Review questions

Integrated summary: Financial-crime concepts and banking risks

Differentiate financial crime categories

Trace predicates and proceeds

Assess retail, corporate and trade exposure

Assess PEP and high-risk customers

A compliance team receives a file on a customer who collected funds from apparently ordinary sales and moved them rapidly through companies controlled by relatives. “Financial crime” is too broad to guide the review. Ask where the money came from, which conduct needs examination, and which institutional duty might be engaged. The current CAMS risk domain distinguishes money laundering, terrorist financing, sanctions, fraud, bribery and corruption, and tax evasion. Several may arise in one case, but their elements and control decisions differ.

Money laundering concerns dealing with proceeds of criminal activity so that their origin or ownership is concealed or appears legitimate, subject to the legal definition in the relevant jurisdiction. A predicate offence is the activity that generated the proceeds, such as fraud or corruption; tax crimes can be predicates where applicable law so provides. The FATF glossary names broad categories while leaving countries to define offences and elements in domestic law. A busy payment account alone proves neither illegal source nor laundering. Test the connection among source, transaction path, beneficial owner, and stated purpose.

Terrorist financing concerns providing funds or assets for a terrorist act or organization under applicable law. The money may originate in legitimate trade or donations, so a clean origin does not settle destination risk. For laundering, trace the generating offence and concealment of its proceeds. For terrorist financing, examine beneficiary, intended use, and network as well as source. Both paths can meet if fraud proceeds are routed to a prohibited group. A charity or cross-border transfer is not inherently suspect; the recipient, controls, purpose, and evidence determine the hypothesis.

Sanctions are specific legal restrictions on designated persons, entities, activities, or sectors under an applicable regime. The UN Security Council’s 1267 regime, for example, includes an asset freeze for designated parties. The required action for an institution still depends on the binding regime, local implementation, current list, match quality, and any authorized exemption. A similar name is not confirmed identity. Verify identifying details, identify legal authority and scope, then route the decision through the authorized process. Neither releasing a payment because one letter differs nor freezing every similar name is a reliable universal rule.

Fraud uses deception to obtain an improper benefit or cause loss; its proceeds may subsequently be laundered. Bribery and corruption involve an improper advantage to influence a decision or abuse a position, sometimes hidden in sham invoices. Tax evasion differs from lawful tax planning, and a low tax bill alone is not a finding of crime. Ask precisely: what representation might be false, who benefits, do documents fit activity and flows, and which jurisdiction defines the possible offence? A concern can be escalated for expert review before its final criminal label is known.

A shop depositing cash and paying a supplier does not, by that fact alone, launder money. Begin with two separate questions: is there evidence that the money is proceeds of prohibited activity, and is there conduct that conceals source or ownership or changes its apparent character? The predicate offence is the activity that generated the proceeds. The FATF glossary names categories including fraud, corruption, tax crime, and environmental crime, while domestic law defines the elements of each offence. An analyst uses those categories to form testable hypotheses, not to issue a criminal finding in a customer file.

The placement, layering, and integration model can help read some flows. Placement moves proceeds into a financial channel or tradable asset; layering creates transactions or entities that distance funds from their source; integration uses them later in apparently legitimate activity. UNODC explains this familiar model, but it is not a checklist that every case must complete in sequence. An asset may be bought directly, stages may overlap, and funds may move through existing accounts without a new cash deposit. Absence of visible placement does not establish innocence.

Build a flow map from concrete fields. Who paid? Who owns and controls the account? When did funds enter and leave? What purpose was declared, and what record supports it? Was there an intermediary or a final asset purchase? Attach an evidence source and confidence level to each arrow. A bank statement proves movement but not its commercial reason. An invoice records a claim for payment but not that a service happened. Compare invoices with contracts, shipping, delivery, and the parties’ ordinary activity. Contradictions among those records are more informative than a complicated diagram.

Banks serve people and companies through products that do not produce one uniform data pattern. A payroll account has recurring income and spending that can be compared with the customer profile. A corporate account may show sales, suppliers, and seasonality. Trade finance adds shipments, documents, and several parties. A monitoring threshold designed for payroll should not simply be copied to a wholesale importer. Describe what legitimate activity should look like for the product, then ask what features facilitate value transfer or obscure a party, and which independent record can test the story.

In retail banking, dispersed deposits followed by rapid consolidation may merit inquiry, yet cash can be normal for a shop. Compare amounts, timing, and locations with documented sales and seasonality rather than relying on a total alone. In corporate banking, a sharp change could reflect a new contract or legitimate financing. Seek a specific agreement, purchase orders, delivery evidence, and commercial or tax records where access is lawful. Separate the legal account holder, beneficial owner, and authorized signatory; they are not interchangeable identities.

Correspondent banking and cross-border payments add layers of institutions, countries, and messages. A bank that sees only part of a chain must establish the limit of its view: does it have originator and beneficiary data, and is its relationship with a respondent bank or an end customer? FATF correspondent-banking guidance tailors measures to the relationship and risk; it does not automatically make every customer of the respondent a direct customer of the correspondent. If essential information is missing, the practical issue is how to obtain it or suspend a decision under applicable rules, not to pretend the bank knows facts outside its records.

In trade finance, value may move through the description, price, quantity, and route of goods, not merely through a transfer. A FATF and Egmont report lists indicators such as conflicts between invoice and contract, pricing that does not fit commercial considerations, vague descriptions, and mismatches between imports and outward payments. An indicator does not prove laundering; specifications, insurance, or delivery terms may explain a price difference. Compare documents using the same item, unit, currency, delivery term, and date. An invoice saying only “parts” is harder to test than one specifying model and quantity, but vagueness alone is not proof of forgery.

A former senior public official applies for an investment account and says the capital came from selling a family company. One error is to reject the applicant solely for a political title; another is to accept the account merely because one sale contract was supplied. A politically exposed person, or PEP, may have influence or authority that increases exposure to corruption risk. FATF Recommendation 12 calls for additional measures according to the type of PEP, circumstances, and applicable regime. PEP status triggers proportionate examination; it is neither evidence of guilt nor an automatic sanctions designation.

Distinguish source of wealth from source of funds. Source of wealth explains how a person accumulated assets over time: business activity, inheritance, professional income, or disposals. Source of funds explains the origin of the particular amount entering a transaction now. Overall wealth may be understandable while the immediate transfer comes from a third party absent from the sale story. Conversely, the transfer may come from the applicant’s own account while the accumulation of its balance remains unexplained. Neither question replaces the other.

Draw ownership and control, not just a list of names. Record the legal entity, share owners, ultimate beneficial owners, and anyone who can direct a decision or sign. A person with a small share may control the company through an agreement or appointment right. For a foreign intermediate company, follow the chain to natural persons and note the source and date of every link. Public-register data may be incomplete or stale; compare it with customer documents and independent sources available lawfully. FATF PEP guidance describes companies that can obscure a political connection, but these are risk indicators, not an automatic test of crime.

Enhanced due diligence extends checks and oversight in proportion to exposure: obtain approval at the required level, understand purpose and expected activity, establish source of wealth and funds, and monitor the relationship. It need not mean requesting the same document from everyone or excluding an entire sector. Binding details vary by jurisdiction; apply current law and institutional policy when acting. If information is insufficient, identify the correct pending state, the missing evidence, and who can decide on an exception or refusal.