operational due diligence but does not typically trigger alerts or escalation.

B) Transferring large sums to high-risk jurisdictions without apparent business or personal reason is correct. High-risk jurisdictions, often characterized by weak AML controls, limited regulatory oversight, and corruption, present significant money laundering and terrorist financing risks. Frequent or large transfers without clear economic justification may indicate layering, trade-based money laundering, or attempts to move illicit proceeds internationally. Detection involves analyzing the frequency, volume, and destination of transfers, comparing them with the customer’s known profile and historical activity. Enhanced due diligence requires evaluating the purpose of the transactions, verifying counterparties, and assessing whether the customer’s source of funds supports such transfers. Financial institutions implement automated transaction monitoring systems to flag anomalies, followed by human review to validate suspicious activity and determine if a SAR filing is warranted. The reasoning for selecting this choice underscores the importance of geographic risk assessment, transaction analysis, and consistency with the customer’s profile to detect potential laundering attempts. Proactive monitoring and investigation protect the institution from facilitating illicit activity and ensure compliance with AML regulations.

C) Paying international invoices with documented contracts and verifiable counterparties is low-risk. When transfers are consistent with legitimate business operations, and counterparties can be verified, there is minimal risk of laundering or suspicious activity. Regular due diligence ensures transparency without indicating criminal intent.

D) Sending occasional family remittances consistent with previous behavior is also low-risk. Transfers that match historical patterns, amounts, and purposes, particularly among verified family members, typically do not indicate suspicious activity. Monitoring may be performed, but there is no inherent red flag in this scenario.

The reasoning for selecting transfers to high-risk jurisdictions emphasizes how deviations from expected transactional behavior can indicate potential money laundering. Criminals exploit weak regulatory frameworks, international transfers, and anonymity to move illicit proceeds across borders. Financial institutions mitigate this risk through risk-based monitoring, automated alerts, human review, and escalation protocols. This approach ensures that suspicious activity is detected early, investigated thoroughly, and reported appropriately, reducing regulatory exposure and protecting the integrity of the financial system.

Question 62

Which of the following is MOST indicative of potential money laundering through private banking accounts?

A) Depositing routine salary payments into a personal account

B) Rapid movement of large funds between multiple accounts inconsistent with known wealth or business activity

C) Regular payment of household expenses from documented income sources

D) Maintaining a modest savings account with occasional interest accrual

Answer: B) Rapid movement of large funds between multiple accounts inconsistent with known wealth or business activity

Explanation

A) Depositing routine salary payments into a personal account is low-risk. Regular income deposits from verified sources align with standard personal banking activity and are unlikely to indicate suspicious activity. Such deposits are traceable and consistent with expected financial behavior.

B) Rapid movement of large funds between multiple accounts inconsistent with known wealth or business activity is correct. This pattern is a classic indicator of layering, where illicit funds are moved through multiple accounts to obscure their origin. In private banking, high-net-worth clients may have access to complex financial structures, including trusts, corporate accounts, and international holdings, which can be exploited for money laundering. Detection requires monitoring transaction frequency, volume, counterparties, and account relationships. Automated monitoring systems, supported by human review, flag anomalies for further investigation. Enhanced due diligence involves verifying the source of funds, ensuring the transactions align with the client’s declared wealth, and assessing the legitimacy of counterparties. Suspicious activity may also include rapid fund transfers between jurisdictions with differing AML regulations or to high-risk regions without clear economic purpose. Escalation protocols require documentation, internal review, and SAR filing when necessary. The reasoning for selecting this option highlights the importance of proactive monitoring and risk-based approaches in private banking to identify potential laundering schemes. Financial institutions mitigate exposure by analyzing unusual transactional behavior relative to the client profile, verifying funds, and escalating concerns to regulatory authorities when appropriate.

C) Regular payment of household expenses from documented income sources is low-risk. Such activity is routine and predictable, consistent with legitimate financial behavior, and does not indicate money laundering.

D) Maintaining a modest savings account with occasional interest accrual is also low-risk. Routine interest accumulation on small balances is a normal banking activity and unlikely to trigger AML concerns.

The reasoning for selecting rapid movement between accounts emphasizes layering as a critical stage in money laundering. By creating complex fund transfers, criminals distance illicit proceeds from their source, making detection challenging. Effective AML controls require a combination of automated monitoring, human analysis, verification of source of funds, and risk-based investigation. Continuous oversight, escalation protocols, and SAR filing ensure that suspicious activity is identified, reported, and mitigated, protecting financial institutions from regulatory penalties and exposure to illicit activity.

Question 63

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

A) Breaking up large cash deposits to avoid reporting thresholds

B) Over-invoicing or under-invoicing goods in cross-border trade to disguise illicit funds

C) Purchasing luxury vehicles using previously laundered funds

D) Moving funds between multiple bank accounts to obscure their origin

Answer: B) Over-invoicing or under-invoicing goods in cross-border trade to disguise illicit funds

Explanation

A) Breaking up large cash deposits to avoid reporting thresholds is associated with placement-stage laundering. Structuring involves introducing illicit funds into the financial system by splitting large sums into smaller amounts. While it is an important laundering technique, it is not specific to trade-based schemes.

B) Over-invoicing or under-invoicing goods in cross-border trade to disguise illicit funds is correct. TBML exploits trade mechanisms to move illicit proceeds across borders while concealing the true value or nature of the transaction. Over-invoicing allows the transfer of excess funds out of a country, whereas under-invoicing permits illicit proceeds to enter a country under the guise of legitimate trade. Additional methods include misrepresentation of quantity, quality, or shipping documentation and the use of multiple intermediaries or shell companies. Detection requires thorough verification of invoices, bills of lading, shipment records, and counterparties. Risk-based monitoring systems identify unusual trade patterns, while human review investigates potential anomalies. Enhanced due diligence involves assessing the legitimacy of trade counterparties, verifying goods and services, and evaluating whether declared values are consistent with market norms. Regulatory guidance, including FATF Recommendations, emphasizes monitoring international trade flows, verifying documentation, and investigating anomalies to prevent laundering. Financial institutions and trade finance participants are required to implement robust controls, conduct risk-based analysis, and escalate suspicious activity to regulatory authorities.

C) Purchasing luxury vehicles using previously laundered funds is associated with the integration stage. Integration converts illicit funds into tangible assets that appear legitimate and allows criminals to enjoy the proceeds of crime without detection.

D) Moving funds between multiple bank accounts to obscure their origin corresponds to layering. Layering involves complex fund transfers to distance illicit proceeds from their source, making detection more difficult. While this may accompany TBML, it is not the defining characteristic.

The reasoning for selecting trade manipulation highlights the sophistication of TBML. Criminals exploit international trade mechanisms to move significant illicit funds while maintaining the appearance of legitimacy. Detection requires robust verification, monitoring, and human review. Institutions must assess counterparty legitimacy, transaction authenticity, and documentation integrity. Risk-based controls, combined with continuous monitoring and escalation procedures, ensure compliance with AML regulations and reduce exposure to laundering schemes. TBML remains high-risk because it can conceal large-scale fund movement across jurisdictions, making verification, due diligence, and monitoring essential for effective prevention. Detecting anomalies in trade requires understanding market values, shipment patterns, and typical trade practices. By combining automated monitoring with expert human analysis, institutions can identify suspicious transactions and mitigate potential financial crime risks effectively.

Question 64

Which of the following is MOST indicative of layering in the money laundering process?

A) Depositing illicit cash into multiple bank accounts

B) Using complex financial transactions and multiple accounts to distance funds from their criminal source

C) Purchasing real estate with previously laundered funds

D) Filing SARs to report suspicious activity

Answer: B) Using complex financial transactions and multiple accounts to distance funds from their criminal source

Explanation

A) Depositing illicit cash into multiple bank accounts is part of placement. Placement introduces illicit funds into the financial system, often using techniques like cash deposits or monetary instruments. While it involves multiple accounts, the primary purpose is entry into the system, not obscuring the origin of funds.

B) Using complex financial transactions and multiple accounts to distance funds from their criminal source is correct. Layering is the second stage of money laundering, designed to separate illicit proceeds from their origin through intricate financial maneuvers. Techniques include transferring funds across multiple accounts, using shell companies, conducting international transfers, and exploiting offshore jurisdictions. Layering makes tracing funds difficult for regulators and law enforcement. Detection involves monitoring transactional patterns, account relationships, volumes, and frequency relative to the customer’s profile. Financial institutions use automated alerts, human review, and risk-based investigation protocols to detect potential layering activity. Effective AML programs combine transaction monitoring with source-of-funds verification, enhanced due diligence, and escalation procedures to ensure suspicious activity is investigated and reported. The reasoning highlights how layering obscures illicit fund origin and emphasizes the importance of proactive monitoring, human analysis, and regulatory compliance. Layering often precedes integration, allowing funds to be safely converted into legitimate assets without detection. Failure to detect layering exposes institutions to regulatory violations, financial crime facilitation, and reputational harm.

C) Purchasing real estate with previously laundered funds represents integration, not layering. Integration reintroduces illicit funds into the legitimate economy through tangible or liquid assets.

D) Filing SARs is a compliance measure, not a stage of money laundering. SARs report suspicious activity to regulators and law enforcement but do not constitute part of the laundering process.

The reasoning for selecting complex transactions to distance funds emphasizes layering’s function as a critical stage of money laundering. Layering introduces complexity, cross-border transfers, and multiple accounts to hide illicit origins. Institutions mitigate this risk through automated monitoring, human analysis, risk-based escalation, and SAR reporting. Early detection and investigation prevent funds from reaching the integration stage, protecting both the institution and the financial system.

Question 65

Which of the following is the MOST effective method to mitigate AML risk in correspondent banking relationships?

A) Ignoring transactions from low-risk jurisdictions

B) Applying enhanced due diligence, ongoing monitoring, and understanding the respondent bank’s AML controls

C) Accepting all transactions if the correspondent bank is reputable

D) Monitoring accounts only during annual audits

Answer: B) Applying enhanced due diligence, ongoing monitoring, and understanding the respondent bank’s AML controls

Explanation

A) Ignoring transactions from low-risk jurisdictions is insufficient. Even low-risk jurisdictions can be exploited for money laundering through layering, structuring, or trade-based schemes. Neglecting monitoring exposes the institution to undetected illicit activity.

B) Applying enhanced due diligence, ongoing monitoring, and understanding the respondent bank’s AML controls is correct. Correspondent banking allows foreign banks’ customers indirect access to domestic financial systems, creating significant AML exposure. Enhanced due diligence includes evaluating the respondent bank’s AML policies, ownership structures, risk management procedures, and transaction history. Ongoing monitoring detects unusual patterns, high-risk transactions, or changes in the respondent bank’s risk profile. Understanding the AML environment of the respondent bank ensures compliance with FATF and regulatory guidance and mitigates exposure to financial crime. Automated monitoring, combined with human review, allows institutions to identify and escalate suspicious activity. Regulatory expectations emphasize due diligence, risk-based oversight, and continuous assessment of correspondent relationships to prevent laundering and ensure compliance. Failure to apply enhanced controls can result in regulatory penalties, reputational damage, and exposure to illicit funds.

C) Accepting all transactions if the correspondent bank is reputable is insufficient. Reputation alone does not guarantee AML compliance or risk mitigation. Even reputable banks may inadvertently facilitate suspicious activity if due diligence is not conducted.

D) Monitoring accounts only during annual audits is reactive and ineffective. Continuous, risk-based monitoring is required to detect and prevent suspicious activity in real-time. Annual reviews alone cannot mitigate the inherent risks in correspondent banking relationships.

The reasoning for selecting enhanced due diligence and ongoing monitoring highlights the complexity and risk of correspondent banking. Banks must continuously evaluate transaction patterns, AML controls, and risk profiles of respondent banks. Proactive, risk-based monitoring, verification, and human analysis ensure early detection of suspicious activity, regulatory compliance, and protection of the financial system from exploitation.

Question 66

Which of the following is MOST effective in detecting money laundering through shell companies?

A) Accepting the company’s documentation at face value

B) Conducting enhanced due diligence on ownership structures, beneficial owners, and business purpose

C) Assuming the company is low-risk if registered in a reputable jurisdiction

D) Ignoring complex ownership chains if the company is a supplier of legitimate goods

Answer: B) Conducting enhanced due diligence on ownership structures, beneficial owners, and business purpose

Explanation

A) Accepting the company’s documentation at face value is insufficient. Shell companies are often created to conceal beneficial ownership, source of funds, and the true purpose of transactions. Criminals may provide false, incomplete, or misleading documents. Relying solely on submitted paperwork exposes institutions to facilitating money laundering and potential regulatory penalties. Without independent verification, financial institutions cannot identify who ultimately controls or benefits from the entity, increasing AML risk.

B) Conducting enhanced due diligence on ownership structures, beneficial owners, and business purpose is correct. Shell companies are frequently used to layer and integrate illicit funds into the financial system. Enhanced due diligence requires identifying ultimate beneficial owners, assessing the legitimacy of business operations, verifying addresses, cross-checking against public and private databases, and understanding the rationale for complex ownership chains. Suspicious indicators include nominee directors, frequent changes in ownership, offshore incorporation, lack of substantive business operations, and transactions inconsistent with declared business activity. Institutions implement risk-based approaches by combining automated monitoring, human review, and escalation procedures to detect and investigate potential misuse. Proper due diligence mitigates exposure to laundering, ensures compliance with regulatory standards, and provides documentation for audits or regulatory inspections. Detecting shell company abuse involves analyzing relationships between entities, understanding corporate structures, verifying counterparties, and reviewing transaction patterns for inconsistencies. Regulators expect institutions to assess risk not only based on jurisdiction but also based on ownership complexity, transactional activity, and operational transparency. Enhanced due diligence and ongoing monitoring allow institutions to identify abnormal financial flows, report suspicious activity through SARs, and prevent funds from entering the legitimate financial system undetected. Failure to conduct thorough due diligence can result in regulatory fines, reputational damage, and potential facilitation of criminal activity.

C) Assuming the company is low-risk if registered in a reputable jurisdiction is incorrect. Even companies in reputable jurisdictions may be used to conceal illicit activity, as criminals exploit corporate opacity and cross-border transactions. Jurisdiction alone does not mitigate risk.

D) Ignoring complex ownership chains if the company is a supplier of legitimate goods is insufficient. Even legitimate business activity can be used to disguise laundering through layering and integration, particularly when ownership structures obscure beneficial ownership.

The reasoning for selecting enhanced due diligence highlights the central role of verification, ownership transparency, and risk-based monitoring in preventing shell company-based money laundering. Institutions must combine automated monitoring, human review, and regulatory reporting to identify, investigate, and mitigate illicit activity effectively.

Question 67

Which of the following is MOST indicative of money laundering in cash-intensive businesses?

A) Occasional deposits consistent with business activity

B) Frequent deposits structured below reporting thresholds or inconsistent with normal business patterns

C) Paying legitimate employee salaries and vendor invoices

D) Regular deposits of small change from day-to-day operations

Answer: B) Frequent deposits structured below reporting thresholds or inconsistent with normal business patterns

Explanation

A) Occasional deposits consistent with business activity are low-risk. Predictable deposits aligned with normal operational patterns do not raise immediate AML concerns. Financial institutions routinely monitor such activity without triggering escalation protocols.

B) Frequent deposits structured below reporting thresholds or inconsistent with normal business patterns is correct. Structuring, or smurfing, is a common technique in cash-intensive businesses to introduce illicit funds into the financial system while avoiding reporting requirements. Frequent small deposits across multiple accounts, sudden spikes in cash flow, or patterns inconsistent with historical activity indicate potential placement-stage laundering. Detection requires monitoring for deviations from expected cash behavior, comparing deposits with business type and volume, and investigating anomalies. Automated transaction monitoring systems, combined with human review, flag suspicious activity. Enhanced due diligence includes reviewing source of funds, customer profile, and financial history. Financial institutions must escalate suspicious patterns, document investigations, and file SARs when warranted. Regulatory guidance emphasizes that cash-intensive businesses are inherently higher-risk due to their reliance on liquid cash, and institutions must apply risk-based controls, proactive monitoring, and verification procedures to detect illicit activity. Effective detection involves correlating multiple accounts, transaction frequencies, deposit timing, and customer behavior to identify anomalies that may indicate laundering. Financial institutions must also consider geographic risk, industry norms, and transaction purpose to determine whether deposits are suspicious. Monitoring is not limited to large deposits; structured smaller transactions cumulatively may constitute illicit activity. Comprehensive AML programs integrate automated alerts, human analysis, and escalation processes to address potential risks effectively.

C) Paying legitimate employee salaries and vendor invoices is routine operational activity and low-risk. These payments are consistent with normal business operations and do not indicate laundering.

D) Regular deposits of small change from day-to-day operations are also low-risk. Predictable deposits consistent with operational activity are unlikely to be indicative of suspicious behavior.

The reasoning for selecting structured deposits highlights placement-stage laundering in cash-intensive businesses. By monitoring frequent small deposits and deviations from expected cash flows, institutions detect early-stage money laundering. Risk-based controls, combined with enhanced due diligence and reporting, ensure compliance with AML regulations and protect the financial system from exploitation.

Question 68

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

A) Depositing cash into bank accounts to enter the financial system

B) Conducting multiple cross-border transfers to obscure the origin of funds

C) Converting laundered funds into legitimate assets such as real estate or luxury goods

D) Filing SARs to notify regulators of suspicious activity

Answer: C) Converting laundered funds into legitimate assets such as real estate or luxury goods

Explanation

A) Depositing cash into bank accounts to enter the financial system corresponds to the placement stage. Placement introduces illicit funds into financial channels but does not disguise or convert them into legitimate assets. Detection focuses on identifying unusual deposits, structured transactions, or anomalies in account behavior.

B) Conducting multiple cross-border transfers to obscure the origin of funds is characteristic of layering. Layering distances funds from their source through complex financial maneuvers, including multiple accounts, jurisdictions, and transactions. Detection involves monitoring transaction patterns, volume, frequency, and consistency with the customer profile.

C) Converting laundered funds into legitimate assets such as real estate or luxury goods is correct. Integration is the final stage of money laundering, where funds are reintroduced into the legitimate economy and made to appear lawful. Criminals often purchase high-value assets, luxury items, or invest in businesses to legitimize funds. Detection requires institutions to monitor asset acquisitions, verify sources of funds, and identify transactions inconsistent with declared wealth. Enhanced due diligence involves assessing ownership structures, financing arrangements, and counterparties. Monitoring for unusual purchases, rapid acquisitions, or high-value investments helps detect integration-stage laundering. Regulatory guidance emphasizes that integration often involves tangible or liquid assets, including real estate, vehicles, art, and corporate investments. Institutions implement risk-based controls, automated monitoring, and human review to detect potential integration. SAR filing is required if transactions are suspicious or inconsistent with customer activity. Effective AML programs ensure that integration-stage laundering is mitigated by combining verification of source of funds, assessment of transaction legitimacy, and ongoing monitoring. Integration is particularly challenging to detect because the funds have already passed placement and layering, making them appear legitimate. Institutions must maintain comprehensive oversight to ensure that high-value asset purchases, investments, or financial transfers are consistent with the customer’s financial profile and declared wealth. Failure to detect integration exposes financial institutions to regulatory penalties, reputational harm, and the risk of facilitating criminal activity.

D) Filing SARs to notify regulators of suspicious activity is a compliance mechanism, not a stage of money laundering. SARs report suspicious activity to law enforcement but do not constitute the laundering process itself.

The reasoning for selecting conversion into legitimate assets emphasizes the critical role of integration. Criminals aim to legitimize illicit proceeds by converting them into tangible or liquid assets. Effective monitoring, verification of funds, and risk-based controls help institutions detect integration-stage laundering and ensure regulatory compliance, protecting the financial system from abuse.

Question 69

Which of the following is MOST indicative of suspicious activity in private banking transactions?

A) Small, predictable deposits aligned with personal income

B) Frequent, large international wire transfers inconsistent with known wealth or business activity

C) Routine mortgage payments from documented income

D) Monthly utility payments consistent with prior behavior

Answer: B) Frequent, large international wire transfers inconsistent with known wealth or business activity

Explanation

A) Small, predictable deposits aligned with personal income are low-risk. Routine personal deposits consistent with known sources of income do not indicate suspicious activity and typically require only standard monitoring.

B) Frequent, large international wire transfers inconsistent with known wealth or business activity is correct. Private banking clients often have access to complex financial networks and international accounts, which may be exploited for laundering illicit funds. Rapid, high-value international transfers inconsistent with the client profile, declared wealth, or business operations suggest potential layering or integration of illicit funds. Detection involves monitoring transaction frequency, volume, counterparties, and geographic risk. Enhanced due diligence includes verifying source of funds, reviewing account history, and assessing the legitimacy of counterparties and transactions. Financial institutions employ automated monitoring tools, human review, and escalation protocols to identify and investigate suspicious activity. Regulatory guidance emphasizes heightened scrutiny for private banking clients, particularly for high-net-worth individuals, politically exposed persons, or clients from high-risk jurisdictions. Escalation involves documenting anomalies, conducting in-depth investigations, and filing SARs when appropriate. Proactive monitoring of unusual wire transfers protects institutions from regulatory violations, reputational damage, and potential involvement in financial crimes.

C) Routine mortgage payments from documented income are low-risk. Payments consistent with known financial activity and income sources do not raise AML concerns.

D) Monthly utility payments consistent with prior behavior are also low-risk. Predictable, traceable transactions aligned with established patterns do not indicate suspicious activity.

The reasoning for selecting frequent, large international transfers emphasizes the importance of transaction consistency with client profiles. Deviations from expected patterns, particularly involving cross-border movement of funds, often signal potential laundering or financial crime. Proactive monitoring, enhanced due diligence, and escalation protocols ensure early detection and regulatory compliance. Effective AML programs combine automated detection, human review, and risk-based controls to identify suspicious activity in private banking accounts.

Question 70

Which of the following is the MOST effective approach to mitigating AML risk in correspondent banking?

A) Ignoring transactions from low-risk jurisdictions

B) Conducting enhanced due diligence, ongoing monitoring, and assessing the respondent bank’s AML controls

C) Accepting all transactions if the correspondent bank has a good reputation

D) Reviewing accounts only during annual audits

Answer: B) Conducting enhanced due diligence, ongoing monitoring, and assessing the respondent bank’s AML controls

Explanation

A) Ignoring transactions from low-risk jurisdictions is inadequate. Even low-risk jurisdictions can be exploited for money laundering through layering, structuring, or trade-based schemes. Failure to monitor these transactions creates blind spots and exposes institutions to illicit activity.

B) Conducting enhanced due diligence, ongoing monitoring, and assessing the respondent bank’s AML controls is correct. Correspondent banking provides foreign banks’ clients indirect access to the domestic financial system, creating exposure to money laundering, terrorist financing, and sanctions violations. Effective risk management requires evaluating the respondent bank’s AML policies, governance, ownership structures, transaction history, and risk profile. Ongoing monitoring identifies unusual activity, changes in behavior, and transactions inconsistent with the respondent bank’s profile. Institutions implement automated monitoring tools, risk-based controls, and human review to detect and escalate suspicious transactions. Regulatory guidance, including FATF recommendations, emphasizes a risk-based approach to correspondent banking, requiring continuous assessment and enhanced due diligence. Proper implementation mitigates the risk of financial crime, ensures regulatory compliance, and protects the institution from reputational damage. Enhanced due diligence involves reviewing the respondent bank’s internal controls, transaction monitoring procedures, sanctions compliance, and historical behavior. Automated alerts flag deviations or anomalies, prompting manual investigation. Escalation and reporting protocols ensure that suspicious transactions are addressed in compliance with regulatory requirements. Failure to conduct due diligence can result in regulatory penalties, exposure to illicit funds, and reputational harm.

C) Accepting all transactions if the correspondent bank has a good reputation is insufficient. Reputation does not guarantee AML compliance or risk mitigation. Even reputable banks may have exposure to high-risk customers or jurisdictions.

D) Reviewing accounts only during annual audits is reactive and ineffective. Continuous, risk-based monitoring is required to detect suspicious activity in real-time and prevent illicit transactions from occurring.

The reasoning for selecting enhanced due diligence, ongoing monitoring, and assessment of AML controls emphasizes proactive management of correspondent banking risk. Institutions must continuously evaluate transactions, monitor patterns, and verify respondent banks’ controls. This approach ensures regulatory compliance, reduces exposure to illicit funds, and maintains the integrity of the financial system.

Question 71

Which of the following is MOST indicative of potential money laundering in insurance products?

A) Purchasing term life insurance with predictable premiums aligned with income

B) Making frequent large premium payments followed by early policy surrenders or partial withdrawals

C) Buying insurance for legitimate risk coverage and paying premiums annually

D) Paying premiums via payroll deductions from a verified salary

Answer: B) Making frequent large premium payments followed by early policy surrenders or partial withdrawals

Explanation

A) Purchasing term life insurance with predictable premiums aligned with income is low-risk. Term life insurance is straightforward, premiums are consistent with the policyholder’s declared income, and there is no immediate mechanism for converting funds into cash for illicit purposes. These predictable patterns generally do not trigger AML concerns unless other anomalies are present, such as unusually high coverage amounts relative to income or inconsistent funding sources.

B) Making frequent large premium payments followed by early policy surrenders or partial withdrawals is correct. This is a classic money laundering indicator in insurance. Criminals may use insurance products, particularly those with cash value components, to place illicit funds into the financial system. They then layer the money by transferring it through multiple products or accounts before converting it back into apparently legitimate funds through early surrender or partial withdrawal. Such transactions are indicative of placement and layering, as the funds are being introduced, moved, and eventually reintroduced in a form that appears legitimate. Detection involves monitoring policy funding patterns, identifying rapid changes in coverage or withdrawals inconsistent with policyholder profiles, and reviewing the sources of funds for premium payments. Financial institutions employ risk-based monitoring systems that flag unusual insurance transactions, especially those involving large sums, multiple products, or early surrenders. Enhanced due diligence includes assessing the policyholder’s source of funds, reviewing historical payment patterns, and analyzing ownership structures. Regulatory guidance emphasizes that insurance products with cash value or investment components are high-risk vehicles for money laundering, particularly when the transactions deviate from normal business patterns. Financial institutions must escalate suspicious activity for further investigation or SAR filing, documenting the rationale and analysis performed. The reasoning for selecting early surrenders and large premium payments underscores the potential for criminals to convert illicit proceeds into seemingly legitimate insurance payouts. By monitoring these behaviors proactively, institutions protect themselves from facilitating money laundering and ensure compliance with AML regulations. Continuous monitoring, risk-based reviews, and automated alert systems are essential for identifying potential insurance-related money laundering. Financial institutions must also train staff to recognize these red flags, verify sources of funds, and conduct thorough investigations of unusual transactions. Failure to detect such activity can result in regulatory penalties, reputational harm, and inadvertent facilitation of criminal proceeds.

C) Buying insurance for legitimate risk coverage and paying premiums annually is low-risk. When the purpose of the policy aligns with genuine risk management needs and payments are consistent with the policyholder’s profile, there is minimal AML concern.

D) Paying premiums via payroll deductions from a verified salary is also low-risk. Payroll deduction ensures traceability and aligns with documented income, reducing the likelihood of suspicious activity.

The reasoning for selecting large premium payments followed by early withdrawals highlights insurance as a medium for laundering illicit funds. Financial institutions mitigate this risk by applying enhanced due diligence, monitoring unusual funding and withdrawal patterns, verifying source of funds, and escalating suspicious activity for regulatory reporting. Proactive monitoring ensures compliance, prevents criminal exploitation of insurance products, and maintains financial system integrity.

Question 72

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

A) Conducting small, domestic cash deposits in routine patterns

B) Over-invoicing or under-invoicing goods in cross-border transactions to move illicit funds

C) Rapidly withdrawing funds from personal bank accounts

D) Making purchases of luxury goods for personal use with documented income

Answer: B) Over-invoicing or under-invoicing goods in cross-border transactions to move illicit funds

Explanation

A) Conducting small, domestic cash deposits in routine patterns is low-risk. These transactions reflect normal business operations or personal deposits and do not indicate sophisticated laundering through trade. While cash deposits may be monitored for structuring, they are not specific to trade-based money laundering.

B) Over-invoicing or under-invoicing goods in cross-border transactions to move illicit funds is correct. TBML involves manipulating the value or quantity of goods in international trade to disguise the movement of illicit funds. Over-invoicing allows excess funds to leave a country while appearing legitimate, and under-invoicing allows illicit proceeds to enter a country under the guise of legal trade. Additional TBML techniques include falsifying shipping documentation, misrepresenting the type or quality of goods, using shell companies or intermediaries, and conducting complex multi-country transactions to layer funds. Detection requires thorough verification of invoices, bills of lading, shipment records, and counterparties. Financial institutions implement automated trade monitoring systems to flag anomalies such as unusually high or low invoice values, frequent changes in shipment destinations, or unusual trading patterns inconsistent with historical activity. Human review validates these anomalies, assesses the legitimacy of trade partners, and evaluates whether the trade aligns with normal market practices. Regulatory guidance, including FATF Recommendations, emphasizes the importance of scrutinizing cross-border trade, verifying documentation, and conducting enhanced due diligence to mitigate TBML risk. Effective TBML detection also involves cross-referencing market prices, shipment volumes, and corporate records to identify inconsistencies. Escalation protocols require documenting suspicious activity, investigating anomalies, and filing SARs where appropriate. The reasoning for selecting this option highlights the sophistication of TBML, where criminals exploit trade mechanisms to integrate illicit funds into the legitimate economy. Institutions must combine technology, human expertise, and regulatory compliance to detect and mitigate TBML effectively. Monitoring trade-based activity requires specialized knowledge of industry norms, market values, and international trade practices. Automated systems, enhanced due diligence, and human analysis work together to identify suspicious patterns, prevent criminal exploitation of trade, and ensure compliance with AML regulations. Failure to detect TBML can lead to significant regulatory penalties, reputational damage, and the facilitation of illicit fund flows.

C) Rapidly withdrawing funds from personal bank accounts is associated with layering or integration but is not specific to trade-based money laundering. While it may indicate suspicious behavior, it lacks the trade context essential for TBML identification.

D) Making purchases of luxury goods for personal use with documented income is low-risk. Legitimate, verifiable purchases using documented income do not indicate illicit fund integration or laundering through trade.

The reasoning for selecting over-invoicing or under-invoicing emphasizes the complexity of TBML and the importance of thorough trade verification, monitoring, and human review. By combining automated systems with enhanced due diligence, institutions can detect suspicious trade activity, protect the financial system, and comply with AML standards.

Question 73

Which of the following is MOST indicative of suspicious activity in PEP (Politically Exposed Person) accounts?

A) Small, routine payments consistent with declared income

B) Frequent, large transactions inconsistent with the PEP’s known wealth or source of funds

C) Paying regular household bills from documented income sources

D) Making charitable donations consistent with historical giving patterns

Answer: B) Frequent, large transactions inconsistent with the PEP’s known wealth or source of funds

Explanation

A) Small, routine payments consistent with declared income are low-risk. Routine transactions that align with the customer’s income, lifestyle, and historical behavior do not trigger suspicion. These activities are predictable and traceable.

B) Frequent, large transactions inconsistent with the PEP’s known wealth or source of funds is correct. PEPs are high-risk due to their political influence, access to public funds, and potential involvement in corruption or bribery. Unusual high-value transactions, particularly those inconsistent with declared income or business activity, may indicate the placement or layering of illicit funds. Detection involves monitoring transaction frequency, volume, and geographic risk, and comparing activity with historical patterns. Enhanced due diligence includes verifying the source of funds, reviewing relationships with other PEPs or high-risk entities, and assessing the legitimacy of counterparties. Financial institutions use automated monitoring tools to flag anomalies, followed by human review to determine whether activity is suspicious and whether SARs should be filed. Regulatory guidance emphasizes the need for proactive monitoring, risk-based assessment, and periodic review of PEP accounts to detect and prevent financial crime. Escalation protocols ensure suspicious activity is investigated and documented, protecting both the institution and the financial system. The reasoning for selecting large, inconsistent transactions highlights the multidimensional nature of PEP risk and the importance of comprehensive monitoring, enhanced due diligence, and risk-based compliance.

C) Paying regular household bills from documented income sources is low-risk. Routine payments consistent with declared income and lifestyle do not indicate laundering.

D) Making charitable donations consistent with historical giving patterns is also low-risk. Charitable activity aligned with past behavior does not typically suggest suspicious activity unless other anomalies exist.

The reasoning emphasizes that PEP accounts require continuous monitoring and assessment. Deviations from expected financial behavior, particularly high-value, cross-border transactions, signal potential money laundering or corruption risks. Risk-based monitoring, verification of source of funds, and escalation of suspicious activity protect financial institutions and ensure compliance with AML regulations.

Question 74

Which of the following BEST describes the purpose of a Suspicious Activity Report (SAR)?

A) To document customer identity during onboarding

B) To notify regulators and law enforcement of transactions suspected to involve illicit activity

C) To report routine financial statements to management

D) To monitor payroll and vendor payments for internal purposes

Answer: B) To notify regulators and law enforcement of transactions suspected to involve illicit activity

Explanation

A) Documenting customer identity during onboarding is a KYC activity and does not constitute a SAR. KYC ensures that the institution knows who the customer is, but it is separate from reporting suspicious activity.

B) Notifying regulators and law enforcement of transactions suspected to involve illicit activity is correct. SARs are a primary AML compliance mechanism for reporting suspicious transactions. They provide detailed information about the parties involved, transaction types, amounts, patterns, and reasons for suspicion. SARs are confidential, and institutions are prohibited from disclosing filings to the customer to avoid tipping off potential criminals. Detection of suspicious activity relies on automated monitoring systems, human analysis, and risk-based reviews. Indicators may include unusual deposits, rapid fund transfers, inconsistent behavior with known profiles, transactions involving high-risk jurisdictions, or activity involving high-risk products such as cash-intensive businesses, insurance, or trade finance. Once suspicious activity is detected, institutions conduct investigations, document findings, and escalate for SAR filing. Filing a SAR allows law enforcement to analyze trends, detect criminal activity, and take enforcement action. Regulatory guidance emphasizes timely filing, accuracy, and confidentiality to protect the investigation. SARs also provide institutions with a defense against regulatory penalties by demonstrating proactive AML compliance. The reasoning for selecting notification to regulators highlights the central role of SARs in connecting suspicious activity to regulatory oversight and law enforcement. Effective SAR programs involve automated detection, human review, documentation, investigation, and secure reporting. Institutions must ensure staff are trained to recognize red flags, validate suspicious activity, and escalate appropriately. Continuous improvement of SAR processes ensures that evolving laundering techniques are detected, investigated, and reported in accordance with AML standards. Proper SAR management protects institutions from reputational risk, regulatory enforcement, and criminal exploitation of financial services.

C) Reporting routine financial statements to management is unrelated to SARs. Financial statements provide operational oversight but do not specifically report suspicious activity.

D) Monitoring payroll and vendor payments for internal purposes is an operational function and does not serve the regulatory purpose of a SAR.

The reasoning emphasizes that SARs are essential for AML compliance. They provide regulators and law enforcement with intelligence on potential financial crime, maintain confidentiality, and ensure timely action against illicit activity. Effective programs combine automated monitoring, human analysis, documentation, and escalation to meet regulatory obligations.

Question 75

Which of the following BEST indicates suspicious activity in real estate transactions?

A) Purchasing property at market value using verified income

B) Buying multiple high-value properties using shell companies without clear economic rationale

C) Paying property taxes from documented income sources

D) Renting a property for personal use with predictable payments

Answer: B) Buying multiple high-value properties using shell companies without clear economic rationale

Explanation

A) Purchasing property at market value using verified income is low-risk. When source of funds is legitimate and the transaction aligns with customer wealth, AML concerns are minimal.

B) Buying multiple high-value properties using shell companies without clear economic rationale is correct. Real estate is a common vehicle for money laundering due to its high value, liquidity, and ability to integrate illicit funds. Criminals often use shell companies, complex ownership structures, or offshore entities to obscure beneficial ownership and the origin of funds. Indicators include rapid acquisition of multiple properties, sudden changes in ownership, nominee directors, inconsistent funding sources, and cross-border transactions without legitimate business purpose. Detection involves verifying ownership, assessing transaction purpose, and evaluating financing structures. Financial institutions, real estate agencies, and legal professionals apply enhanced due diligence, risk-based monitoring, and escalation procedures for suspicious activity. Regulatory guidance emphasizes transparency in high-value or cross-border real estate transactions. Continuous monitoring, verification of source of funds, and reporting anomalies help prevent integration of illicit funds into the legitimate economy. Institutions analyze patterns of acquisition, financing methods, and ownership structures to detect suspicious real estate activity. Effective AML controls require a combination of automated monitoring, human review, and escalation protocols to identify and mitigate laundering risks. Failure to detect suspicious activity in real estate exposes institutions to regulatory penalties, reputational damage, and facilitation of criminal funds. The reasoning highlights that high-value acquisitions without economic rationale, especially via shell companies, are strong indicators of money laundering. Enhanced due diligence, monitoring, and verification ensure AML compliance and protect the financial system.

C) Paying property taxes from documented income sources is low-risk. Transparent funding sources reduce AML concerns.

D) Renting a property for personal use with predictable payments is low-risk. Routine transactions consistent with historical patterns do not indicate laundering.

The reasoning emphasizes the importance of monitoring high-value real estate transactions, verifying ownership and source of funds, and identifying rapid acquisitions or complex structures as red flags for laundering. Proactive AML measures mitigate risk and ensure regulatory compliance.

Question 76

Which of the following is MOST indicative of potential money laundering in cryptocurrency transactions?

A) Transferring small amounts of cryptocurrency to personal wallets for personal use

B) Conducting frequent, high-value transactions through multiple wallets, often with rapid conversions to fiat currency

C) Purchasing cryptocurrency from regulated exchanges with verified identity

D) Holding cryptocurrency long-term for personal investment

Answer: B) Conducting frequent, high-value transactions through multiple wallets, often with rapid conversions to fiat currency

Explanation

A) Transferring small amounts of cryptocurrency to personal wallets for personal use is low-risk. Such transactions are consistent with ordinary cryptocurrency ownership, investment, or personal use. These transfers are typically traceable and aligned with the individual’s known financial behavior.

B) Conducting frequent, high-value transactions through multiple wallets, often with rapid conversions to fiat currency is correct. This behavior is highly indicative of laundering activity in the cryptocurrency space. Criminals exploit the pseudonymous nature of blockchain transactions, moving illicit funds through multiple wallets and exchanges to obscure their origin. Rapid conversion to fiat currency allows funds to be reintroduced into the traditional financial system as seemingly legitimate proceeds. Detection requires blockchain analytics, monitoring for wallet clustering, transaction frequency, and volume relative to known customer activity. Enhanced due diligence involves identifying counterparty wallets, monitoring exchange activity, reviewing source of funds, and assessing the economic rationale for transactions. Regulators emphasize applying AML/CFT controls to cryptocurrency service providers, including KYC verification, transaction monitoring, and reporting suspicious activity. Risk-based approaches involve using automated transaction monitoring tools capable of identifying unusual patterns, rapid movement of assets, and transactions to high-risk jurisdictions or entities. Financial institutions must also train staff to recognize cryptocurrency-specific red flags such as mixing services, peer-to-peer transfers without clear purpose, and frequent use of privacy coins designed to conceal transaction flows. Escalation and SAR filing protocols are critical for transactions exhibiting these patterns, ensuring that suspicious activity is documented and reported to authorities while protecting the institution from regulatory exposure. The reasoning for selecting rapid, high-value, multi-wallet activity underscores the complexity of cryptocurrency laundering schemes, highlighting the need for sophisticated monitoring tools, human expertise, and regulatory compliance. Institutions implementing robust AML programs for cryptocurrency transactions reduce the risk of facilitating illicit activity while maintaining transparency and accountability in emerging financial technologies. Failure to monitor such transactions exposes institutions to regulatory penalties, reputational risk, and potential participation in criminal proceeds.

C) Purchasing cryptocurrency from regulated exchanges with verified identity is low-risk. Transactions through legitimate, regulated platforms provide traceability and transparency, reducing the likelihood of laundering.

D) Holding cryptocurrency long-term for personal investment is also low-risk. Long-term holding consistent with investment objectives does not typically indicate illicit activity unless unusual patterns or sources of funds are identified.

The reasoning emphasizes that cryptocurrency laundering is highly sophisticated, often involving multiple wallets, high-frequency transfers, and rapid conversion to fiat currency. Institutions mitigate this risk through analytics, KYC, monitoring, and escalation procedures, ensuring regulatory compliance and protection from facilitating illicit funds.

Question 77

Which of the following BEST indicates suspicious behavior in international wire transfers?

A) Sending predictable payments for invoices to verified suppliers

B) Rapid transfers of large sums to multiple high-risk jurisdictions with no apparent business purpose

C) Paying international invoices with verified contracts and legitimate counterparties

D) Sending occasional remittances consistent with historical personal activity

Answer: B) Rapid transfers of large sums to multiple high-risk jurisdictions with no apparent business purpose

Explanation

A) Sending predictable payments for invoices to verified suppliers is low-risk. Such transfers are routine in business operations, aligned with contractual obligations, and traceable. Predictability and documentation reduce AML concerns.

B) Rapid transfers of large sums to multiple high-risk jurisdictions with no apparent business purpose is correct. High-risk jurisdictions often have weak AML/CFT controls, limited regulatory oversight, and heightened corruption risks. Rapid, unexplained transfers may indicate layering, trade-based money laundering, or other illicit fund movement. Detection involves monitoring transfer frequency, amount, and destination, comparing activity to the customer’s historical profile, and reviewing the legitimacy of counterparties. Enhanced due diligence requires understanding the purpose of transfers, source of funds, and whether transactions are consistent with expected business or personal activity. Automated transaction monitoring systems flag unusual patterns, followed by human review to validate and escalate suspicious activity. Regulatory guidance emphasizes enhanced due diligence for transactions to high-risk jurisdictions, ensuring institutions identify and mitigate exposure to illicit activity. Escalation protocols and SAR filings ensure that suspicious activity is investigated and reported appropriately. The reasoning for selecting this option highlights geographic risk, unusual transaction patterns, and lack of economic rationale as critical indicators of potential money laundering. By continuously monitoring transactions, verifying sources of funds, and analyzing deviations from expected behavior, institutions protect themselves from regulatory penalties, reputational damage, and inadvertent facilitation of criminal proceeds.

C) Paying international invoices with verified contracts and legitimate counterparties is low-risk. Transparent, verifiable payments aligned with contracts are consistent with legitimate trade and do not indicate suspicious activity.

D) Sending occasional remittances consistent with historical personal activity is also low-risk. Transfers that match prior patterns and documented purposes do not indicate laundering.

The reasoning emphasizes that large, rapid transfers to high-risk jurisdictions without business rationale are a major red flag in AML. Institutions mitigate risk through transaction monitoring, enhanced due diligence, and proactive escalation, ensuring compliance with regulations and protecting the financial system.

Question 78

Which of the following is MOST indicative of structuring or “smurfing” in cash transactions?

A) Depositing a single large cash sum at a branch

B) Breaking up large cash deposits into multiple smaller deposits just below reporting thresholds

C) Making regular deposits consistent with business revenue

D) Depositing cash into a verified account consistent with historical patterns

Answer: B) Breaking up large cash deposits into multiple smaller deposits just below reporting thresholds

Explanation

A) Depositing a single large cash sum at a branch is detectable under standard reporting thresholds. While large cash deposits may be suspicious, they are reportable and traceable. This activity alone does not indicate structuring.

B) Breaking up large cash deposits into multiple smaller deposits just below reporting thresholds is correct. Structuring, or smurfing, is a common method of placement-stage money laundering. Criminals aim to avoid triggering currency transaction reports (CTRs) or other mandatory filings by fragmenting large sums into smaller, less noticeable amounts. Detection requires monitoring deposit patterns, amounts, timing, and frequency. Automated systems flag repetitive deposits just below thresholds, and human analysis evaluates the consistency with customer behavior and account profile. Indicators of structuring may include multiple deposits across different branches, accounts, or days, inconsistent with business or personal patterns. Enhanced due diligence involves verifying source of funds, historical deposit activity, and business or personal income profiles. Regulatory guidance mandates financial institutions to file SARs for suspected structuring activity, ensuring law enforcement is informed. Escalation protocols involve documentation, investigation, and reporting to regulatory authorities. The reasoning for selecting fragmented deposits highlights the placement-stage risk where illicit funds enter the financial system while avoiding detection. Institutions mitigate this risk through automated monitoring, staff training, risk-based analysis, and SAR filing. Failure to detect structured deposits increases regulatory risk and facilitates laundering. Comprehensive programs combine transaction monitoring, human review, and escalation procedures to identify and mitigate suspicious cash activity.

C) Making regular deposits consistent with business revenue is low-risk. Predictable deposits aligned with operational activity do not indicate structuring.

D) Depositing cash into a verified account consistent with historical patterns is also low-risk. Regular, traceable deposits consistent with account history do not signal suspicious activity.

The reasoning emphasizes the importance of detecting structuring to prevent placement-stage money laundering. Automated alerts, human analysis, and escalation protocols ensure early detection and regulatory compliance, protecting the financial system from illicit fund entry.

Question 79

Which of the following BEST represents a red flag for money laundering in a customer who uses private banking services?

A) Depositing salary payments into a personal account

B) Rapid, unexplained movement of large funds between multiple accounts inconsistent with known wealth or business activity

C) Paying mortgage or utility bills from documented income

D) Making predictable, routine deposits aligned with historical behavior

Answer: B) Rapid, unexplained movement of large funds between multiple accounts inconsistent with known wealth or business activity

Explanation

A) Depositing salary payments into a personal account is low-risk. Routine income deposits aligned with declared earnings are consistent with normal financial behavior and do not indicate suspicious activity.

B) Rapid, unexplained movement of large funds between multiple accounts inconsistent with known wealth or business activity is correct. Private banking clients often have access to complex financial instruments, multiple accounts, and international holdings. Criminals may exploit these capabilities to layer and integrate illicit funds. Detection involves monitoring frequency, volume, counterparty relationships, and geographic risk. Automated monitoring systems flag anomalies, and human review validates the activity against the customer’s known profile. Enhanced due diligence includes verifying source of funds, reviewing historical account behavior, assessing business activity, and identifying potential shell companies or nominees. Regulatory guidance emphasizes that private banking accounts are high-risk due to complexity and high-value transactions. Escalation protocols, SAR filing, and comprehensive documentation ensure suspicious activity is investigated thoroughly. The reasoning for selecting rapid, unexplained fund movement highlights layering-stage laundering, where illicit proceeds are transferred between accounts to obscure their origin. Institutions mitigate this risk through risk-based monitoring, transaction analysis, enhanced due diligence, and escalation processes. Early detection reduces exposure to regulatory penalties, reputational damage, and involvement in financial crimes. Financial institutions must combine automated alerts with human expertise to identify complex laundering schemes, particularly in high-net-worth or private banking accounts.

C) Paying mortgage or utility bills from documented income is low-risk. Regular payments consistent with documented income are predictable and traceable.

D) Making predictable, routine deposits aligned with historical behavior is also low-risk. Consistency with past behavior does not raise suspicion.

The reasoning emphasizes that unusual activity inconsistent with profile, particularly rapid movement of large funds, is a major red flag in private banking. Enhanced due diligence, monitoring, and escalation are critical for AML compliance.

Question 80

Which of the following is MOST effective for mitigating AML risk in correspondent banking?

A) Ignoring low-risk jurisdictions

B) Conducting enhanced due diligence, ongoing monitoring, and reviewing the respondent bank’s AML controls

C) Accepting all transactions if the correspondent bank has a strong reputation

D) Monitoring accounts only during annual audits

Answer: B) Conducting enhanced due diligence, ongoing monitoring, and reviewing the respondent bank’s AML controls

Explanation

A) Ignoring low-risk jurisdictions is insufficient. Even low-risk jurisdictions can be exploited through layering, structuring, or trade-based schemes. Neglecting monitoring exposes the institution to illicit activity and regulatory risk.

B) Conducting enhanced due diligence, ongoing monitoring, and reviewing the respondent bank’s AML controls is correct. Correspondent banking provides indirect access to domestic financial systems for foreign banks and their clients, creating exposure to money laundering, terrorist financing, and sanctions violations. Effective mitigation involves evaluating the respondent bank’s AML policies, ownership, governance, transaction history, and internal controls. Ongoing monitoring detects unusual activity, high-risk transactions, or changes in the respondent bank’s risk profile. Financial institutions implement automated monitoring, risk-based analysis, and human review to identify and escalate suspicious activity. Regulatory guidance, including FATF Recommendations, emphasizes continuous assessment, enhanced due diligence, and risk-based monitoring in correspondent banking relationships. Escalation procedures and SAR filing ensure suspicious activity is reported to authorities. The reasoning emphasizes proactive management, risk assessment, and verification of controls as central to mitigating AML risk. Institutions reduce exposure by continuously monitoring transactions, analyzing patterns, and assessing compliance with AML/CFT regulations. Failure to implement these measures can result in regulatory penalties, reputational harm, and facilitation of illicit activity.

C) Accepting all transactions if the correspondent bank has a strong reputation is insufficient. Reputation alone does not guarantee AML compliance or risk mitigation.

D) Monitoring accounts only during annual audits is reactive and ineffective. Continuous, risk-based monitoring is required to detect suspicious activity in real time.

The reasoning emphasizes the critical role of enhanced due diligence, continuous monitoring, and assessment of AML controls in correspondent banking. Institutions must actively manage risk, verify the respondent bank’s policies, and escalate anomalies to ensure compliance and reduce exposure to illicit activity.