Chapter 2: International AML/CFT Standards

Question 1

Identify the three important tasks that FATF focuses on to fulfill its objectives.

Answer 1

Spreading the anti-money laundering message worldwide; monitoring implementation of the FATF Recommendations among FATF members; and reviewing money laundering trends and countermeasures.

Question 2

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

Answer 2

The identification of risks;

development of appropriate policies;

criminal justice system and law enforcement;

financial system and its regulation;

transparency of legal persons and arrangements; and

international cooperation.

Question 3

Describe FATF’s Recommendation 15 (2012) concerning new products, delivery mechanisms, and technologies.

Answer 3

Countries and financial organizations should assess the risks associated with the development of new products, business practices, delivery mechanisms, and technology. They should assess these risks prior to launching new products and take appropriate measures to mitigate the identified risks.

Question 4

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

Answer 4

Customer identification;

compliance with laws;

conformity with high ethical standards and local laws and regulations;

full cooperation with national law enforcement to the extent permitted without breaching customer confidentiality;

staff training; and

recordkeeping and audits.

Question 5

According to the Basel Committee’s January 2014 guidelines, “Sound Management of Risks Related to Money Laundering and Financing of Terrorism,” what controls should banks implement?

Answer 5

Risk analysis and governance;

three lines of defense;

customer due diligence and acceptance;

transaction monitoring systems and ongoing monitoring;

management of information; and

reporting of suspicious transactions and asset freezing

Question 6

According to the Basel Committee’s KYC guidance, what are the four key elements of a KYC program?

Answer 6

The four key elements of a KYC program are customer identification, risk management, customer acceptance policy, and ongoing monitoring.

Question 7

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

Answer 7

Risk management; customer acceptance and identification policies; and ongoing monitoring of higher-risk accounts.

Question 8

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

Answer 8

It specifically includes the category of trust and company service providers;

it covers all dealers trading in goods who trade in cash over 15,000 euros; and

it expands the definition of financial institution to include certain insurance intermediaries.

Question 9

How is a private banking account defined under Section 312 of the USA PATRIOT Act?

Answer 9

A private banking account is defined as an account with a minimum aggregate deposit of US$1 million; an account for one or more non-US people; and an account that is assigned to a bank employee acting as a liaison with the non-US person.

Question 10

What are the primary ways in which the EU’s Second Money Laundering Directive expanded the scope of the First Directive?

Answer 10

The EU’s Second Directive extended the scope of the First Directive beyond drug-related crimes; expanded the definition of “criminal activity” to cover not just drug trafficking, but all serious crimes;

brought currency exchanges and money remittance offices under AML coverage;

clarified that knowledge of criminal conduct can be inferred from objective factual circumstances;

provided a more precise definition of money laundering;

and widened the businesses and professions that are subject to the obligations of the Directive.

Question 11

According to Section 312 of the USA PATRIOT Act, the due diligence program for correspondent banks must address what three measures?

Answer 11

Determining whether enhanced due diligence is necessary;

assessing the money laundering risk presented by the correspondent account; and

applying risk-based procedures and controls reasonably designed to detect and report suspected money laundering.

Question 12

What are the FATF-designated thresholds that should trigger AML scrutiny?

Answer 12

The threshold that financial organizations should monitor for occasional customers is US$15,000 [Recommendation 10];

for casinos, including Internet casinos, it is US$3,000 [Recommendation 22]; and

for dealers in precious metals, when engaged in any cash transaction, it is $US15,000 [Recommendations 22-23].

Question 13

Describe FATF’s Recommendations regarding suspicious activity reporting.

Answer 13

Financial organizations must report to the appropriate FIU when they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to terrorist financing.

The financial organizations and employees reporting such suspicions should be protected from liability for reporting and prohibited from disclosing that they have reported such activity.

Confidentiality concerning suspicious activity reports (SARs) is critical to the effective functioning of the reporting regime.

Question 14

The Wolfsberg Group and the FATF recommend what enhanced due diligence before commencing or continuing a business relationship with high-risk customers?

Answer 14

For high-risk customers, both the Wolfsberg Group’s Correspondent Banking Principles and the FATF recommend

obtaining the approval of senior management to commence or continue the business relationship, as well as

requiring the first payment to be carried out through an account in the customer’s name with a bank subject to similar CDD standards.

Question 15

Identify the seven topics of international standards incorporated into the FATF 40 Recommendations.

Answer 15

AML/CFT policies and coordination [Recommendations 1-2];

money laundering and confiscation [Recommendations 3-4];

terrorist financing and financing of proliferation [Recommendations 5-8];

financial and nonfinancial institution preventative measures [Recommendations 9-23];

transparency and beneficial ownership of legal persons and arrangements [Recommendations 24-25];

powers and responsibilities of competent authorities and other institutional measures [Recommendations 26-35]; and

international cooperation [Recommendations 36-40].

Question 16

Describe FATF’s Recommendation concerning the risk-based approach.

Answer 16

Countries should start by identifying, assessing, and understanding the money laundering and terrorist financing risks they face.

Then they should take appropriate measures to mitigate the identified risks.

The risk-based approach allows countries to allocate their limited resources in a targeted manner in line with their own specific circumstances to increase the efficiency of the preventative measures.

Financial organizations should also use a risk-based approach to identify and mitigate their risks.

Question 17

Differentiate between what are referred to as FATF’s “black list” and “grey list.”

Answer 17

Countries and jurisdictions on the “black list” have strategic deficiencies that are so serious that FATF calls on its members and nonmembers to apply EDD and, in the most serious cases, countermeasures.

Countries and jurisdictions on the “grey list” are already actively engaging with FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.

Once a jurisdiction is under increased monitoring, it means it has committed to swiftly resolve the identified strategic deficiencies within an agreed-upon time frame, while the FATF keeps it under close scrutiny.

Question 18

At a high level, what are the criteria for becoming a FATF Member?

Answer 18

The jurisdiction should be strategically important based on quantitative (e.g., size of GDP, population) and qualitative indicators (e.g., impact on global financial system, level of AML/CFT risks faced) and additional considerations (e.g., level of adherence to financial sector standards), and FATF’s geographic balance should be enhanced by the jurisdiction becoming a member.

Question 19

Does the Basel Committee prohibit the use of numbered accounts?

Answer 19

No, numbered accounts should not be prohibited, but they should be subjected to exactly the same KYC procedures as other customer accounts.

KYC tests may be carried out by select staff, but the identity of customers must be known to an adequate number of staff if the bank is to be sufficiently diligent.

“Such accounts should in no circumstances be used to hide the customer identity from a bank’s compliance function or from the supervisors.”

Question 20

What must EU member countries do with the EU Directives?

Answer 20

EU members must transpose the Directives into law.

Question 21

What was considered a predicate offense for money laundering under the First EU Money Laundering Directive?

Answer 21

The First Directive of 1991 confined predicate offenses of money laundering to drug trafficking, as defined in the 1988 Vienna Convention. However, member states were encouraged to extend the predicate offenses to other crimes.

Question 22

What is the revised threshold for reporting suspicious transactions under the Fourth EU Money Laundering Directive?

Answer 22

Natural and legal persons trading in goods are covered to the extent that they make or receive cash payments of €10,000 or more (decreased from €15,000).

Question 23

What are the nine FATF-Style Regional Bodies?

Answer 23

Asia/Pacific Group on Money Laundering (APG);

Caribbean Financial Action Task Force (CFATF);

Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL);

Eurasian Group (EAG);

Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG);

Financial Action Task Force of Latin America (GAFILAT);

Inter-Governmental Action Group against Money Laundering in West Africa (GIABA);

Middle East and North Africa Financial Action Task Force (MENAFATF);

Task Force on Money Laundering in Central Africa (GABAC).

Question 24

Which of the FATF-Style Regional Bodies issued its own set of 19 recommendations, which were specific to the region?

Answer 24

The Caribbean Financial Action Task Force (CFATF)

Question 25

What permanent international organization was the first reach an agreement on model legislation aimed specifically at dealing with money laundering?

Answer 25

The Organization of American States (OAS), via the Inter-American Drug Abuse Control Commission

Question 26

What organization provides a forum for financial intelligence units around the world to improve cooperation and foster trust among countries to securely share sensitive information in the fight against money laundering and the financing of terrorism.

Answer 26

The Egmont Group of Financial Intelligence Units

Question 27

How does Section 319(a) of the USA PATRIOT Act affect non-US banks that have an account with a US financial organization?

Answer 27

Section 319(a) of the USA PATRIOT Act greatly strengthened the forfeiture powers over the funds of foreign persons and organizations. If the funds the United States pursues are deposited in a foreign bank that keeps an interbank account at a US bank, the United States may bring a case to forfeit the crime-tainted funds in the US account

Question 28

What is the role of OFAC?

Answer 28

OFAC, the Office of Foreign Assets Control, is the division of the U.S. Department of Treasury

that administers and enforces economic and trade sanctions

based on US foreign policy and national security goals

against targeted foreign countries, terrorists, international narcotics traffickers, and criminals engaged in activities related to the proliferation of weapons of mass destruction.

OFAC imposes controls on transactions and freezes foreign assets under US jurisdiction.

Question 29

Describe the Wolfsberg Group’s recommendation concerning a correspondent bank’s due diligence on a respondent bank.

Answer 29

According to the Wolfsberg Group, a bank’s due diligence on a respondent bank should be based on the respondent’s risk profile and the nature of the business relationship.

Due diligence should address specific risk indicators, such as the respondent bank’s geographic risk, ownership and management structures, customer base, and products and services offered.

Furthermore, the determination of the level and scope of due diligence that is required on a respondent bank should be made after considering the relationship between the respondent bank and its ultimate parent (if any).

Question 30

According to the Basel Committee, what are the responsibilities of the board of directors related to AML/CFT compliance?

Answer 30

The board of directors plays a critical oversight role.

The board should approve and oversee policies for risk, risk management, and compliance.

The board also should have a clear understanding of the money laundering risks, including timely, complete, and accurate information related to the risk assessment.

Along with senior management, the board should appoint a qualified chief AML officer with overall responsibility for the AML function and provide this officer with sufficient resources to execute his responsibilities to oversee compliance with the bank’s AML program.

Question 31

According to the Basel Committee, how are sound KYC policies and procedures critical to protecting the safety and soundness of banks?

Answer 31

The Basel Committee’s KYC guidance centers on the use of due diligence requirements to mitigate the dangers of corrupt customers.

Without due diligence, banks can be subject to reputational, operational, legal, and concentration risks, which can result in significant financial cost.

Sound KYC policies and procedures are critical to protecting the safety and soundness of banks, as well as the integrity of banking systems.

Question 32

What is the purpose of a memorandum of understanding in the context of financial intelligence units (FIUs) conducting investigations?

Answer 32

FIUs are tasked with receiving and analyzing SARs and maintaining close links with police and customs authorities.

They share information among themselves informally in the context of investigations, usually on the basis of memoranda of understanding.

The Egmont Group of FIUs has established a model for MOUs.

They are not typically used for obtaining evidence, but for obtaining intelligence that might lead to evidence.