MODULE 1

AML UNIT 1 SAQ

Question 1
2
Why is money laundered?

Answer:

 „„ To disguise the source of illicit property

 „„ To enable criminals to benefit securely from their crimes
 „„ To avoid leaving a trail leading back to the crime.

Question 2
2

What are the shortcomings of the traditional three-stage interpretation of money laundering?

Answer: The three-stage approach is not always borne out in reality in that not all  crimes generate cash
that then needs to be placed and the proceeds of crime can be 'self-laundered' thereby avoiding the need to
engage in a protracted process altogether. Participation in any stage of the crime can constitute the
offence.

Question 3
2

List two types of predicate criminal conduct that would not require money to be ‘placed’.

Answer: A predicate offence refers to the underlying crime that gives rise to the laundering of the
proceeds. It does not have to involve physical cash ‘placement‘and the proceeds may already be within
the regulatory financial system, and therefore could encompass the proceeds of predicate offences (and by
no means all), such as:

 „„ fraud
 „„ corruption
 „„ bribery
 „„ smuggling
 „„ tax evasion.

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Question 4
2

What are ‘sham transactions’ and how are they used for laundering purposes?

Answer: A sham transaction is one that has the appearance of legitimacy, sometimes supported by the
use of false documentation, e.g. movement of funds from offshore to onshore accounts as a cover for a
false property deal, or a business trading transaction where there is no actual trade activity, but that
appears to be confirmed by false documentation, e.g. sham invoices. A 'sham transaction' may be used to
provide a 'cover story' and therefore a supporting rationale for the movement of value between two
collusive criminal parties. If the transaction is questioned, then the 'cover story' will help to disguise the
illicit nature of the activity and provide 'plausibility' that will help in avoiding detection.

Question 5
2

Why would a criminal choose to use money orders, postal orders or traveler’s cheques to transfer
value from one country to another?

Answer: Money orders, postal orders, traveler’s cheques and other negotiable instruments are easily
transportable and may be deposited elsewhere without attracting attention. These orders may also be
payable to ‘bearer’ and can therefore be used to disguise the true beneficial owner of the funds.

Question 6
2

Why is it important to confirm the true nature of the customer's underlying business activities, and
the origin of their wealth and funds?

Answer: A launderer may make illicit payments that appear to be the proceeds of a genuine transaction.
A customer may appear to be distributing the proceeds of, for instance, a real estate deal, or royalty
payments for the sale of intellectual property. The reality is, however, that there is no substance to these
claims and the funds are from illicit activity. Regulations require that as part of customer due diligence
procedures, the sources of wealth and funds are identified for all customers and verified on a risk basis so
that any payments that are made or received that are outside the range of declared resources can be
identified and investigated to identify any potentially reportable suspicious activity.

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AML UNIT 2 SAQ

Question 1
2

List four international bodies that are engaged in helping to combat money laundering.

Answer: Select from:

 „„ Basel Committee on Banking Supervision

 „„ United Nations Office on Drugs and Crime
 „„ International Monetary Fund
 „„ European Commission and Council
 „„ Organization for Economic Co-operation and Development
 „„ Financial Action Task Force and FSRBs
 „„ Offshore Group of Banking Supervisors
 „„ Wolfsberg Group
 „„ Transparency international

Question 2
List some of the international initiatives designed to combat money laundering.

Answer: Select from:

 Vienna Convention (1988)

 Palermo Convention (2000)
 Basel Principles
 Wolfsberg Principles
 EU Anti Money Laundering Directives
 OECD Conventions/Regulations
 FATF 40 Recommendations 

Question 3
2

Outline the work of the FATF.

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Answer: The FATF is the premier transnational AML/CFT organization. Its primary objective is to
support the development and promotion of national and international strategies to combat money
laundering, terrorism financing and the financing of proliferation. Its main functions include: monitoring
international jurisdiction compliance with Recommendations and issuing updates and guidance on current
and emerging money laundering and terrorism financing threats and typologies. 

Question 4
2

Explain how the FATF monitors its members’ compliance with the 40 Recommendations.

Answer: The FATF monitors compliance with the 40 Recommendations via a peer to peer
assessment process. This includes:

 „„ self-assessment exercises; and

 „„ on-site evaluations by FATF-nominated representatives.

Previously, the Non-Cooperative Countries and Territories (NCCT) Scheme was used to monitor and
influence regimes. Today a ‘blacklist’ system operates to identify ‘jurisdictions that have been identified
as not meeting FATF standards and that have ‘strategic AML  deficiencies’.

Question 5
2

Name some of the emerging money laundering risk typologies that have been identified by FATF
since 1989. 
Answer: A range of practices could be selected, for example

 virtual currencies (identified 2014)

 prepaid card, Mobile Payments and Internet-based Payments Services (2013)
 illicit tobacco Trade (2012)
 trafficking in human beings and smuggling migrants (2011)
 vulnerabilities of free trade zones (2010)
 football sector (2009)
 securities sector typologies (2009)
 vulnerabilities of casinos and gaming sector (2009)
 money laundering and terrorist vulnerabilities of commercial websites and Internet payment
systems (2008)
 proliferation financing (2008)
 laundering the proceeds of VAT Carousel (2007)

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AML UNIT 3 SAQ

Question 1
How does the subjective test of suspicion differ from the objective test of suspicion? Why is this
difference important?

Answer: The subjective test is concerned with what a person actually knows or suspects. The objective
test is concerned with what a reasonable person would have known or suspected in the same
circumstances and is sometimes referred to as the ‘negligence test’. It can be used to prosecute a person
for failing to report their knowledge or reasonable grounds for suspicion by demonstrating that a
‘reasonable person’ would have been suspicious when presented with the same facts and information,
even when the person, or subject, denies having knowledge.

Question 2
What is the willful blindness test?

Answer: The test is used to confirm whether a person turned a ‘blind eye’ to information that ordinarily
would have put him or her on enquiry in relation to money laundering or some other criminal activity.
Willful blindness is considered to be a form of knowledge under US law and according to UK case law
(see Baden Delvaux v Societe Generale) 

Question 3
2

Explain what is meant by the term predicate criminality.

Answer: Money laundering is an offence that involves dealing with the proceeds of crime. The original
criminal conduct that preceded the money laundering is called a predicate offence. Offences such as
fraud, drug dealing, tax evasion, etc. would fall into this category.

Question 4
2

Why is the inclusion or exclusion of tax evasion from a test of predicate criminality an important
factor?

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Answer: Its inclusion imposes an obligation upon financial sector service staff to report suspicion of such
activity to law enforcement. Tax evasion is not a predicate crime in all jurisdictions but there is a general
move to make this the case to ensure that tax crimes are criminalized internationally.

Question 5
2

What are the generally accepted exceptions to customer confidentiality?

Answer: See principles in Tournier v National Provincial & Union Bank of England [1924] and of
course HSBC V Shah.  More recently, in the UK refer to section 37 of the Serious Crime Act. 

Question 6
2

What are the key lessons for banks from the Shah v HSBC case?

Answer: The key lessons from the case are:

 a bank may need to open its files up to scrutiny to confirm the state of mind (i.e. reasons for
suspicion) of the person who submitted an SAR; if it cannot provide the evidence it may be liable for
losses from a delayed transaction
 clear records must be kept on matters relevant to a suspicion held
 an SAR submitted to law enforcement agencies must fully reflect all known information causing
suspicion
 the bank ‘s nominated officer must be properly nominated and appropriate records maintained to
confirm this accountability and responsibility
 a bank should incorporate a clause in its customer/banker contractual terms setting out its
obligations to: a. suspends transactions when money laundering is suspected, and b. refuse to divulge
why it is not making a   transaction.

UNIT 4 SAQ

Question 1
2

List six forms of direct and indirect taxes that are typically payable.

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Answer: Any six of: Income Tax, Withholding Tax, Capital Gains Tax, Wealth Tax, Estate Tax, Sales
and Value Added Tax, International Import and Export Trade Tariffs and Excise Tax, Social Security Tax
and Corporation Tax.

Question 2
Tax systems can be grouped according to geographical, political or loosely formed families of
countries that share some similar sources of tax law and other common features. Can you describe
the US family of taxation?

Answer: There is a single Internal Revenue Tax Code (IRC) in the US which imposes corporate and
individual tax. It is long and complex. The IRC imposes tax upon US citizens on a global basis and adopts
a classical system of tax collection of dividends and investment income. States, as well as the federal
government, have authority to tax. 

Question 3
An individual may have a personal connection to a particular state by reason of three main factors,
and thus becomes liable to pay taxes imposed by that state. What are they?

Answer:

 Residence: the internal tax laws (not immigration laws, which are quite separate and distinct) of
a state contain specific provisions to determine whether a person is resident in that state for tax
purposes. These laws usually combine circumstances (home, job, family and economic ties) with    a
minimum period of stay (usually 183 days) and give rise to tax liability on worldwide earnings,
income, etc.
 Domicile: a person is domiciled in the place where he or she has a settled home; a person who is
domiciled in a particular state usually resides there for tax purposes.
 Nationality: the tax laws of some states, most notably the US, determine that a person’s
nationality or citizenship gives rise to tax liability on worldwide earnings, income, etc.

Question 4
2

The residence for tax purposes of a company is determined by a different test to that for an
individual person. It is determined by the company’s place of incorporation or place of
management and control (or some combination of the two). Describe the Place of Incorporation test
and the Management and Control test.

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Answer:

Place of incorporation test

The jurisprudence that justifies the incorporation test is simple: if a company is incorporated in Country
A, it is subject to the laws of Country A, including its tax regime;306 if a company is incorporated in, say,
the US, it is deemed to be resident for tax purposes and subject to the corporate tax laws of the US on its
worldwide profits, while any other company is classified as a foreign   company.

Management and control test

The internal tax laws of a number of countries state that a company is liable to  pay tax on its profits in
the jurisdiction where it is managed and controlled and  the standard test for this is the place where central
management and control are located and exercised in relation to critical decision making, rather than
operational day-to-day business decisions of an administrative nature – this is usually the place where the
board of directors meet and take the effective business   decisions.

306. Incorporation is the sole decisive factor in: Argentina, Bolivia, Bulgaria, Cameroon, Chile,
Colombia, Congo, Costa Rica, Czech Republic, Ecuador, Egypt, Estonia, Finland, France, Greece,
Guatemala, Honduras, Hungary, Iran, Ivory Coast, Japan, Lithuania, Nicaragua, Nigeria, Panama,
Peru, Philippines, Puerto Rico, Russia, Slovak Republic, Slovenia, Sweden, Taiwan, Ukraine, United
States, Yugoslavia, and Zimbabwe. Incorporation is just one of the criteria in: Australia, Austria,
Barbados, Belgium, Belize, Brazil, Brunei, Cambodia, Canada, Cyprus, Denmark, Dominican Republic,
Fiji, Germany, Iceland, Indonesia, Ireland, Israel,  Italy, Jamaica, Japan, Kenya, Lebanon, Luxembourg,
Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania,
Saudi Arabia, Spain, South Africa, Switzerland, Tanzania, Thailand, Turkey, Uganda, United Kingdom,
Venezuela, Yemen and Zambia

UNIT 5 SAQ

Question 1
2

List what you consider to be the key retail banking money laundering risks.

Answer:

 That the proceeds of crime may pass through retail bank accounts at any stage of the money
laundering process.

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 There is an increasing risk of fraudulent applications by identity   thieves.
 Provision of services to cash-generating businesses is a particular area of risk.
 Internet banking is a fast-growing risk dimension which criminals seek to exploit.
 The international size, scale and footprint of some large banks provides criminals with
opportunities for moving value around the world within a single organization, thereby reducing the
frequency of checks and controls. 

Question 2
2

What are the main risks involved when dealing with a correspondent bank account?

Answer: Correspondent banking relationships are based upon the principle of third party reliance and if
poorly controlled can allow other financial institutions with inadequate AML/CFT systems and controls
direct access to international banking systems. Particular risks include ‘nesting’ and ‘payable through
account’ services that permit undisclosed third party payments to be made.

Question 3
2

What are the main characteristics of cyber-laundering?

Answer: Web-based banking services in effect allow banking customers to use their PCs as ATMs. Other
characteristics include:

 the non-face-to-face nature of the relationship between a customer and Web-based financial
services provider offers a higher degree of anonymity
 the rapidity with which Web-based financial transactions are conducted
 the accessibility of the Internet, and
 the borderless nature of the Internet.

Question 4
2

What do the FATF identify as the key attractions to international trade for money launderers?

Answer:

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 The enormous volume of trade flows, which obscures individual transactions and provides
abundant opportunities for criminal organizations to transfer value across borders between collusive
partners.
 The complexity associated with (often multiple) foreign exchange transactions and recourse to
diverse financing arrangements.
 The additional complexity that can arise from the practice of commingling illicit funds with the
flows of legitimate business activity.
 The limited recourse to verification procedures or programs for exchanging customs data between
countries.
 The limited resources that most customs agencies have available to detect illegal trade
transactions.

Question 5
Describe what the main difficulties are when dealing with bearer share companies.

Answer: The shares can be acquired without the purchaser being identified, they are transferrable by
mere delivery of the certificate and companies that issue them can be owned and controlled by
anonymous individuals. 

Question 6
2

List the key reasons why organized crime uses corporate vehicles to launder money.

Answer:

 They are able to commingle criminal proceeds with legitimate business transactions.
 The identity of true owner can be masked.
 They are vulnerable to being used for tax fraud and/or bribery and corruption
 With substantially more volume and larger financial values than on a personal account it can be
difficult to identify transactions that are out of line with normal account activity.
 Nominee directors and shareholders can be used to further distance    an individual from the
business while maintaining the control a money launderer seeks.

Question 7
2

MONEYVAL has identified a number of reasons why the securities market could be vulnerable to
money laundering. What are these reasons?

Answer:

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 The speed with which securities transactions can be executed and settled.
 The number of large-volume transactions   conducted.
 The large volume of over-the-counter securities transactions conducted in MONEYVAL member
countries.
 The international nature of the securities markets.
 Mixing ‘clean’ and ‘dirty’ money in securities market transactions together with the large volume
of transactions makes investigations extremely difficult.

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