CSS Correspondent Banking & Trade Finance Flashcards

Which type of trade finance instrument is most vulnerable to sanctions evasion through over- or under-invoicing of goods?

Answer: Documentary letters of credit and open account trade

Documentary LCs and open account trade are common vehicles for trade-based money laundering (TBML) and sanctions evasion through price manipulation (over/under-invoicing), allowing illicit value transfers disguised as legitimate trade.

A correspondent bank's 'nested correspondent banking' arrangement creates sanctions risk because:

Answer: Third-party banks gain access to the correspondent's network, making it difficult to identify the ultimate originator of transactions

Nested correspondent banking occurs when a smaller foreign bank uses another foreign bank's correspondent account to access U.S. dollar clearing, hiding the ultimate transaction originator from the U.S. correspondent bank.

What is the significance of Automatic Identification System (AIS) data in maritime sanctions compliance?

Answer: AIS transponder data allows compliance teams to track vessel movements and identify sanctioned port calls or ship-to-ship transfers

AIS transponder data provides real-time and historical vessel location information, enabling compliance teams to detect when vessels have called at sanctioned ports, conducted ship-to-ship transfers, or engaged in other suspicious behaviors.

In the context of trade-based sanctions evasion, 'transshipment' refers to:

Answer: Shipping goods through a non-sanctioned third country to disguise their origin or ultimate destination

Transshipment as a sanctions evasion technique involves routing goods through a third, non-sanctioned country (a 'transit hub') to obscure that they originated from or are destined for a sanctioned country.

Which financial institution action is required when it receives a SWIFT MT202 COV (cover payment) where underlying payment information reveals a sanctions concern?

Answer: Hold the MT202 COV and investigate the underlying transaction details to determine if blocking or rejection is required

MT202 COV messages contain underlying payment information that must be screened — financial institutions cannot ignore sanctions red flags in underlying payment data even if the direct counterparty appears clean.

Which red flag is most indicative of potential sanctions evasion in a trade finance transaction?

Answer: The goods described are inconsistent with the known business of the buyer or seller, or the transaction route is illogical

Goods inconsistent with a party's known business profile, or transaction routes that make no commercial sense (e.g., routing through countries with no logical connection to the trade), are strong red flags for potential sanctions evasion or TBML.