Customer Due Diligence (CDD) Flashcards

What enhanced due diligence measures are specifically required for Politically Exposed Persons (PEPs) under FATF Recommendation 12?

Answer: Senior management approval for the relationship, reasonable measures to establish the source of wealth and funds, and enhanced ongoing monitoring

FATF Recommendation 12 requires that for PEPs, institutions must: obtain senior management approval; take reasonable measures to establish source of wealth and funds; and conduct enhanced ongoing monitoring of the business relationship.

What is 'source of funds' vs. 'source of wealth' in the context of PEP due diligence?

Answer: Source of funds refers to the origin of the specific funds in a transaction or account, while source of wealth refers to how the customer accumulated their total net worth

Source of funds identifies where the specific money in a particular transaction came from (salary, sale of property, inheritance), while source of wealth examines how the customer accumulated their overall net worth over their lifetime.

What is 'perpetual KYC' (pKYC) and how does it differ from traditional periodic CDD reviews?

Answer: A continuous, event-driven approach to CDD that updates customer risk profiles in real time as new information is received, rather than conducting scheduled periodic reviews

Perpetual KYC is a modern approach that continuously monitors and updates customer risk profiles based on real-time data triggers, replacing or supplementing the traditional periodic (annual/triennial) review cycle with dynamic, event-driven updates.

What are 'money service businesses' (MSBs) and why do they require enhanced due diligence?

Answer: Non-bank financial institutions (check cashers, money transmitters, currency exchangers, prepaid card issuers) that process large volumes of cash or value transfers and are frequently targeted by money launderers

MSBs are non-bank financial businesses that handle currency, money orders, wire transfers, and similar instruments. They require EDD because their cash-intensive, high-volume operations and often anonymous customers create significant ML/TF exposure.

What is a 'legal entity customer' under FinCEN's CDD Rule, and what are the primary exemptions from the beneficial ownership requirement?

Answer: A corporation, LLC, partnership, or other entity formed by filing with a state; exemptions include publicly listed companies, government entities, regulated financial institutions, and certain pooled investment vehicles

Legal entity customers are entities formed by filing with state or federal authorities. Key exemptions from beneficial ownership requirements include publicly traded companies (registered with the SEC), government entities, federally regulated financial institutions, and certain SEC-registered investment vehicles.

How should financial institutions handle CDD for customers who claim to be acting on behalf of an undisclosed principal?

Answer: Treat this as a significant red flag, attempt to identify and verify the undisclosed principal, and consider whether to file a SAR if the principal cannot be identified

Customers acting for undisclosed principals raise significant AML concerns because the true beneficial owner is hidden. Institutions should attempt to identify the principal, treat the opacity as a high-risk indicator, and consider whether suspicious activity reporting is warranted.