ACAMS CAMS Certified Anti-Money Laundering Specialist (the 6th edition) Exam Dumps and Practice Test Questions Set 6 Q 101- 120 

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Question 101

What is the primary reason why a financial institution should conduct ongoing monitoring of politically exposed persons (PEPs)?

A) To ensure all PEPs are treated as high-risk customers regardless of their activity
B) To detect changes in behavior, transactions, or risk that may indicate potential abuse of public position
C) To satisfy auditor expectations even if risk levels remain unchanged
D) To comply with sanctions requirements that automatically apply to all PEPs

Answer: B

Explanation

A) The suggestion that all such individuals must be viewed the same way regardless of their behavior or context misunderstands risk-based assessment. This perspective incorrectly implies that every individual with a public role will always present elevated danger, which is not aligned with global regulatory expectations. It also eliminates the ability of institutions to differentiate between customers whose political exposure ended years ago and those still in active positions.

B) The fundamental purpose of monitoring individuals who hold or held influential political roles is to detect unusual behavior that might indicate misuse of influence or access to public assets. This includes tracking of account activity, significant balance fluctuations, foreign transfers, use of shell entities, or sudden changes in financial patterns. The rationale behind this approach is grounded in the possibility that such individuals, due to their access to state resources, policy decisions, or privileged economic data, may be vulnerable to corruption, embezzlement, or bribery, making continuous observation essential even when initial controls were already applied at onboarding.

C) Performing such follow-up solely for the benefit of external reviewers does not align with regulatory expectations or internal risk management principles. Auditor expectations cannot substitute for institutional responsibility to manage risk. Monitoring must be tied to real factors including behavior, geographic exposure, and transactional red flags, not to generalized assurance reporting.

D) Automatic application of sanctions to all individuals with such status is incorrect. Belonging to this group does not automatically create prohibited relationships under sanctions regimes. Only individuals specifically named under sanction programs fall into that category. In many countries, thousands of public officials may qualify under this category, but only a small number appear on restrictive lists.

The correct response corresponds to the principle that continuous observation of financial behavior is essential because the inherent exposure of individuals in public positions can evolve quickly. Engagement in bribery, abuse of office, or interactions with questionable intermediaries can be detected only through a dynamic process. This process centers on whether transactions remain reasonable compared to profile information, wealth origin, and ongoing risk assessment. Monitoring allows institutions to reevaluate risk classification when new data emerges, ensuring that early warning signs are not missed. This vigilance protects both the institution and the financial system from potential misuse.

Question 102

Which scenario most clearly represents the integration stage of money laundering?

A) Depositing cash into multiple small bank accounts to avoid attention
B) Placing illegal proceeds into a casino to exchange them for chips
C) Wiring funds from layered offshore entities into a legitimate investment project
D) Using cash smuggling to move illicit currency across borders

Answer: C

Explanation

A) A situation involving multiple small cash deposits reflects an early process that attempts to introduce physical currency into accounts while bypassing attention thresholds. This phase is characterized by the difficulty of injecting cash into the system without detection. The activity described is typically associated with the earliest point in the cycle and does not reflect the final stage.

B) The use of gaming establishments or similar venues to exchange currency for chips or tokens also occurs early in the laundering cycle. This activity introduces unlawful value into the financial system in a manner intended to disguise its origin. The method seeks to break the link between the criminal activity and the funds by converting them into other forms of value through a placement mechanism.

C) Routing funds through several organizational layers and then directing the proceeds into a legitimate development or investment vehicle signifies an advanced process. The value now appears to originate from corporate or investment structures rather than criminal origins. At this step, the funds re-enter the economy disguised as legitimate profits. This typically happens after the initial stages of depositing the money and creating complex structures that obscure the trail. By the time the funds arrive in a lawful enterprise, they appear integrated and disconnected from their illicit source.

D) Transporting currency physically across borders is a method used to introduce cash into a different jurisdiction, often at an earlier point of the process. It remains tied to the initial need to move physical proceeds to a location where they can be more easily placed into the financial system. It does not reflect the reinsertion of cleaned value into legitimate economic channels.

The correct response aligns with the understanding that reintroducing laundered value into legitimate business activities is the hallmark of the final stage. This stage gives the appearance of lawful wealth, enabling criminals to enjoy the proceeds without drawing attention. Such transactions may include investments in real estate, business acquisitions, or other ventures that mask illicit origins. Reinvestment through legitimate channels finalizes the laundering cycle.

Question 103

Why must an institution evaluate the effectiveness of its suspicious activity reporting program on a periodic basis?

A) To confirm that the number of filed reports matches industry averages
B) To ensure detection, escalation, and reporting processes remain aligned with evolving risks
C) To satisfy law enforcement requests for annual performance reviews
D) To reduce the volume of reports sent to regulators

Answer: B

Explanation

A) Simply comparing volume to external benchmarks overlooks the purpose of suspicious activity reporting programs. Filing frequency varies by customer base, business model, sector, and risk exposure. Institutions may naturally generate more or fewer reports than peers due to legitimate differences in operations. Matching external numbers is neither required nor prudent.

B) Processes for identifying unusual patterns, escalating concerns, and drafting reports must evolve alongside changing typologies, new products, technological shifts, and regulatory expectations. Without regular evaluation, detection systems may become outdated, internal communication may break down, or employees may lack updated guidance. The aim of periodic reviews is to verify that alerts capture emerging threats, investigative procedures are effective, and submitted reports meet quality standards that support law enforcement needs. This ensures that the institution continues to fulfill its obligations and mitigates the risk of blind spots.

C) Law enforcement agencies benefit from strong reporting quality, but they do not mandate annual performance audits for institutions. Their focus lies in receiving meaningful, timely information rather than requiring institutions to perform specific assessments for their benefit. Internal review obligations stem from regulatory expectations, not from direct requests by investigative bodies.

D) Reducing the number of reports is not the objective of reviewing program performance. Institutions should file whenever they detect reasonable grounds for suspicion. Evaluations help refine accuracy, but they do not aim to limit filings. Efforts to reduce reporting volume can create compliance failures if they suppress legitimate reports.

The correct response reflects the fact that suspicious activity reporting systems must adapt as risks evolve. Criminals continuously change methods, and institutions expand services and geographic reach. As such, mechanisms for detection, escalation, and reporting must be reviewed regularly to ensure they remain effective. Internal audits, feedback loops, staff training, and technology assessments all contribute to maintaining a robust reporting system.

Question 104

Which situation best illustrates a risk that should trigger enhanced due diligence for a correspondent banking relationship?

A) The respondent bank operates exclusively in a low-risk jurisdiction
B) The respondent bank lacks transparent ownership structures and serves high-risk customer segments
C) The respondent bank has undergone recent regulatory examinations with no findings
D) The respondent bank offers only limited deposit services to foreign clients

Answer: B

Explanation

A) Operating solely in a jurisdiction with established regulatory systems generally reduces risk. When the environment is characterized by strong supervisory frameworks, robust enforcement, and transparent practices, the likelihood of misuse decreases. This does not eliminate the need for due diligence, but it does not automatically require additional scrutiny.

B) Lack of clarity in ownership arrangements and servicing of segments vulnerable to criminal misuse are key factors that heighten exposure. This includes situations where beneficial owners are difficult to identify due to complex corporate layers or opaque structures. Coupled with customer types such as offshore entities, money service businesses, or high-risk political figures, the exposure increases substantially. These circumstances require deeper examination. Enhanced review allows the institution to evaluate controls, understand the customer base, assess monitoring capabilities, and ensure compliance frameworks are adequate before forming or maintaining the relationship.

C) Positive regulatory outcomes are favorable indicators. If recent inspections revealed no shortcomings, this tends to lower—not raise—risk. It shows that authorities have evaluated the institution and found systems to be satisfactory. This reassurance reduces the need for heightened scrutiny unless other risk factors emerge.

D) Offering limited services does not inherently produce elevated danger. If the range of products is uncomplicated or restricted, the degree of exposure may be lower, not higher. Straightforward account structures, limited foreign engagement, and narrow product lines often present fewer opportunities for misuse.

The correct response reflects that opaque ownership and high-exposure customer groups present increased danger in cross-border banking relationships. Correspondent arrangements allow foreign institutions access to financial systems, and deficiencies in transparency or customer controls create pathways for exploitation. Because the correspondent institution relies heavily on the respondent’s internal safeguards, unclear ownership or risky clientele demand additional scrutiny before proceeding.

Question 105

What is the key purpose of documenting the rationale behind a customer’s risk rating during onboarding?

A) To justify offering reduced due diligence to all clients
B) To provide a clear basis for future reviews and support consistent decision-making
C) To ensure that customers understand their internal AML risk classification
D) To meet data retention requirements for marketing analysis

Answer: B

Explanation

A) The intent behind recording risk considerations is not to justify minimal scrutiny. The documentation exists to explain how risk levels were determined, not to support weakening of controls. Applying uniform minimal review contradicts regulatory expectations and undermines the risk-based approach.

B) Maintaining written reasoning ensures transparency and supports reevaluation when customer behavior, products used, or circumstances change. Analysts can look back on previously identified factors to understand why particular conclusions were drawn. This promotes consistency, strengthens internal governance, and helps future reviewers assess whether the initial evaluation remains accurate. It also assists auditors and regulators in understanding how decisions were reached, supporting institutional accountability.

C) Internal classifications used to guide due diligence requirements are not typically communicated to clients, and doing so may even create risk by revealing monitoring practices. The purpose is internal risk management, not customer communication.

D) These records are not designed for marketing or commercial analytics. Their function is compliance, not sales. Using them for non-compliance purposes could violate privacy principles and undermine their intended role.

The correct response aligns with the fact that transparent and well-structured documentation improves oversight quality. Reasoned explanations help ensure that assessments are defensible, consistent, and easily revisited. As customer profiles change, institutions can compare new information against the original basis for the rating, enabling ongoing and informed risk management.

Question 106

A financial institution notices that a long-standing customer suddenly begins receiving large incoming international wire transfers from multiple unfamiliar counterparties located in different high-risk regions. What is the most appropriate first step?

A) Immediately terminate the customer relationship
B) File a suspicious activity report without any additional review
C) Conduct an internal investigation to understand the source and purpose of the activity
D) Ignore the activity because the customer has been with the institution for many years

Answer: C

Explanation

A) Ending the relationship without any prior analysis removes the institution’s ability to understand the activity, assess the credibility of explanations, or determine whether a filing obligation exists. Immediate termination is rarely the appropriate first action and may even conceal details that should have been reviewed. Such an abrupt action misses the structured process required for identifying unusual behavior, which involves internal research, customer outreach, and risk assessment before making a decision. Long-term customers can still engage in suspicious behavior, and eliminating the relationship preemptively may interfere with proper reporting obligations.

B) Filing a report without reviewing internal information or contacting the customer compromises the quality of reporting. Institutions are expected to analyze available internal data, transactional patterns, and customer background before submitting reports. Reports must contain meaningful narrative details, and skipping the investigation phase leads to poorly documented submissions. Regulators expect institutions to carry out a reasonable review before deciding whether a filing should be made. Therefore, submitting a report prematurely does not align with the structured investigative sequence required.

C) Reviewing internal systems and conducting an internal investigation is the most appropriate first step. This involves assessing prior transaction history, verifying whether new counterparties align with the customer’s stated purpose of the account, determining whether the geographic risk and amounts represent a departure from normal behavior, and documenting all findings. Institutions must compare the new activity with known customer information, including occupation, business profile, expected turnover, and past transactional patterns. An internal investigation creates a foundation for deciding whether the next steps should include outreach, escalation, or reporting. It also provides the institution with context to judge whether the change in activity can be reasonably explained.

D) Dismissing unusual behavior simply because the customer has maintained a long relationship conflicts with risk-based principles. Historical familiarity does not eliminate the possibility of misuse of the account. Criminal actors often intentionally maintain normal behavior over long periods before initiating suspicious activity to avoid detection. Ignoring abnormal patterns undermines monitoring obligations and exposes the institution to regulatory consequences.

The correct response reflects the requirement that unusual or unexpected activity must be reviewed and evaluated. Sudden high-value international transactions from unfamiliar sources located in elevated-risk areas represent a significant change in behavior, requiring internal analysis. By conducting a structured review, the institution can determine whether the activity has a legitimate explanation, requires customer contact, or meets the criteria for escalation to compliance and possible reporting. Internal analysis ensures that decisions are informed, documented, and aligned with proper governance practices.

Question 107

Which scenario most clearly represents the misuse of a correspondent banking account?

A) A respondent bank settles trade transactions for its commercial clients
B) A respondent bank allows foreign financial institutions to access the account without the correspondent’s knowledge
C) A respondent bank uses the account to process payroll transactions for employees
D) A respondent bank sends periodic requests for updated compliance documentation

Answer: B

Explanation

A) The processing of trade transactions for commercial clients is typically a legitimate and expected activity within correspondent banking. These arrangements allow banks without a physical presence in a foreign jurisdiction to facilitate cross-border payments or trade settlement. When the activity is consistent with the respondent’s business model, adequately documented, and subject to appropriate oversight, it does not represent misuse. Trade settlements fall within the normal scope of correspondent operations.

B) Permitting unapproved foreign institutions to indirectly access the account constitutes a significant abuse of the relationship. This scenario is commonly referred to as nested activity. The correspondent bank evaluates and approves the respondent bank based on its governance, monitoring capabilities, customer due diligence standards, and risk profile. When additional financial institutions—unknown to the correspondent—gain access to the account through the respondent bank, the correspondent loses visibility and cannot assess the underlying risk factors. This undermines transparency and creates an unacceptable vulnerability to money laundering, sanctions evasion, or illicit transfers. Such misuse violates the fundamental principles of correspondent banking and requires immediate escalation.

C) Processing payroll for employees is generally a normal component of banking operations. Payroll transactions, provided they align with stated business profiles and expected activity levels, do not represent a misuse of correspondent facilities. Internal salary transfers are routine, predictable, and easily understood by compliance teams, creating no inherent exposure.

D) Regularly seeking updated documentation supports ongoing due diligence and risk assessment. It ensures that the correspondent has current information about ownership structure, compliance programs, sanctions controls, and customer monitoring procedures. This behavior reflects prudent management rather than misuse.

The correct answer highlights a serious threat: indirect access to cross-border banking channels by unapproved institutions. When unauthorized entities use the respondent’s account to clear transactions, the correspondent cannot evaluate the risk or apply effective controls. Such misuse creates a blind spot in monitoring and regulatory compliance. Global guidance emphasizes that correspondent institutions must maintain transparency into who is accessing their banking infrastructure. Allowing nested activity without oversight can lead to significant regulatory penalties, reputational damage, and potential facilitation of illicit financial flows. Proper governance requires immediate investigation, remediation, and possibly termination of the relationship.

Question 108

A beneficial owner of a corporate customer is later discovered to be using several offshore trusts to obscure personal ownership and avoid visibility. What should the institution do first?

A) Immediately close the customer’s accounts
B) Request additional information to clarify the ownership structure and purpose of the trusts
C) Report the customer to law enforcement without reviewing internal data
D) Ignore the discovery because trust structures are common in some jurisdictions

Answer: B

Explanation

A) Terminating the relationship without learning the full nature of the structure prevents the institution from determining whether wrongdoing occurred, whether reporting is necessary, or whether additional clarity may resolve concerns. Abrupt closure removes the opportunity to properly document facts or escalate issues. Such decisions should only occur after the institution attempts to understand the ownership layers and determine whether the customer can provide legitimate explanations.

B) Seeking more information is the most appropriate first action. Offshore trusts are not inherently illicit, but when they appear designed to obscure ownership, the institution must clarify the structure. This includes requesting documentation about the trustees, settlors, beneficiaries, and purpose of the structure. The institution must determine whether the trusts are used for legitimate succession planning, asset protection, or tax planning—or whether they function as concealment mechanisms. Lack of transparency around beneficial ownership is a red flag that requires deeper review. Additional data helps determine whether further escalation, enhanced monitoring, or reporting is required.

C) Contacting law enforcement prematurely disregards internal assessment procedures. Institutions must first evaluate available records, review customer files, conduct research, and seek explanation from the customer. Reports are appropriate only when the institution has reason to suspect illicit activity, and that suspicion must be supported by documented analysis. Immediate external reporting without review constitutes a breakdown in internal governance.

D) The fact that trusts exist in some jurisdictions does not remove the obligation to understand them. Trusts can be used for legitimate purposes but may also be exploited to hide ownership, launder funds, or evade taxes. Normalization of the structure does not excuse lack of transparency. Each situation must be evaluated based on its own circumstances.

The correct response aligns with the principle of understanding ownership transparency as a cornerstone of due diligence. Institutions must always know who ultimately owns or controls corporate entities. When inconsistencies or concealment mechanisms appear, deeper inquiry is required. By seeking clarification, the institution builds the foundation for determining next steps, including whether behavior aligns with legitimate explanations or constitutes suspicious activity. Proper due diligence ensures risks are identified, documented, and managed before deciding on account termination or external reporting.

Question 109

A compliance officer observes that several customer accounts are repeatedly generating alerts for similar anomalous patterns. What is the most effective response?

A) Disable the alert rule to reduce false positives
B) Perform a thematic review to understand whether the repeated patterns indicate a broader risk
C) Instruct analysts to close alerts quickly to avoid backlog
D) Assume the monitoring system is malfunctioning

Answer: B

Explanation

A) Turning off rules to avoid repeated triggering is a dangerous approach that removes safeguards designed to detect unusual activity. Even when alerts are frequent, they may reveal underlying risks that require attention. Deactivating rules undermines the effectiveness of monitoring systems, exposes the institution to regulatory findings, and prevents identification of potential criminal activity.

B) Conducting a thematic analysis allows the institution to identify whether patterns observed across multiple accounts indicate a broader systemic issue, emerging criminal typology, or internal control weakness. Such analysis can reveal trends such as coordinated activity by related customers, misuse of products, gaps in onboarding, or new laundering techniques. Thematic review helps determine whether adjustments to risk scoring, rule calibration, enhanced training, or escalation is required. It strengthens the monitoring framework by transforming repeated triggers into meaningful insight.

C) Encouraging analysts to close alerts quickly undermines investigative quality. Analysts must evaluate each alert thoroughly, documenting findings and assessing whether escalation is required. Speed cannot be prioritized over the accuracy and completeness of review. Pressure to clear alerts rapidly risks missing red flags, producing inadequate documentation, and failing to detect suspicious conduct.

D) Concluding that the system is malfunctioning without examination is premature. While technical issues are possible, repeated alert patterns often indicate genuine transactional anomalies or risk correlations. Systems must be assessed methodically, and alerts must be investigated before assuming technical failure.

The correct answer aligns with the understanding that repeated alert patterns serve as a valuable indicator of underlying thematic risk. Observing consistent anomalies across accounts highlights the potential emergence of new laundering methods or gaps in controls. A thematic approach helps institutions take a systemic view rather than treating alerts in isolation. It strengthens governance, supports continuous system improvement, and enhances the ability to detect coordinated or evolving threats.

Question 110

A customer with a medium-risk rating begins transacting in a way that resembles structured cash deposits below reporting thresholds. What is the most appropriate response?

A) Upgrade the risk rating and immediately close the account
B) Conduct a review of the activity and consider escalation to the compliance team
C) Ignore the activity because the customer is not high risk
D) Request the customer to stop making cash deposits

Answer: B

Explanation

A) Changing the customer’s rating and immediately closing the account without analyzing the pattern overlooks the required investigative procedures. The institution must first understand the behavior, review history, and determine whether a legitimate explanation exists. Account closure may be appropriate later, but only after sufficient analysis and escalation are completed.

B) Reviewing the activity and conducting an escalation to compliance when necessary is the correct approach. Structured deposits are a recognized red flag, as they are often used to avoid reporting obligations. The institution must assess frequency, locations, deposit amounts, and how the activity compares to the customer’s known profile. After documenting findings, the compliance team can determine whether the behavior indicates potential criminal intent, requires enhanced monitoring, or meets criteria for suspicious activity reporting. This structured approach ensures regulatory obligations are met while maintaining appropriate governance.

C) Ignoring the pattern because the customer has a moderate risk classification violates monitoring requirements. Risk ratings guide due diligence but do not eliminate the obligation to investigate suspicious behavior. Even customers initially rated low or medium may later demonstrate concerning activity. Monitoring systems exist to detect such changes, and ignoring red flags leaves the institution vulnerable.

D) Asking the customer to stop depositing cash does not resolve the underlying concern. It may alert the customer to internal monitoring and influence future behavior in ways that conceal rather than clarify risk. The goal is not to modify customer behavior before understanding it, but to investigate and determine whether activity requires escalation.

The correct response reflects the principle that suspicious patterns must be investigated regardless of assigned risk levels. Structured deposits represent potential attempts to evade monitoring thresholds and therefore require review. By conducting a detailed assessment and escalating appropriately, the institution fulfills its obligations, preserves the integrity of the monitoring process, and ensures that decisions are informed, documented, and compliant with regulatory expectations.

Question 111

A bank discovers that a corporate customer has recently changed its beneficial ownership three times within six months, with each new owner located in a different high-risk jurisdiction. What should the bank do first?

A) Immediately close all accounts of the corporate customer
B) Request clarification and supporting documentation about the ownership changes
C) File a suspicious activity report without further review
D) Ignore the ownership changes because the company is legally registered

Answer: B

Explanation

A) Ending the relationship without first gathering information removes the opportunity to understand the motivations and legitimacy behind the frequent changes in ownership. Beneficial ownership changes can occur for legitimate reasons such as strategic acquisitions, mergers, or restructuring. Closing the accounts prematurely denies the bank the chance to assess the context, understand the corporate narrative, and compile adequate documentation. Abrupt termination without analysis may also cause the bank to miss elements that could prove essential for escalation or reporting.

B) Seeking supporting documentation and requesting explanations is the most appropriate initial step. Frequent changes in ultimate ownership—especially when the new controlling parties reside in elevated-risk jurisdictions—represent a significant red flag. However, before any filing or separation can be considered, the institution must first review the facts. This includes obtaining shareholder registers, updated corporate governance documents, details of acquisition transactions, and explanations regarding why the ownership has shifted so often. By examining these materials, the bank can determine whether the changes align with legitimate business needs or if they could indicate concealment, nominee ownership, or attempts to obscure sources of wealth and control. This inquiry helps shape whether escalation, enhanced due diligence, reporting, or relationship termination becomes necessary.

C) Submitting a report before conducting research violates the structured investigative framework institutions must follow. Reports must be based on reasonable suspicion supported by documented facts, internal review, and coherent narrative. Filing prematurely leads to incomplete or low-quality reporting, which undermines regulatory expectations and weakens the value of the information shared with authorities. Financial institutions are expected to evaluate, analyze, and compile relevant data before deciding whether suspicion exists.

D) Ignoring the ownership changes undermines the foundation of due diligence obligations. Registration alone does not guarantee transparency or legitimacy. Jurisdictions with lenient registration standards may include shell companies, nominee arrangements, or minimal verification of owners. A company can be legally registered while still engaging in activities that obscure control or facilitate illicit activity. The bank must always understand who ultimately owns or controls an entity, and changes to that information—especially sudden or frequent ones—require review.

The correct response reflects the expectation that institutions must maintain thorough knowledge of beneficial owners throughout the life of a business relationship. Sudden or repeated changes in ownership, particularly when involving multiple high-risk foreign jurisdictions, require immediate inquiry. By collecting documents, understanding motivations, and reviewing the structure, the bank can determine whether legitimate restructuring is taking place or whether the changes suggest concealment, layering, or money laundering typologies. Proper documentation of the inquiry supports future decisions, ensures regulatory compliance, and strengthens the risk assessment process.

Question 112

A customer who operates a cash-intensive business suddenly starts depositing checks from multiple foreign entities that appear unrelated to the customer’s stated business model. What is the most appropriate first action?

A) Treat the deposits as normal because they are not in cash
B) Conduct a review of the activity to determine whether it aligns with the customer’s expected profile
C) Ask the customer to stop depositing foreign checks
D) Automatically upgrade the customer to high-risk and close the account

Answer: B

Explanation

A) Assuming that behavior is normal merely because the deposits are not in physical currency is incorrect. Suspicious behavior is assessed based on alignment with the customer profile, not the type of instrument. A cash-based business suddenly receiving numerous foreign checks raises questions about the origin of the funds, business relationships, and legitimacy of foreign partners. Treating the activity as normal without evaluating it fails to meet monitoring obligations.

B) Reviewing the activity is the correct initial step. The institution must examine whether these foreign checks are consistent with known business operations. A cash-intensive customer typically handles local transactions and physical currency. Receiving foreign checks from entities without apparent business ties suggests potential third-party laundering, the use of accounts as pass-through vehicles, or undocumented commercial arrangements. The bank must review transaction history, business documentation, and any declared foreign relationships. If necessary, the bank should escalate to compliance for further assessment or reporting. The review phase is essential to determine whether there is a plausible explanation or whether unusual activity requires escalation.

C) Directing the customer to halt certain types of transactions without understanding the nature of the activity may unintentionally tip off the customer. Regulations prohibit alerting a customer to the institution’s suspicion. The institution must first understand whether the behavior triggers suspicion before giving any guidance. Asking the customer to stop an activity before completing review compromises the investigation and could influence the customer to alter behavior to conceal patterns.

D) Automatically raising the customer’s risk level and ending the relationship without evaluation undermines risk-based decision-making. Risk ratings guide monitoring requirements but do not substitute for proper analysis. Before any reclassification or termination can occur, the bank must investigate and document facts, understand the customer’s explanation, and consider whether reporting is warranted. Automatic escalation without review is not acceptable practice.

The correct response emphasizes that deviations from a known business model require internal review. Monitoring systems are designed to identify inconsistencies or unusual behavior, and when such patterns arise, the institution must analyze them. A structured review allows the bank to determine whether the foreign checks are legitimate business proceeds, part of new commercial arrangements, or indicative of suspicious activity. Through documented investigation, the institution protects itself, fulfills its compliance obligations, and ensures that any escalation or reporting is well-supported.

Question 113

What is the primary reason a financial institution must understand the expected activity of a customer at onboarding?

A) To ensure customers do not use the account for tax planning
B) To establish a baseline for monitoring future activity and detecting anomalies
C) To limit the customer’s ability to make large transactions
D) To simplify the process of filing regulatory reports

Answer: B

Explanation

A) The goal of gathering information during onboarding is not to prevent customers from engaging in legal tax planning. Customers may structure their finances for various lawful purposes. Institutions must distinguish between legal arrangements and activities that indicate concealment or evasion. Understanding expected activity is unrelated to prohibiting customers from managing their finances legitimately.

B) Establishing a baseline is essential. Knowing the customer’s business operations, expected transaction volumes, typical counterparties, geographic focus, and purpose of the account allows the institution to detect deviations later. Monitoring systems rely on comparing actual activity with expected patterns. When behavior diverges from what was documented, it may indicate growth, new partnerships, or potential misuse of the account. Without initial data, institutions cannot assess whether transactions appear normal or unusual. The absence of a baseline creates gaps in monitoring, weakens early detection capabilities, and hinders escalation decisions. Proper onboarding information ensures that ongoing monitoring functions effectively throughout the customer relationship.

C) Understanding expected activity does not grant the institution authority to limit legitimate large transactions. A customer may need to conduct substantial payments or transfers as part of normal business operations. The institution uses expected activity as a guide to assess whether large transactions align with known customer behavior. The goal is to detect anomalies, not to impose arbitrary restrictions on customer activity.

D) Simplifying regulatory reporting is not the primary reason for collecting expected activity information. While clear customer profiles may support stronger reporting when necessary, the main purpose is risk management, not administrative simplification. Institutions must understand their customers to detect and prevent misuse, not to prepare reports more easily.

The correct response aligns with the principle that customer due diligence forms the foundation of effective monitoring. Onboarding allows the institution to document the nature of the customer’s business, financial background, and expected activity. With this information, the institution can later assess whether transactions are normal, suspicious, or require additional analysis. Knowledge gained during onboarding ensures that monitoring systems operate intelligently and that escalations are based on identifiable deviations from known patterns.

Question 114

A correspondent bank discovers that its respondent bank is servicing a large number of high-risk money service businesses without previously disclosing this information. What should the correspondent bank do first?

A) Immediately terminate the correspondent banking relationship
B) Request details about the respondent’s customer due diligence, monitoring practices, and list of such businesses
C) File a suspicious activity report without seeking any clarification
D) Ignore the issue as long as transactions settle normally

Answer: B

Explanation

A) Ending the relationship immediately, without understanding the respondent’s controls, misses the structured process required for evaluating risk. While servicing large numbers of high-risk entities represents a serious concern, the correspondent must first assess whether adequate controls exist. Abrupt termination prevents understanding whether risks can be mitigated or whether the respondent bank’s internal framework is sufficient.

B) Asking for detailed information is the correct first step. The correspondent must understand how the respondent evaluates, approves, and monitors these high-risk entities. This involves reviewing customer onboarding practices, beneficial ownership verification, transaction monitoring systems, geographic exposure, and escalation procedures. The correspondent must determine whether the respondent’s practices meet standards that protect the correspondent from indirect exposure to high-risk customers. Transparency is essential because correspondent banks rely on the respondent’s controls to mitigate risk. Requesting information ensures the correspondent can evaluate whether continued relationships are sustainable or whether escalation, enhanced due diligence, or potential termination is required.

C) Filing a report without gathering information results in incomplete or inaccurate submissions. Before reporting any suspicion, the correspondent must conduct internal review, document findings, assess risk context, and understand the nature of the respondent’s customer base. Only after this process can the correspondent determine whether activity appears suspicious or whether the respondent’s controls are sufficient.

D) Ignoring the issue is not acceptable. High-risk businesses present elevated exposure to money laundering. Without visibility into how the respondent manages these clients, the correspondent is exposed to potential misuse of its account. Institutions must not rely solely on smooth transaction processing, as operational efficiency does not equate to compliance strength.

The correct response reflects the principle that transparency and understanding of underlying customer relationships are critical in correspondent banking. When the correspondent discovers high-risk client segments that were not disclosed previously, it must review the respondent’s controls before deciding whether to escalate, enhance due diligence, or exit. Understanding the respondent’s practices strengthens risk management and ensures compliance with global standards.

Question 115

A customer begins making rapid movement of funds through multiple accounts within the same institution, with transfers occurring daily and balances returning to near zero at the end of each day. What should the bank do first?

A) Ignore the activity because the funds remain within the institution
B) Conduct an internal review to determine whether the pattern is consistent with the customer’s business
C) Immediately freeze all the customer’s accounts
D) Advise the customer to slow down the frequency of transfers

Answer: B

Explanation

A) Dismissing the activity because the funds do not leave the institution fails to acknowledge that suspicious behavior can occur within internal channels. Rapid funds movement may indicate layering, concealment attempts, or the use of accounts as pass-through vehicles. Internal movement does not eliminate potential risk. Monitoring applies to intra-bank transfers just as it does to external cross-border or inter-institutional activity.

B) Reviewing the activity is the correct first step. Rapid movement of funds in and out of accounts, especially when balances revert to zero frequently, is a known red flag. The institution must assess whether the customer’s business model supports such movement. For example, money service businesses or certain trading companies may have high-volume flows. However, if the customer’s declared business does not involve such activity, the behavior may represent layering or attempts to obscure audit trails. The internal review should examine the purpose of the accounts, historical activity, counterparties involved, and whether the transfers appear to have legitimate economic purpose. The investigation forms the basis for deciding whether escalation or reporting is warranted.

C) Freezing accounts without conducting analysis or seeking guidance from compliance may violate legal standards and prematurely disrupt a customer’s operations. Account freezing has serious consequences and typically requires regulatory, internal, or legal justification, depending on the jurisdiction. It must be based on clear evidence of ongoing criminal activity or legal requirements—not solely on preliminary review.

D) Telling the customer to reduce transfer frequency risks tipping off the customer. Regulations prohibit alerting individuals that their behavior has triggered scrutiny. Providing such guidance before investigating may compromise the review and hinder the institution’s ability to identify suspicious conduct.

The correct response aligns with the principle that internal investigation is necessary when unusual behavior arises. Rapid cyclical movement of funds may indicate structural laundering, account misuse, or third-party transactions inconsistent with customer profiles. By conducting a thorough review, documenting findings, and assessing whether escalation is necessary, the institution maintains compliance integrity. Understanding whether behavior reflects legitimate business patterns or suspicious conduct ensures proper governance, accurate reporting, and effective risk management.

Question 116

A bank notices that a newly onboarded customer has begun initiating multiple international wire transfers to several unrelated individuals in different high-risk jurisdictions. The amounts vary widely, and the customer previously stated they had no international business dealings. What should the bank do first?

A) Request an explanation and documentation supporting the purpose of the transfers
B) Automatically classify the customer as high-risk now that international activity is present
C) Close the customer’s account immediately
D) Assume the customer’s business expanded and treat the activity as normal

Answer: A

Explanation

A) The appropriate first step is to gather information and request documentation that clarifies the nature of the international transfers. When a new customer’s activity diverges from what was initially stated during the onboarding process, the bank must investigate to determine whether the behavior has a legitimate basis. Requesting an explanation helps the institution evaluate whether the customer’s circumstances changed, whether new business relationships developed, or whether the transfers represent potentially suspicious behavior. The institution must obtain invoices, contractual agreements, business correspondence, or other relevant documents to assess legitimacy. This initial inquiry forms the foundation for further analysis, and the bank must document both the request and the customer’s reply as part of its due diligence record.

B) Elevating the customer’s risk rating without first understanding the activity is not the correct initial step. Risk scoring modifications should follow a structured evaluation process. A bank must first collect facts, understand new behavior, and determine whether the new information warrants risk reclassification. Re-scoring is possible after review, but it must not precede information gathering. Premature adjustments distort the risk framework, may overestimate or underestimate exposure, and fail to comply with risk-based decision-making principles.

C) Terminating the relationship without review is inappropriate. Closing an account is an extreme measure generally reserved for instances where the customer fails to provide explanations, where responses indicate possible criminal activity, or where the institution’s risk appetite cannot accommodate the relationship. Immediate closure prevents the bank from gathering critical information that could support suspicious activity reporting. It also eliminates the opportunity to evaluate whether behavior has legitimate explanations. Without proper investigation, the institution risks misunderstanding the situation and failing to comply with procedural guidelines requiring assessment prior to exiting relationships.

D) Assuming that the customer expanded their business and treating the activity as routine contradicts due diligence requirements. The customer explicitly stated that they had no international exposure. Therefore, international wire transfers to multiple unrelated recipients in high-risk areas represent a significant deviation. Treating such deviations as normal results in ineffective monitoring, inadequate oversight, and failure to detect potential money laundering patterns. Banks must investigate any activity inconsistent with declared customer profiles.

The correct response rests on the fundamental principle that institutions must understand unusual deviations from expected patterns. When a customer who declares no international activity begins sending multiple foreign transfers—especially to destinations with elevated risks—this is a red flag requiring immediate inquiry. By seeking justification and supporting documentation, the bank collects the information it needs to determine whether the activity is suspicious or legitimate. This process supports effective monitoring, ensures regulatory compliance, and forms the basis for potential escalation or reporting.

Question 117

A trust account held at a private bank shows frequent withdrawals by a trustee who lives in a high-risk jurisdiction. The withdrawals consist of large cash amounts, and the trustee refuses to provide details about the trust beneficiaries. What should the bank do?

A) Investigate the withdrawals and request information on the beneficiaries and trust purpose
B) Accept the trustee’s privacy concerns and continue servicing the account
C) Allow withdrawals but increase the account’s monthly service fees
D) Report the activity immediately without any internal review

Answer: A

Explanation

A) When faced with unexplained large cash withdrawals from a trust account, the bank must conduct an investigation and request clarification about the nature of the withdrawals and information regarding beneficiaries. Trusts can be used for legitimate purposes such as estate planning, asset protection, and tax structuring. However, they can also be misused for concealment of ownership, movement of illicit funds, and obfuscation. The trustee’s refusal to provide beneficiary information is highly concerning because financial institutions must know who ultimately benefits from the funds. Understanding the purpose of the trust, its structure, and its controlling parties is essential for risk assessment. Investigating the withdrawals and requesting details aligns with due diligence standards and supports the institution’s monitoring obligations.

B) Accepting the trustee’s refusal to disclose beneficiary details contradicts core compliance principles. While trusts provide legitimate privacy benefits in certain circumstances, financial institutions still require visibility into beneficial owners and trust purposes to comply with regulatory requirements. Banks cannot operate on blind trust, especially when large volumes of cash transactions are present and associated with a high-risk jurisdiction. Failure to inquire further constitutes neglect of risk-based monitoring obligations and may expose the institution to significant regulatory penalties.

C) Increasing service fees does nothing to address the risk or gather necessary information. Modifying fees in response to suspicious behavior is entirely inappropriate and demonstrates a misunderstanding of risk management responsibilities. Adjusting costs does not mitigate exposure to potential money laundering and distracts from the requirement to conduct proper due diligence and investigation.

D) Filing a report immediately without internal review is premature. Reporting requires specific factual support, documented efforts to gather information, and reasonable suspicion. If the bank has not investigated the activity internally, the report may lack essential details and context. Proper escalation requires investigation first, then determination of whether the activity is suspicious. Reporting before review violates internal procedure and results in poor-quality filings.

The correct answer reflects the fundamental responsibility of the bank to understand trust structures, beneficiaries, and fund movements. High-risk jurisdictions and cash withdrawals increase exposure, making investigation necessary. Only after proper review can the institution assess whether the activity warrants escalation, enhanced monitoring, or reporting.

Question 118

A customer files several insurance claims within a short period, each for different types of lost or stolen property. The claims appear inconsistent with previous customer behavior. What should the institution do first?

A) Conduct an internal review of the customer’s claim history and supporting documentation
B) Deny all current and future claims immediately
C) Report the customer to law enforcement
D) Assume the customer is experiencing a streak of unfortunate events

Answer: A

Explanation

A) The appropriate first step is to review the customer’s history and supporting claim documentation. A series of unrelated claims filed in a short period may indicate fraud or misuse of insurance services. Before taking any drastic action or reporting, the institution must understand whether the claims are supported by legitimate evidence. Reviewing past claims, verifying details of each incident, and assessing whether the pattern represents legitimate misfortune or manipulation is central to the investigative process. This internal review establishes the context necessary for determining whether to escalate.

B) Denying all claims without investigation violates fairness standards and procedural obligations. Claims must be assessed on their individual merits. Automatically rejecting them deprives the customer of due process and may expose the institution to regulatory consequences for arbitrary decisions. Denial should only occur after evidence is evaluated and inconsistencies are documented.

C) Reporting the customer without review is premature. Institutions must complete internal investigative steps, document findings, and establish reasonable suspicion before making any referral. Without proper review, reporting may be incomplete or incorrect, and authorities may not receive sufficient details to evaluate the case.

D) Assuming the customer is unlucky neglects the responsibility to monitor for patterns indicative of fraud or abuse. While it is possible for multiple losses to occur, the institution cannot assume this without reviewing details. Ignoring the pattern undermines the integrity of fraud prevention systems and exposes the institution to risk.

The correct response emphasizes that internal review is the foundation of any investigative process. When claim activity deviates from historical patterns, reviewing documentation ensures that decisions are grounded in evidence. Only after understanding the situation can the institution decide whether escalation, denial, or reporting is warranted.

Question 119

A customer who operates a small import business suddenly starts receiving multiple round-number wire transfers from individuals in unrelated countries. The customer provides vague explanations and cannot produce invoices. What should the financial institution do?

A) Conduct enhanced due diligence to assess the legitimacy of the transactions
B) Accept the explanation since round-number payments are common
C) Allow the transfers to continue without further inquiry
D) Close the customer’s account without any review

Answer: A

Explanation

A) Enhanced due diligence is necessary when incoming transfers appear inconsistent with the declared nature of the customer’s business. Round-number transfers are often associated with layering or movement of funds without economic purpose. The inability to produce invoices or provide clear information raises significant concerns. Enhanced due diligence allows the institution to collect additional documents such as contracts, supplier information, customs papers, and descriptions of business processes. This deeper analysis enables the institution to assess risk more accurately and determine whether reporting is required.

B) Accepting vague explanations is inappropriate. Round-number transfers are not typical in most commercial settings, where payments usually reflect specific invoice amounts. Accepting such transfers without questioning contradicts monitoring obligations and allows suspicious activity to continue unchecked.

C) Allowing the transfers to continue without inquiry constitutes serious compliance failure. Banks must investigate deviations from customer profiles, especially when incoming funds originate from unrelated foreign senders. Failure to inquire prevents the bank from understanding whether the customer’s account is being misused.

D) Closing the account without reviewing the activity and conducting proper due diligence is premature. The bank must first investigate, request documents, and evaluate whether the behavior suggests money laundering. Termination decisions must follow review—not precede it.

The correct response reflects the need for enhanced scrutiny when business activity diverges from expectations. By performing enhanced due diligence, the institution gathers information required to assess legitimacy, escalate concerns, or file reports.

Question 120

A financial institution detects that a long-time customer has begun sending frequent small-value transfers to several individuals located in conflict zones. The customer has no declared ties to these regions. What should the institution do first?

A) Review the transactions and request clarification from the customer
B) Assume the transfers are harmless due to their small amounts
C) Block all transfers immediately
D) File a suspicious activity report without reviewing the circumstances

Answer: A

Explanation

A) The institution must review the activity and seek clarification. Transfers to conflict zones present significant risk because such areas are commonly associated with terrorist financing, sanctions exposure, or exploitation by illicit networks. Even small-value transfers can indicate structuring designed to evade attention. The institution must analyze transaction history, examine recipient information, and request the customer’s explanation. Gathering documentation or correspondence supporting the purpose of the transfers is essential. This step ensures the institution acts on factual understanding rather than assumptions.

B) Assuming the transfers are harmless due solely to small amounts ignores risk indicators associated with the destination countries. Small transactions can be used to fund extremist groups, circumvent financial monitoring, or support prohibited entities. Assessing risk requires context, not reliance on transaction size alone.

C) Blocking transfers before conducting review or obtaining internal guidance may violate customer rights and internal procedures. Transaction blocking typically follows legal requirements, sanctioned entity detection, or regulatory mandates—not preliminary observations. Premature blocking may constitute an inappropriate restriction on customer activity without sufficient basis.

D) Reporting without reviewing the circumstances is premature. Reports must include detailed narratives backed by evidence, analysis, and documented attempts to obtain information. Filing prematurely may result in incomplete reporting, weakened quality, and failure to provide authorities with the information they need.

The correct response highlights that investigating deviations from customer profiles is critical to determining whether risk exists. Transfers to conflict zones require careful scrutiny, documentation, and analysis. By reviewing the transactions and requesting clarification, the institution ensures its response is informed, compliant, and aligned with risk-based principles.