Sound Management of Risks Related to Money Laundering and Financing of Terrorism

What this chapter covers

Sound Management of Risks Related to Money Laundering and Financing of Terrorism: topics in the order to study them

1. 1ML/FT Risk Overview and Basel Committee GuidelinesStart here to learn the vocabulary, the stages of ML/FT and the purpose of the guidelines that frame everything else.
2. 2Risk Assessment, Governance and Three Lines of DefenceNext, learn how a bank identifies its risk and who owns it, since every later control rests on this assessment.
3. 3Customer Acceptance, Due Diligence and Ongoing MonitoringThis applies the risk-based approach at customer level and is the most testable part, so study it once governance is clear.
4. 4Use of Third Parties, Correspondent Banking and Wire TransfersThese are higher-risk channels that extend customer due diligence, so you need the basic customer controls first.
5. 5Group-wide Implementation, Information Sharing and SupervisionFinish with how the framework works across a whole banking group and how supervisors oversee it, which ties the earlier topics together.

How to prepare Sound Management of Risks Related to Money Laundering and Financing of Terrorism

1. Read the five topics in the given order and write a one-line purpose for each before you go deeper.
2. Build a simple map of the risk-based approach: assess risk, set policy, apply controls in proportion to risk, monitor, review.
3. Make a table of the three lines of defence for yourself: who owns the risk, who oversees it, who gives independent assurance.
4. List the customer due diligence stages and note when enhanced measures apply, such as higher-risk customers or relationships.
5. For third parties, correspondent banking and wire transfers, note what the bank must still do itself and what it cannot hand over.
6. Practise short case questions. For each, name the risk, name the control, then say why other options fall short.
7. Revise the group-wide topic last and link it back to governance and due diligence so you see one connected framework.

Common mistakes in Sound Management of Risks Related to Money Laundering and Financing of Terrorism

• Treating ML/FT as only a compliance issue

  Fix: Remember it is a bank-wide risk. The board, business lines, risk, compliance and audit all have roles.

• Applying the same controls to every customer

  Fix: Match the depth of due diligence to the risk. Choose enhanced measures for higher-risk cases and simpler ones for lower risk where permitted.

• Thinking outsourcing due diligence transfers responsibility

  Fix: State that the bank remains ultimately responsible and must be satisfied the third party's work is adequate.

• Mixing up the three lines of defence

  Fix: Link each line to one idea: own, oversee, assure independently. Check which line a case describes before answering.

• Stopping at onboarding

  Fix: Include ongoing monitoring and periodic review of customer information in any complete answer.

• Ignoring the group dimension

  Fix: Revise how group policies, information sharing and supervision apply across branches and subsidiaries, including in other countries.

Last-day revision: Sound Management of Risks Related to Money Laundering and Financing of Terrorism

• ✓ML/FT risk should be managed inside the bank's overall risk management framework.
• ✓A risk-based approach means controls are stronger where risk is higher.
• ✓The bank must first identify and assess its own ML/FT risks.
• ✓The board and senior management are responsible for the ML/FT risk framework.
• ✓Business units are the first line of defence and own the risk day to day.
• ✓Compliance and risk functions form the second line, and internal audit is the third.
• ✓Customer due diligence covers identification, verification and understanding the customer's activity.
• ✓Higher-risk customers need enhanced due diligence and senior approval.
• ✓Ongoing monitoring checks that transactions fit what the bank knows about the customer.
• ✓When using a third party, the bank stays ultimately responsible for due diligence.
• ✓Correspondent banking is higher risk and needs careful assessment of the respondent bank.
• ✓Wire transfers should carry accurate originator and beneficiary information.
• ✓Group-wide policies should apply consistently, with information shared across the group's entities.

Sound Management of Risks Related to Money Laundering and Financing of Terrorism practice questions

• A bank's internal audit function is reviewing the AML/CFT programme. It finds that the compliance function itself performs the periodic test…
• A bank is preparing its enterprise-wide ML/FT risk assessment. Which approach is most consistent with the Basel Committee guidance?
• An intermediary bank receives a cross-border wire transfer that lacks the required originator information. Which response is most consistent…
• A bank's business line staff argue that they should own customer acceptance decisions without compliance involvement, since they know the cl…
• During ongoing monitoring, a bank notes that a small retail business account, historically showing monthly cash deposits near USD 8,000, sud…
• Under the Basel guidelines, how should supervisors of a cross-border banking group cooperate on ML/FT matters?
• A bank is considering onboarding a foreign politically exposed person (PEP). Which approach best aligns with the Basel guidance?
• A bank's transaction monitoring system flags a long-standing retail customer whose account, usually holding small salary credits, suddenly r…

Sound Management of Risks Related to Money Laundering and Financing of Terrorism in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CS ProfessionalDue Diligence
• CA FinalDue Diligence, Investigation & Forensic Accounting
• CMA FinalIntroduction to Risk Management
• CFA Level IIIPrivate Equity