CSS Risk Analysis & Due Diligence 3 — Questions and Answers
Question 1: Which of the following is an indicator of potential sanctions evasion through trade finance?
- Goods priced at current market value with standard payment terms
- Vague or generic descriptions of goods on shipping documents (Correct answer)
- Use of well-known freight forwarders with established compliance programs
- Payment made directly from the buyer to the seller
Correct answer: Vague or generic descriptions of goods on shipping documents
Generic or vague goods descriptions on trade documents are a red flag for potential misrepresentation aimed at concealing sanctioned goods or parties.
Question 2: When assessing the sanctions risk of a private equity fund client, what is the MOST critical due diligence consideration?
- The fund's historical investment returns
- The identity and sanctions status of the fund's underlying limited partners (Correct answer)
- The fund's investment strategy and target sectors
- The jurisdiction where the fund is legally domiciled
Correct answer: The identity and sanctions status of the fund's underlying limited partners
In private equity funds, sanctioned parties can use limited partner positions to move funds, making LP identity and status the most critical sanctions concern.
Question 3: A bank receives a wire transfer where the originator field contains only initials and no address. Under sanctions compliance, this should trigger:
- Automatic payment processing with a note in the file
- A request for complete originator information before processing (Correct answer)
- Rejection of the payment and permanent blacklisting of the correspondent
- Escalation only if the amount exceeds $10,000
Correct answer: A request for complete originator information before processing
Incomplete originator information prevents proper sanctions screening and must be resolved before processing to avoid potential violations.
Question 4: Which of the following best describes 'secondary sanctions'?
- Sanctions applied to domestic companies for domestic law violations
- Sanctions that target non-US persons for conducting business with sanctioned countries or parties (Correct answer)
- A secondary layer of OFAC list screening applied after primary screening
- Sanctions imposed by the UN Security Council on member states
Correct answer: Sanctions that target non-US persons for conducting business with sanctioned countries or parties
Secondary sanctions extend US sanctions reach to non-US persons by threatening them with US market exclusion if they conduct significant business with sanctioned targets.
Question 5: In a sanctions risk assessment matrix, 'likelihood' of a sanctions violation is BEST measured by:
- The potential financial penalty for a violation
- The frequency and nature of customer interactions with high-risk jurisdictions or parties (Correct answer)
- The number of compliance staff available to review transactions
- The age and size of the institution's customer base
Correct answer: The frequency and nature of customer interactions with high-risk jurisdictions or parties
Likelihood in a risk matrix relates to how often and deeply a business channel or customer interacts with sanctioned or high-risk environments.
Question 6: A company wants to export dual-use technology to a customer in a non-sanctioned country. What sanctions due diligence step is MOST important?
- Confirming the customer's credit rating
- Screening the end-user and end-use to ensure the technology won't be re-exported to a sanctioned destination (Correct answer)
- Verifying the customer has a local import license
- Checking that the product is listed in the customer's inventory
Correct answer: Screening the end-user and end-use to ensure the technology won't be re-exported to a sanctioned destination
End-user and end-use screening is critical for dual-use goods to prevent re-export or diversion to sanctioned parties or destinations.
Question 7: What does 'derisking' mean in the context of sanctions compliance at financial institutions?
- Implementing advanced transaction monitoring technology
- Terminating or avoiding relationships with entire categories of customers to reduce sanctions exposure (Correct answer)
- Diversifying the institution's geographic footprint into lower-risk markets
- Increasing capital reserves to cover potential sanctions penalties
Correct answer: Terminating or avoiding relationships with entire categories of customers to reduce sanctions exposure
Derisking refers to wholesale termination of customer categories or jurisdictions to avoid compliance risk, often criticized for excluding legitimate customers.
CSS Risk Analysis & Due Diligence 3
Which of the following is an indicator of potential sanctions evasion through trade finance?