KYC and Customer Due Diligence Flashcards

Which of the following is an example of a high-risk business type that typically warrants Enhanced Due Diligence?

Answer: A cash-intensive business such as a currency exchange or casino

Cash-intensive businesses like currency exchanges, casinos, car washes, and restaurants handle large volumes of cash, making them inherently higher-risk for money laundering and requiring more scrutiny.

What is a 'customer risk rating' and what is its purpose in an AML program?

Answer: A risk score assigned to customers based on their AML risk factors to calibrate the level of due diligence and monitoring applied

A customer risk rating consolidates multiple risk factors (geography, industry, transaction behavior) into a single score that drives the intensity of due diligence, monitoring, and review cycles.

What action should a financial institution take when a customer refuses to provide information required for CDD/EDD?

Answer: Consider declining or exiting the relationship and filing a SAR if suspicion warrants it

When a customer refuses to provide required CDD information, the institution should consider whether to decline the relationship or exit an existing one, and file a SAR if the refusal itself raises suspicion of money laundering.

What is a 'high-risk country' in AML due diligence and how does it affect customer risk ratings?

Answer: A jurisdiction identified by FATF, OFAC, or national authorities as having significant AML/CFT deficiencies or sanctions concerns, which elevates the risk rating of connected customers

High-risk countries are those flagged by FATF on its grey/black lists, OFAC sanctions lists, or national AML authorities for deficient AML controls, corruption, or tax secrecy, which increases the risk rating of customers with connections to those jurisdictions.

How does 'correspondent banking' create unique AML challenges?

Answer: The respondent bank's customers are often unknown to the correspondent bank, creating nested relationship risks and limited visibility into underlying transactions

In correspondent banking, the correspondent institution provides services to a respondent bank's customers without direct KYC of those end customers, creating 'nested' risk where illicit funds can pass through with limited scrutiny.

What distinguishes 'source of funds' from 'source of wealth' in EDD?

Answer: Source of funds refers to the origin of money in a specific transaction; source of wealth refers to the broader origins of a customer's overall net worth

Source of funds is transaction-specific (where did the money in this particular transaction come from?), while source of wealth is broader (how did this customer accumulate their overall assets and net worth?).