Study Guide

Question 1

What is the correct response when high-risk indicators are present in a customer file?

Answer 1

Escalate the case to your compliance department.

Question 2

Why can’t you delay research or skip compliance steps to open an account?

Answer 2

It exposes your organization to significant risk and violates regulatory expectations.

Question 3

What is the primary purpose of KYC?

Answer 3

To manage financial crime risk

Question 4

What does ‘risk appetite’ mean in KYC?

Answer 4

The level of risk an organization is willing to accept

Question 5

What is a risk-based approach?
(Low, medium,high)

Answer 5

applies controls based on the risk level of the customer.

Question 6

Why is due diligence at onboarding important?

Answer 6

It builds a strong customer profile and monitoring and reduces risk.

Question 7

What are common KYC risk classification levels?

Answer 7

Low, Medium, and High.

Question 8

Who can be considered a customer in KYC?

Answer 8

Individuals, listed companies, private companies, trusts, partnerships, etc.

Question 9

Why are trusts higher risk?

Answer 9

They can obscure true ownership and business purpose.

Question 10

What is a PEP (Politically Exposed Person)?

Answer 10

An individual in a prominent public role, often posing higher financial crime risk.

Question 11

Why are financial institutions categorized as high to low risk?

Answer 11

Depending on their function—e.g., central banks (low risk), money transmitters (high risk).

Question 12

What is jurisdiction risk in KYC?

Answer 12

doing business in countries with high corruption, weak AML laws, or instability.

Question 13

What are red flags for jurisdiction risk?

Answer 13

Poor AML laws, high corruption, sanctions, secrecy jurisdictions, and shell company hubs.

Question 14

What are examples of high-risk jurisdictions?

Answer 14

Cayman Islands, British Virgin Islands, North Korea.

Question 15

What global sources help identify jurisdiction risk?

Answer 15

Transparency International’s Corruption Index, U.S. State Department Narcotics Report, UN, FATF.

Question 16

What are regional risk zones within a country?

Answer 16

Port cities, free trade zones, border areas, or regions known for financial/drug crimes.

Question 17

What is product risk in KYC?

Answer 17

used for illegal activity.

Question 18

What makes a product high risk?

Answer 18

Ease of anonymous use, rapid movement of funds, or access across jurisdictions.

Question 19

What is channel risk?

Answer 19

how a customer interacts with the institution—especially remote or non-face-to-face.

Question 20

Why is non-face-to-face contact a risk?

Answer 20

It limits identity verification and is harder to monitor for unusual behavior.

Question 21

What factors increase channel risk?

Answer 21

Internet banking, mobile onboarding, and transactions without physical presence.

Question 22

What are the Three Lines of Defense in KYC?

Answer 22

1. Front-line business units 2. AFC compliance/risk functions 3. Internal audit

Question 23

What is the role of the first line of defense?

Answer 23

Customer-facing teams that apply policies, perform due diligence, and implement controls.

Question 24

What is the role of the second line of defense?

Answer 24

Compliance functions like the MLRO who oversee AFC policies and manage risk.

Question 25

What is the role of the third line of defense?

Answer 25

Internal audit provides independent review of the effectiveness of controls.

Question 26

Why must the second line of defense avoid conflicts of interest?

Answer 26

To remain unbiased and ensure regulatory compliance is enforced properly.

Question 27

What is the benefit of planning your research in KYC?

Answer 27

You gather only what's necessary for decision-making—no more, no less.

Question 28

What does the 'Assess' step of the research process help you do?

Answer 28

Filter useful vs. irrelevant info and know when your review is complete.

Question 29

What is FATF Recommendation 10 about?

Answer 29

Institutions must take reasonable steps to verify beneficial ownership.

Question 30

How does sanctions compliance differ from AML ownership rules?

Answer 30

Each level of ownership is assessed separately for sanctions—not multiplied.

Question 31

When must an institution go beyond customer representations for UBO?

Answer 31

When required by jurisdiction or internal policy based on risk.

Question 32

What does a centralized beneficial ownership registry do?

Answer 32

Stores verified ownership info accessible by institutions and regulators.

Question 33

Can institutions rely on customer-certified ownership claims?

Answer 33

Yes, if local law allows and reliance is reasonable and documented.

Question 34

What is the 'Explore' step in KYC research?

Answer 34

It involves gathering and verifying customer info using tools, interviews, and screening.

Question 35

What does effective exploring involve?

Answer 35

Screening, negative news checks, verifying registration, and reviewing business presence.

Question 36

What tools can help in the Explore step?

Answer 36

Sanctions lists, mapping tools, business registries, websites, and investigator reports.

Question 37

When should you revisit the Explore step?

Answer 37

When organizing info reveals gaps or triggers the need for Enhanced Due Diligence (EDD).

Question 38

What is a risk-based escalation?

Answer 38

A decision to accept, reject, or investigate a customer further based on risk level.

Question 39

What should you do when a research gap is discovered?

Answer 39

Return to the Explore step to collect and verify more information.

Question 40

What does organizing customer info help with?

Answer 40

It filters important data and prepares it for decision-making reports.

Question 41

What decisions follow completion of due diligence?

Answer 41

Accept, reject, or do more research based on risk appetite.

Question 42

What does a customer risk rating model help determine?

Answer 42

Whether the customer can be accepted, must be rejected, or needs more review.

Question 43

What is residual risk in KYC?

Answer 43

The remaining risk after all controls and checks are applied.

Question 44

What should happen when customer deposit patterns change?

Answer 44

Conduct ongoing due diligence and reassess risk.

Question 45

What if customer behavior remains consistent?

Answer 45

Continue monitoring, but document and verify consistency to justify current risk rating.

Question 46

Why is ongoing due diligence necessary?

Answer 46

To detect changes in behavior that may indicate risk or money laundering.

Question 47

What’s a common KYC failure in high-volume environments?

Answer 47

Focusing on sales over compliance and skipping proper verification.

Question 48

What can personal stories in case studies highlight?

Answer 48

How shortcuts in KYC can lead to compliance failures.

Question 49

What is correspondent banking?

Answer 49

A relationship where one bank provides services to another in a jurisdiction where it lacks presence.

Question 50

Why is correspondent banking high risk?

Answer 50

The correspondent bank doesn’t know the customers of the respondent bank.

Question 51

What must banks assess before opening correspondent accounts?

Answer 51

Ownership, regulatory oversight, and risk level of the respondent bank.

Question 52

What services might be offered to low-risk respondent banks?

Answer 52

Cash management, international transfers, foreign exchange, payable-through accounts.

Question 53

How are high-risk respondent banks treated?

Answer 53

They may be restricted to non-credit, limited services.

Question 54

What is a UBO (Ultimate Beneficial Owner)?

Answer 54

A person who benefits from or controls a legal entity, even if indirectly.

Question 55

What happens if a UBO can't be identified?

Answer 55

Record senior managing officials as UBOs (U.S. and EU practice).

Question 56

Why is hidden UBO information a red flag?

Answer 56

It may indicate attempts to conceal ownership for illegal purposes.

Question 57

What does calculating beneficial ownership involve?

Answer 57

Tracing ownership across all parent companies to reach individuals.

Question 58

What’s the risk of complex ownership structures?

Answer 58

They can hide the real owners and facilitate financial crime.

Question 59

What is trade-based money laundering?

Answer 59

Using false pricing or invoices to disguise the movement of illicit funds through trade.

Question 60

Why be cautious with websites making bold claims?

Answer 60

They may be scams or fronts for illegal activity if not backed by account behavior.

Question 61

What kind of info should go into a KYC report?

Answer 61

Only relevant and risk-related information—filter out personal or unrelated details.

Question 62

Why is filtering information important in KYC?

Answer 62

It ensures reports are focused, clear, and useful for compliance decisions.

Question 63

What enhances the quality of risk assessment?

Answer 63

Using verified, relevant, and cross-checked information.

Question 64

Why are gatekeepers considered high-risk?

Answer 64

They may hide the real customer behind complex structures, requiring more due diligence.

Question 65

How do you know if you've done enough research?

Answer 65

When you've met your organization's standards and gathered sufficient risk-related info.

Question 66

What should you do with customer data?

Answer 66

Store securely, share only with those who need to know, and follow privacy laws.

Question 67

What is the 'Present' step in the KYC research model?

Answer 67

It's when you document, explain, and defend your findings and decisions.

Question 68

What is your duty if financial crime is suspected?

Answer 68

Report it to the authorities following your organization’s defined policies.