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Building an AFC Compliance Program Flashcards

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1
Q

First Line of Defense

A

Reports directly to Senior Management
-Client Relationship mgmt
-Daily Operations
-Quality Control
-Quality Assurance
-Maintenance Control of Framework
-Implements AFC policies set by second line
-Reports to senior management

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2
Q

Second Line of Defense

A

Reports Directly to Senior Management
-AFC compliance and oversight
-managing and testing compliance controls
-independent from business units

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3
Q

Third Line of Defense

A

-Reports Directly to the Board of Directors or Audit Committee
-Internal Audit
-Independent audit of the first two lines
-Safeguards financial institution at the macro level

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4
Q

Senior Management Responsibilities:

Executes AML Program

A

Senior management is ultimately responsible for implementing and overseeing the AML program. They execute the program, ensure policies and procedures are integrated into operational areas, and communicate all compliance expectations to staff.

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5
Q

Senior Management Responsibilities:

Promotes Governance

A

A robust governance structure provides clarity of roles and responsibilities, enhanced accountability, effective oversight and monitoring, promoting a culture of compliance and adaptability to regulatory changes.

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6
Q

Senior Management Responsibilities:

Addresses Deficiencies

A

Senior management takes responsibility for any failures in the AML program, addressing compliance deficiencies, implementing corrective actions, and reporting progress to the board.

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7
Q

Senior Management Responsibilities:

Approves Compliance Reports

A

It reviews and approves compliance reports, including SARs and compliance assessments, ensuring accuracy and transparency.

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8
Q

Senior Management Responsibilities:

Monitors Compliance

A

Senior management monitors compliance with AML policies and regulations, ensuring regular reports on the program’s status, including risk assessments and any significant incidents, are submitted to the board and relevant committees.

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9
Q

Enterprise-wide Risk Assessment (EWRA)

A

Helps organizations evaluate risk exposure to financial crime, including:
-Money laundering
-Terrorist financing
-Proliferation financing
-Sanctions evasion
-Tax evasion
-Bribery and corruption
-Some organizations include fraud operational risks

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10
Q

EWRA Residual Risk Equation

A

Inherent Risk-Control Effectiveness=Residual risk

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11
Q

Questions to ask when considering one’s role relative to the EWRA

A

-How does my organization establish its risk infrastructure?
-What risks am I facing in my role and how are these managed?
-What controls are in place to mitigate these risks?

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12
Q

Risk-based approach:

Introduction

A

Introduced by FATF in 2007 to help organizations align with their risk appetite:

-Identifying, assessing, understanding risks
-Applying appropriate measures to mitigate them

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13
Q

Risk-based approach:

Recognize and Assess all types of risk

A

Accurately judging a customer’s potential involvement in financial crime is an important prerequisite for the risk-based approach. Organizations should conduct due diligence on business operations, industries, customer characteristics, and geographic exposure, to obtain adequate, complete, and truthful customer information for analysis.

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14
Q

Risk-based approach:

Obtain Adequate, complete consumer information

A

Financial crime risk is just one element of risk organizations face. Others include operational risk, credit risk, and market risk. By combining these risk management processes, risk managers can assess financial crime risks and allocate resources to mitigate the highest risks.

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15
Q

Risk-based approach:

Obtain commitment from senior management and employees

A

A risk-based approach focuses effort with the greatest need and impact. It requires the full commitment and support of senior management, and the active cooperation of all employees.

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16
Q

Risk-based approach:

Implement measures to mitigate and monitor risks

A

Adopting a risk-based approach requires implementing a risk-management process to handle financial crime. This process encompasses recognizing the risks, assessing them, and developing control strategies to mitigate and monitor them.

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17
Q

Risk-based approach:

Allocate Resources Based on Risk Exposures

A

Using a risk-based approach allows the organization to allocate resources effectively. These decisions determine the level and frequency of customer profile research and updates.

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18
Q

Examples of Risk-based Approaches

A

-Ensure Matrix management across all risk disciplines
-Recognize, assess, develop controls, to mitigate and monitor risks
-Implement risk management process
-Obtain commitment from senior management and employees
-Focus effort and resources on greatest need
-Obtain adequate, complete customer information

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19
Q

Customer Risk Assessment (CRA) vs EWRA

A

CRA is a risk assessment at the individual customer level, while EWRA is organization-wide

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20
Q

A CRA

A

assesses individual customer and business relationship risk exposure, uses KYC information to assess risk, and determines simplified, standard, or enhanced due diligence.

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21
Q

An EWRA

A

assesses organizational risk exposure, helps allocate resources, determines residual risk to guide AML/CFT framework design, identifies inherent risks, and assesses controls.

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22
Q

Initial CRA

A

-At onboarding
-Establish customer profile
-Build the foundation for future monitoring

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23
Q

Ongoing CRA

A

Triggered by material changes in risk factors, such as:
-Business activity
-Ownership
-Jurisdiction

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24
Q

Periodic CRA

A

Scheduled reviews based on:
-Risk level
-High-risk customers assessed more frequently

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25
Customer Risk Assessment: Transactional Behavior
Deviations from expected transaction patterns, unexplained high-volume cross-border transactions, or the use of complex payment structures
26
Customer Risk Assessment: Delivery Channel
Consider whether the customer is onboarded in person or virtually. Payments that are sent to, or received from, unknown or unassociated third parties should be considered high risk.
27
Customer Risk Assessment: Product
Consider how the products the customer has applied for or might already hold could be misused for financial crime. Examples include correspondent banking, private banking, wealth management, cryptocurrency, and trade finance.
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Customer Risk Assessment: Jurisdiction
Whether a customer is from or conducts business in high-risk jurisdictions, as identified by FATF, OFAC, the EU, and other national regulators
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Customer Risk Assessment: Customer Profile
Natural person or legal person, ownership structure, nature of business, industry, and presence of politically exposed persons (PEP)
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Steps of a CRA
1) Data Collection 2) Risk Scoring 3) Risk Classification 4) Approval Process
31
Screening Types: Payment
The review of payments made and received by customers. If a red flag is detected, it is stopped and held until investigations are complete. This includes payments to or from parties on a sanctions list.
32
Screening Types: Name
A process where financial institutions and other regulated organizations compare customer details against various watchlists and databases to identify potential risks
33
Screening Types: Batch
Allows organizations to systematically review customer databases against updated sanctions lists, PEP lists, and adverse media sources. It is conducted at scheduled intervals to detect newly sanctioned individuals, evolving high-risk customers, and emerging threats.
34
Screening Types: PEP
The process of identifying individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates. PEPs are considered higher risk due to their potential exposure to corruption.
35
Screening Types: IP
A security measure that checks the geographic origin of a customer's IP address. It occurs during or after customer onboarding. If the customer logs in from a sanctioned or high-risk location, the system detects and flags the activity for further review.
36
Screening Types: Location
Involves verifying the geographic information associated with a transaction against known risk databases to flag potentially suspicious activity before or after the transaction occurs
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Screening Types: Adverse Media
A risk management strategy that involves reviewing publicly available information such as news articles, social media, or legal filings to identify potential financial crime risks related to individuals or entities.
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The customer lifecycle: Pre-Onboarding Assessment
-ID&V, screening, KYC/CDD, -CRA -Onboard or reject customer -EDD for high-risk customers
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The customer lifecycle: Periodic Review and Ongoing Due Diligence
-Scheduled KYC refreshes -Continuous risk assessments -Ongoing financial crime risk management -Perpetual KYC
40
The customer lifecycle: Investigations
-Ongoing controls -Escalation and case management -SAR filings, if necessary
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The customer lifecycle: Screening
-TM: Continuous observation of transactions after onboarding to identify unusual or illicit activity -Screening: PEP, adverse media, payment, and batch
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The customer lifecycle: Offboarding
-Due to suspected illicit activity or noncompliance risks -Exits based on risk appetite mismatch should be case-by-case
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Examples of regulator requests
-Routine examinations or targeted investigations -Monitorship following breaches -Special provisions to obtain information -UK Financial Services and Markets Act 2000: Sections 166 and 100 -USA PATRIOT Act: Section 314(a)
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Transaction monitoring
-Occurs continuously, in real time and retroactively, after customer is onboarded -Detects suspicious activity during or after transactions occur -Can identify unusual or illicit activity
45
Payment screening
-Identifies the risk of individuals, entities, or jurisdictions for payments your organization sends or receives -If adequate and effective controls are in place, it could prevent illicit transactions before they are completed.
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Transaction monitoring examples: Large Transactions
Transactions that exceed a certain threshold, often set by regulatory bodies or financial institutions themselves
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Transaction monitoring examples: Structuring
The act of dividing a single, large transaction into multiple smaller transactions to evade reporting requirements or to hide the true source of funds
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Transaction monitoring examples: Round Trip Transactions
A sent remittance returned as a received remittance immediately or shortly afterward
49
Transaction monitoring examples: Transfers to high-risk jurisdictions
Require heightened scrutiny due to potential risks. These jurisdictions might have weak AML laws, political instability, or a history of illicit activities.
50
Transaction monitoring examples: Unexpected transactions
Transactions that differ from the expected or anticipated volumes or values documented in the customer's KYC
51
Customer segmentation
-Classifies customers based on specific criteria: -Risk profiles, behaviors, characteristics. -Indicates exposure to financial crime -Allows organizations to: -Strengthen financial crime prevention measures. -Allocate resources more efficiently.
52
Scenario creation and development
-Designing hypothetical situations or risk profiles: -Illustrates how financial crimes might occur. -Helps test and improve the effectiveness of TM systems
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Rule development
-Scenarios are converted into rules. -Integrated into TM systems -Different thresholds for the same scenario will be in place, depending on low, medium, or high risk -Measurable rules should: -Align with requirements, best practices. -Capture relevant risks identified by regulators.
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Threshold setting
-Definition of limits: Value, frequency, location, type -Types of thresholds: -Value-based -Frequency-based -Time-based -Dynamic review and adjustment -Regulatory compliance
55
System tuning
The process of refining rules, thresholds, parameters, and models to enhance TM system effectiveness
56
Scenario Setting
Creating, modifying, or removing detection rules based on historical suspicious activity and incidents
57
Threshold Setting
Defining the minimum level of activity required to trigger an alert. Adjusting these thresholds enhances sensitivity and accuracy while reducing false positives for better resource use.
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Frequency
Defining the minimum level of activity required to trigger an alert. Adjusting these thresholds enhances sensitivity and accuracy while reducing false positives for better resource use.
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System tuning data points: Configuration
Information related to the rule, including the creation date, purpose, typology, or scenarios it attempts to identify, established thresholds, and alert frequency
60
System tuning data points: Alert Productivity and conversion rates
Include the volume, frequency, and materiality of the alerts, or how many alerts result in investigations and suspicious activity reports
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System tuning data points: Transaction Patterns and customer behavior trends
Historical transaction data and customer behavior can reveal anomalies and trends that suggest emerging risks, helping organizations adjust detection criteria.
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System tuning data points: Industry Information and Law Enforcement Guidance
This includes information from peer organizations on emerging risks and the effectiveness of different monitoring strategies. Similarly, guidance, advisories, and feedback from law enforcement agencies and regulatory bodies can inform tuning efforts.
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Process for alerts review
1) Review internal information. 2) Identify and review external information. 3) Contact business line staff. 4) Document findings in a written report.
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Sources of investigation: Open Source Intelligence
This includes social media and news organizations. Ongoing negative news screening programs and systems can identify information that prompts reviews and generates investigative leads.
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Sources of investigation: Regulatory Actions or RFIs
Includes routine requests for details of activities under review by a regulator, which might help form a view that an internal investigation should be conducted. More formal investigations from the regulators might also provide the context for further internal review. Also, regulatory findings and recommendations help identify additional risks and initiate reviews.
66
Sources of investigation: Internally-generated Alerts
These include those generated as a result of screening and transaction monitoring processes. They can originate from any employee irrespective of their roles and responsibilities. Other sources include whistleblower portals, audit findings, customer complaints, and control failures.
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Sources of investigation: Information Sharing requests
These requests enhance the ability to detect suspicious activities and initiate reviews. Examples include Sections 314a and 314b, Article 75 of EU framework.
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Sources of investigation: Law Enforcement Requests, Court Orders
Requests for Information (RFI) from law enforcement might include direct inquiries for specific information as part of an investigation. Subpoenas, search warrants, information requests, and other court orders might require the organization to provide specific information.
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Sources of investigation: RFI from Counterparties and Respondent Banks
These include formal requests for clarification, data, or additional details that might provide the context for seeing a fuller view of activity which then leads to an investigation.
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LEA request
-Criminal investigative agencies -Furthers a specific criminal investigation -Specific individuals and/or entities, transactions, or accounts -Legal authority related to criminal procedure -Evidence gathering, asset seizure, and prosecution support
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Regulatory request
-Financial regulatory bodies Assess and ensure AML/CFT compliance, inform policy -Organization's overall AML program and adherence to rules -Statutory and regulatory authority over financial institutions -Remediation of AML deficiencies, enforcement actions
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