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In the money laundering process, which stage involves the initial introduction of illicit funds into the financial system?
Money Laundering Stages
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In the money laundering process, which stage involves the initial introduction of illicit funds into the financial system?
Placement
Layering
Integration
Structuring
Correct answer
Placement
Placement is the first stage where cash or proceeds are placed into financial institutions. Structuring is a technique, not a stage. Layering obscures the audit trail, and integration makes funds appear legitimate.
A compliance officer notices a customer makes multiple cash deposits of $9,900 each on consecutive days, followed by wire transfers to a high-risk jurisdiction. What is the most appropriate action?
Close the account immediately to prevent further activity.
Conduct enhanced due diligence and consider filing a SAR.
Report each deposit individually as a cash transaction report.
Ignore the activity since each deposit is below $10,000.
Correct answer
Conduct enhanced due diligence and consider filing a SAR.
Multiple deposits just below the threshold suggest structuring, which is suspicious. Enhanced due diligence is needed to determine if a SAR is warranted. Closing the account may tip off the customer; ignoring activity violates AML obligations; cash transaction reports are not sufficient alone.
Under the risk-based approach, which scenario would most likely qualify for simplified due diligence (SDD)?
A customer who is a politically exposed person (PEP).
A customer requesting a large cross-border wire transfer.
A publicly traded company with transparent ownership structure.
A cash-intensive business such as a convenience store.
Correct answer
A publicly traded company with transparent ownership structure.
SDD is for lower-risk customers. A publicly traded company with transparent ownership is typically low risk. PEPs, large cross-border wires, and cash-intensive businesses are higher risk and require standard or enhanced due diligence.
A bank is opening an account for a shell company incorporated in a secrecy jurisdiction. Which measure is most critical to identify the natural persons who ultimately own or control the company?
Obtaining a copy of the company's certificate of incorporation.
Verifying the identity of the registered agent.
Reviewing the company's business plan and financial projections.
Requesting a list of shareholders with ownership of 25% or more.
Correct answer
Requesting a list of shareholders with ownership of 25% or more.
Beneficial ownership identification requires obtaining information on individuals with significant ownership (typically 25% or more). A certificate of incorporation only proves legal existence, not ownership. Registered agents are intermediaries, not beneficial owners. Business plans do not reveal ownership.
According to FATF Recommendation 10, when is customer due diligence (CDD) required?
Only when a customer opens a new account.
When establishing a business relationship, when conducting an occasional transaction above a threshold, or when there is suspicion of money laundering.
Only when a customer conducts a transaction over $10,000.
CDD is not required for existing customers if they are low risk.
Correct answer
When establishing a business relationship, when conducting an occasional transaction above a threshold, or when there is suspicion of money laundering.
FATF Recommendation 10 requires CDD at relationship establishment, for occasional transactions above a designated threshold, when there is suspicion of ML/TF, or when there are doubts about previously obtained customer data. It is not just for new accounts or specific thresholds; ongoing due diligence is also required.
A teller suspects a customer is laundering money through a series of small transactions. The total amount involved is $8,000. What should the teller do?
File a SAR only if the total reaches $10,000 or more.
Report the suspicious activity to the compliance officer, who will decide if a SAR is warranted.
Ignore the activity because no single transaction exceeds the reporting threshold.
Advise the customer to break transactions into smaller amounts to avoid suspicion.
Correct answer
Ignore the activity because no single transaction exceeds the reporting threshold.
Suspicion triggers reporting obligations, not transaction amount thresholds. The teller should escalate internally. Filing a SAR is a compliance officer decision. Ignoring or advising on structuring is illegal.
Which organization is a global network of financial intelligence units (FIUs) that facilitates information sharing on suspicious transactions?
Financial Action Task Force (FATF)
International Monetary Fund (IMF)
World Bank Group
The Egmont Group
Correct answer
The Egmont Group
The Egmont Group is the international network of FIUs. FATF sets standards, IMF and World Bank focus on financial stability and development.
A bank's screening system flags a customer name that closely matches a name on a sanctions list. After initial review, the bank determines with high confidence it is a false positive. What is the appropriate action?
Document the false positive determination and allow normal processing to continue.
Freeze the account while awaiting confirmation from the regulatory authority.
File a SAR explaining the potential match and the bank's conclusion.
Contact the customer to verify their identity before taking any action.
Correct answer
Document the false positive determination and allow normal processing to continue.
If the bank confidently determines a false positive, it should document the review and reasoning, then clear the alert. Freezing without suspicion is unnecessary; filing a SAR is not required for false positives; contacting the customer may tip off if it is a true match.
What is a key difference between money laundering and terrorist financing?
Terrorist financing always involves smaller amounts than money laundering.
Money laundering is illegal only in certain jurisdictions, while terrorist financing is universally prohibited.
Money laundering requires funds derived from criminal activity; terrorist financing may use legitimate funds.
Terrorist financing does not involve the financial system; money laundering does.
Correct answer
Money laundering requires funds derived from criminal activity; terrorist financing may use legitimate funds.
Money laundering presupposes a predicate offense generating illicit funds. Terrorist financing can involve clean funds intended for illegal acts. Both are illegal globally; amounts vary; both use financial systems.
According to FATF standards, for how long must financial institutions retain transaction records after the business relationship has ended?
At least 3 years
At least 5 years
At least 7 years
At least 10 years
Correct answer
At least 5 years
FATF recommends a minimum of 5 years for transaction records after the relationship ends or the occasional transaction is completed. Some national laws may require longer, but 5 years is the minimum standard.
Recall the answer before opening each card.
Placement, where illicit cash or proceeds are introduced into the financial system, often through deposits or purchases.
Conduct enhanced due diligence and consider filing a SAR. Structuring indicates potential money laundering, requiring investigation.
A publicly traded company with transparent ownership structure, because it is lower risk. PEPs and cash-intensive businesses do not qualify.
Request a list of shareholders with 25% or more ownership. This reveals the natural persons who ultimately own or control the entity.
At business relationship establishment, for occasional transactions above a threshold, when suspicion of ML/TF exists, or when doubts about customer data arise.
Escalate internally to the compliance officer. Suspicion triggers reporting obligations regardless of amount; ignoring is illegal.
A global network of financial intelligence units (FIUs) that facilitates information sharing on suspicious transactions internationally.
Document the false positive determination and allow normal processing. Do not freeze, file SAR, or contact customer.
Terrorist financing can use legitimate funds for illegal acts, while money laundering always involves funds from criminal activity.
At least 5 years, per FATF minimum standard. National laws may require longer.
Making multiple transactions just below a reporting threshold to avoid detection. It is a red flag for money laundering.
FATF sets international standards for AML/CFT, including the 40 Recommendations. It conducts mutual evaluations of member countries.
Enhanced Due Diligence, applied to higher-risk customers (e.g., PEPs, shell companies) to obtain additional information on source of funds and beneficial ownership.
A crime that generates illicit funds that can be laundered. Examples: drug trafficking, fraud, corruption. Necessary for money laundering conviction.
Integration, where laundered funds are reintroduced into the economy as legitimate assets, making them appear clean.
Suspicious Activity Report, filed by financial institutions to FIUs when there is suspicion of ML/TF, regardless of transaction amount.
Politically Exposed Person, an individual with a prominent public function, posing higher corruption risk. Requires enhanced due diligence.
The natural person(s) who ultimately own or control a legal entity, typically owning 25% or more of shares or voting rights.
To enable FIU-to-FIU information sharing for combating money laundering and terrorist financing, complementing FATF standards.
Freeze the assets and file a SAR. Do not tip off the customer. Follow local sanctions regulations and notify relevant authorities.
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This is an analysis of the practice bank, not a claim about the vendor's live exam blueprint. Use it to identify the knowledge, judgment, and recall patterns exercised here, then verify your coverage against the current official exam guide.
The practice bank begins with a foundational question on the money laundering stages, specifically placement—the initial introduction of illicit funds into the financial system. This stage is often detected through structuring or other red flags. Question 2 builds on this by presenting a scenario of repeated deposits just below the reporting threshold followed by wires to a high-risk jurisdiction. The correct action is to conduct enhanced due diligence and consider filing a SAR, emphasizing that suspicion, not amount, triggers reporting obligations. Question 6 further reinforces that even small total amounts ($8,000) require escalation if suspicion exists, correcting a common misconception that only large transactions are reportable.
Question 3 tests the risk-based approach by asking which scenario qualifies for simplified due diligence (SDD). A publicly traded company with transparent ownership is low risk and qualifies for SDD, while PEPs, large cross-border wires, and cash-intensive businesses require standard or enhanced due diligence. Question 4 addresses beneficial ownership for shell companies in secrecy jurisdictions: the most critical measure is obtaining a list of shareholders with 25% or more ownership, as this reveals the natural persons who ultimately control the entity. Question 5 covers when CDD is required per FATF Recommendation 10: at relationship establishment, for occasional transactions above thresholds, upon suspicion of ML/TF, or when doubts about customer data arise.
The practice bank includes questions on global AML frameworks. Question 7 asks which organization is a global network of FIUs—the Egmont Group. Understanding the roles of FATF, Egmont, IMF, and World Bank is important. Question 10 tests record-keeping per FATF standards: transaction records must be retained for at least 5 years after the business relationship ends. This is a minimum, though national laws may require longer. Question 9 distinguishes money laundering from terrorist financing: ML requires funds from criminal activity, while TF may use legitimate funds. Both are illegal and use financial systems, but the source of funds differs.
Question 8 presents a sanctions screening scenario where a name closely matches a sanctions list but is determined with high confidence to be a false positive. The appropriate action is to document the false positive determination and allow normal processing to continue. Freezing assets without suspicion, filing a SAR for false positives, or contacting the customer (which could tip off a true match) are not correct. This highlights the importance of documented review processes and clearing alerts appropriately. Sanctions compliance requires efficient handling of false positives to avoid unnecessary operational friction while maintaining vigilance.
Study workflow
When analyzing transactions, first determine the stage: placement (cash entry), layering (complex transfers to obscure source), or integration (apparently legitimate investments). Focus on unusual cash deposits, structuring, or rapid movement to high-risk jurisdictions. These indicate placement or layering.
If you suspect money laundering or terrorist financing, escalate immediately to the compliance officer regardless of transaction amount. Do not ignore activity because it falls below thresholds. Document all red flags. The compliance officer will decide whether to file a SAR.
For legal entities, especially shell companies or those in secrecy jurisdictions, request documentation showing individuals with 25% or more ownership or control. Verify through independent sources. If ownership is opaque, apply enhanced due diligence and consider declining the relationship.
When a screening alert occurs, perform a thorough review comparing name, date of birth, address, and other identifiers. If you conclude with high confidence it is a false positive, document the review and reasoning, then clear the alert. Do not freeze assets or file SARs for confirmed false positives.
Assess customer risk based on type, geography, products, and channel. For low-risk customers (e.g., publicly traded companies), apply simplified due diligence. For higher risk (PEPs, cash-intensive businesses, large cross-border wires), apply enhanced due diligence including source of funds and beneficial ownership checks.
FAQ
Clear boundaries on what the bank covers, how to use it, and where official vendor information still matters.
Money laundering involves funds derived from criminal activity (predicate offense), while terrorist financing may use legitimate funds intended for illegal acts. Both are illegal and use the financial system, but the source of funds differs.
At least five years. Some national laws may require longer, but five years is the FATF minimum. This applies to all transaction records, including those related to occasional transactions.
The Egmont Group is a global network of financial intelligence units (FIUs) that facilitates information sharing on suspicious transactions and other financial intelligence. It complements FATF standard-setting by enabling operational cooperation.
CDD is required when establishing a business relationship, conducting an occasional transaction above a designated threshold (typically $15,000), when there is suspicion of money laundering or terrorist financing, or when there are doubts about previously obtained customer data.
Document the false positive determination, including the review methodology and reasoning, then clear the alert and allow normal processing. Do not freeze assets, file a SAR, or contact the customer, as these actions could be inappropriate or tip off a true match.
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