Regulation and financial crime: formula sheet

Key formulas

Three stages of laundering

Placement → Layering → Integration

Placement puts cash into the system, layering hides the trail, integration returns the money as apparently legitimate wealth.

Laundering offence

Concealing, disguising, transferring or acquiring criminal property = offence

Applies when you know or suspect the property comes from crime. Exact wording varies by jurisdiction.

Failure to report

Knowledge or suspicion + no report to the nominated officer or authority = offence

In many jurisdictions, professionals in the regulated sector commit an offence if they fail to report. Internally, the report goes to the firm's money laundering reporting officer (MLRO).

Tipping off

Disclosing a report or investigation to the person concerned, likely to prejudice it = offence

The aim is to stop the suspect hiding evidence or moving money. Do not alert the client.

Core AML procedures

Identify and verify the customer → assess risk → monitor → report suspicion internally → MLRO decides → keep records

Use this chain as the skeleton for any answer.

Customer due diligence

CDD = identify + verify identity + identify beneficial owner + understand purpose of relationship + ongoing monitoring

Enhanced due diligence is used for higher-risk customers such as PEPs.

Reporting route

Employee → MLRO → national authority

Staff report internally to the MLRO, not directly to the authority, under the usual structure.

Tipping off

Do not tell the customer or any third party about a report or investigation

Tipping off is an offence in most jurisdictions.

Record keeping

Keep ID evidence and transaction records for the legally required period

Commonly at least five years in many countries; give the period only if the question does.

Fraud triangle

Fraud = Pressure + Opportunity + Rationalisation

All three elements are usually present. Management can mainly reduce opportunity through controls.

Fraud versus error

Fraud = deliberate act; Error = unintentional mistake

Intent is the test. The financial effect may be the same.

Bribery versus corruption

Bribery ⊂ Corruption

Bribery is one type of corruption. Corruption is the broader abuse of position for personal gain.

Prevention versus detection

Prevention = stop it happening; Detection = find it after it happened

Preventive controls reduce opportunity. Detective controls reveal fraud and also deter it.

Tax evasion

Evasion = illegal + dishonest concealment or false information

Examples: unreported income, fake expenses, false returns. A criminal offence.

Tax avoidance

Avoidance = legal use of rules to reduce tax

Within the law, but aggressive schemes may be challenged or restricted and carry ethical and reputation risk.

Tax planning

Planning = using reliefs and allowances as intended

The accepted, low-risk form of avoidance.

Accountant's key principles

Integrity + Professional behaviour + Confidentiality

Do not assist evasion. Confidentiality can be overridden where the law requires or permits disclosure.

Test to apply

Concealing or lying? Yes = evasion. No = avoidance

Size of the saving does not decide the answer.

Data protection principles (GDPR-style)

Lawful, fair and transparent | Purpose limitation | Data minimisation | Accuracy | Storage limitation | Integrity and confidentiality | Accountability

Learn these as a checklist. Match each scenario to the principle it breaks.

Information security aims (CIA)

Confidentiality + Integrity + Availability

Confidentiality: only authorised people see data. Integrity: data is accurate and unaltered. Availability: data is accessible when needed.

Main cyber threats

Hacking | Phishing | Malware | Ransomware | Denial of service | Identity theft

Know a one-line definition of each.

Control types for data

Preventive | Detective | Corrective

Firewall and passwords prevent. Intrusion monitoring detects. Backups and recovery plans correct.

Legislation vs regulation

Legislation = law set by government; Regulation = detailed rules made and enforced by regulators or bodies

Regulation often derives its power from legislation but is not always law itself.

Typical whistleblowing route

Internal (line manager or designated person) → regulator or external authority → public disclosure as last resort

A general pattern, not a rule in every country. Protection rules differ by jurisdiction.

Elements of a good whistleblowing policy

Clear reporting channel + confidentiality + protection from retaliation + investigation process + feedback

Use as a checklist when asked to evaluate or design a policy.

Consequences of non-compliance

Fines + legal action + licence loss + reputational damage + management time

Use for questions on why compliance matters.

Quick revision

• Money laundering turns the proceeds of crime into apparently legitimate money.
• The three stages in order are placement, layering and integration.
• Placement puts illegal cash into the financial system; layering hides its trail; integration returns it as seemingly clean money.
• Firms use customer due diligence and monitoring to detect laundering, and suspicious activity must be reported through the proper channel.
• Tipping off, meaning warning a suspect about a report, is a serious problem and must be avoided.
• Fraud is deception for gain; bribery is offering or accepting an inducement to influence a decision.
• Tax evasion is illegal; tax avoidance uses the rules legally to reduce tax.
• Cybercrime uses computers or networks to commit crime, such as hacking, phishing and malware.
• Data protection rules require personal data to be handled lawfully, kept secure and used for stated purposes.
• Whistleblowing means raising concerns about wrongdoing, and good policies protect the person who speaks up.
• Compliance means following laws, regulations and internal policies, and it needs clear procedures and training.

Common mistakes

• Putting the stages in the wrong order or mixing up layering and integration. Fix: Remember that layering hides the trail and integration is when the criminal enjoys the money as clean. Think: in, hide, out.
• Calling a cash deposit into a bank account layering. Fix: The first entry of cash into the financial system is always placement.
• Saying staff report suspicions directly to the authorities. Fix: In the standard structure the employee reports to the MLRO, who decides on external reporting.
• Thinking you need proof of money laundering before reporting. Fix: Knowledge or reasonable suspicion is enough. Investigating is for the authorities.
• Treating every mistake that loses money as fraud. Fix: Always look for deliberate deception. An honest error with the same loss is an error.
• Saying the organisation can easily remove pressure or rationalisation. Fix: State that management can mainly control opportunity through controls. Pressure and rationalisation are personal and harder to see.
• Saying tax avoidance is illegal. Fix: Avoidance is legal. Evasion is illegal. Link evasion with dishonesty.
• Deciding by the size of the tax saved. Fix: Judge by method. Honest use of rules is avoidance whatever the amount.
• Confusing phishing with hacking. Fix: Phishing tricks a person into giving details. Hacking breaks into a system technically. Phishing is often the first step to hacking.
• Calling every harmful program a virus. Fix: Use malware as the general term. Virus, worm, trojan, spyware and ransomware are types of it.

Exam tips

• Learn the three stages with one example each. Scenario questions usually describe an action, not name the stage.
• Read for the word 'cash'. Cash entering the system points to placement.
• Separate the three offences clearly: handling, staying silent, and warning.
• Never advise telling the client about a report. If a question asks what to do, the answer is to report to the MLRO and avoid alerting the client.
• Link this topic to ethics. Questions may ask how confidentiality gives way to the duty to report.
• Learn the roles as a chain: employee, MLRO, authority. Many questions test who does what.
• Watch for the words tipping off. Any option that tells the client is almost always wrong.
• In multiple response questions, select exactly the stated number of options.