Sanctions Due Diligence

Question 1

In March 2015, Commerzbank agreed to pay $1.45 billion in fines for violation of US laws and New York state law. Which of these actions would likely have resulted in a lower fine?

Answer 1

Commerzbank’s US employees having completed the voluntary self-disclosures

Question 2

How does the scope of KYC information used for sanctions compliance differ from that used for AML requirements?

Answer 2

The scope of KYC information used for sanctions compliance can be more limited than that for AML purposes.

Question 3

The three categories of key information to collect about customers are:

Answer 3

the customer, the products and services, and the jurisdiction/geography.

Question 4

Which statement reflects the meaning of “control” with regard to the concept of beneficial ownership?

Answer 4

“Control” recognizes that a person in whose name an account is opened with a bank is not necessarily the person who ultimately controls such funds.

Question 5

Which of the following statements is accurate concerning the concept of beneficial ownership?

Answer 5

Beneficial ownership refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.

Question 6

A financial institution can verify beneficial ownership information about a customer by:

Answer 6

requiring the customer to provide reliable documents, such as government-issued passports.

Question 7

Which of the following constitutes an operational challenge that can be encountered when attempting to identify beneficial owners?

Answer 7

Unreliable information from a new customer

Question 8

How is determining beneficial ownership for sanctions due diligence (SDD) different from determining beneficial ownership for anti-money laundering (AML) requirements in the United States?

Answer 8

Most AML requirements identify a beneficial owner as one that owns more than 25% of a legal entity, whereas OFAC applies the 50 Percent Rule to legal entity ownership for SDD.

Question 9

Which of the following is a significant difference between the EU’s European Best Practice Guidance and OFAC concerning sanctions due diligence and beneficial ownership?

Answer 9

The EU does not apply the aggregate rule to ownership interests separately maintained by sanctions targets.

Question 10

Which of the following statements is accurate concerning knowing the nature of a customer’s business and its products and services for the purpose of sanctions due diligence (SDD)?

Answer 10

Although the information is collected as part of the process of assessing AML risks, the way in which it is assessed for SDD is different.

Question 11

Customers whose businesses involve trade-related activities warrant close attention in regard to the nature of business and products and services because:

Answer 11

cargo can be transferred from one ship or other form of transport to another via another country before arriving at its final destination.

Question 12

Which item relates to a customer’s jurisdiction/geography as part of the customer’s sanctions risk profile?

Answer 12

Travel for work and travel funding

Question 13

Which of the following is a common error/assumption made about sanctions due diligence?

Answer 13

A customer that has no obvious presence in or direct link to a sanctioned country is a low sanctions risk.

Question 14

The four steps for gathering KYC information in the sanctions due diligence research model include:

Answer 14

assess, explore, organize, and present.

Question 15

Which of the following constitutes a known sanctions risk that is common in wealth management and private banking?

Answer 15

Customers tend to be powerful clients or involved with powerful clients.

Question 16

Which of the following constitutes a known sanctions risk that is common in commercial and investment banking?

Answer 16

Customers tend to use intermediaries.

Question 17

Free trade zones are a key risk area in trade-related activities because:

Answer 17

they commonly have inadequate sanctions safeguards and weak procedures to inspect goods and legal entities.

Question 18

Why are sanctions risks potentially higher and more difficult to identify when financial institutions offer correspondent banking to other firms?

Answer 18

The correspondent bank may provide services for individuals or entities for which it has neither verified the identities nor obtained any firsthand knowledge.

Question 19

Describe customer due diligence (CDD) as part of risk management.

Answer 19

CDD is a set of internal controls that enable a financial institution to establish a customer’s identity, predict with relative certainty the types of transactions in which the customer is likely to engage, and assess the extent to which the customer exposes the institution to a range of risks (i.e., money laundering and sanctions).

Question 20

Define sanctions due diligence (SDD).

Answer 20

Sanctions due diligence (SDD) is a process that focuses on the risks specific to sanctions, considering governance and risk assessment.

Question 21

What is the role of a sanctions compliance officer (SCO) within a sanctions compliance program?

Answer 21

The SCO is responsible for ongoing monitoring for sanctions compliance, is the contact point for all sanctions-related issues for internal and external authorities and is responsible for reporting suspicious transactions.

Question 22

What is the purpose of dual control?

Answer 22

The purpose of dual control is to protect against internal fraud and prevent internal control failure at a single point.

Question 23

When is enhanced due diligence (EDD) appropriate?

Answer 23

Due to the targeted nature of sanctions and the risks of links to terrorist financing, it is important to have in place solid governance frameworks for business activities in or related to sanctioned countries and terrorist financing networks. Therefore, firms need to develop appropriate risk assessment tools with which to identify high-risk customers and high-risk products.

Question 24

What are the three lines of defense within the governance structure of a sanctions compliance program?

Answer 24

The three lines of defense within the governance structure of a sanctions compliance program are (1) the business line (front line), (2) sanctions compliance and (3) internal audit.

Question 25

What is the key information to collect about customers to help reduce a firm’s sanctions compliance risk?

Answer 25

Key information to collect about customers includes the customer, the nature of the business, and the jurisdiction or geographical connections.

Question 26

Define beneficial owner.

Answer 26

The term “beneficial owner” has two different definitions depending on the context: (1) The natural person who ultimately owns or controls the funds in an account through which a transaction is being conducted or (2) The natural person(s) who ultimately owns or controls a customer or who exercises effective control over a legal person or arrangement.

Question 27

How does the Office of Foreign Assets Control (OFAC) 50% Rule prevent sanctions targets from creating complex corporate structures and spreading out their ownership holdings?

Answer 27

How does the Office of Foreign Assets Control (OFAC) 50% Rule prevent sanctions targets from creating complex corporate structures and spreading out their ownership holdings?

Question 28

How is the EU’s European Best Practice Guidance different from the Office of Foreign Assets Control (OFAC) regarding sanctions due diligence and beneficial ownership?

Answer 28

How is the EU’s European Best Practice Guidance different from the Office of Foreign Assets Control (OFAC) regarding sanctions due diligence and beneficial ownership?

Question 29

Explain the common error of “pass-through sanctions risk.”

Answer 29

Pass-through sanctions risk is the incorrect assumption that the sanctions risks associated with a customer’s affiliates or subsidiaries are simply a problem for the customer to assess and manage.

Question 30

What information is included in a bill of exchange?

Answer 30

A bill of exchange includes information such as the names of the exporter, importer, issuing bank, and the bank where the funds will be drawn.

Question 31

How is an end-user certificate used?

Answer 31

An end-user certificate is a shipping document used to certify that a buyer is the final recipient of the materials and is not planning to transfer the materials to another party.

Question 32

Define bill of lading.

Answer 32

A bill of lading is a required document that a carrier issues as a receipt of cargo. It includes the type and quantity of cargo, as well as the destination.

Question 33

What is correspondent banking?

Answer 33

Correspondent banking is the provision of banking services by one bank (the correspondent bank) to another bank (the respondent bank).

Question 34

Why are the sanctions risks potentially higher and more difficult to identify when a financial institution offers correspondent banking to other firms?

Answer 34

When a financial institution carries out financial transactions on behalf of customers of another institution, the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained any firsthand knowledge.

Question 35

Why is dual control sometimes referred to as “four eyes”?

Answer 35

Dual control is a principle whereby at least two employees are required to complete an internal control task—thus, “four eyes.”

Question 36

What does enhanced due diligence (EDD) do?

Answer 36

EDD identifies the direct and, more importantly, the indirect links to sanctioned entities and individuals.