Financial Institutions and Money Laundering Risks

This set of flashcards covers key concepts regarding financial institutions, money laundering risks, AML compliance, and related regulatory issues.

What are the consequences of AML compliance failures for financial institutions?

They expose institutions to regulatory and reputational risks, result in severe financial penalties, and can damage long-term viability in the global market.

What is operational risk in the context of financial institutions?

Operational risk is the direct or indirect loss of operations due to inadequate or failed internal processes, people, systems, or external events.

What is legal risk for an organization?

Legal risk is the possibility of criminal penalties, lawsuits, or contracts that cannot be enforced affecting the organization's operations.

How does concentration risk affect financial institutions?

Concentration risk arises from over-exposure to a single customer or a group of related customers, increasing vulnerability to financial crime.

Why is reputational risk critical for financial institutions?

Reputational risk can lead to loss of customer confidence and targeted criminal actions, especially if institutions are known to have weak controls.

What are the three stages of money laundering?

The three stages are placement, layering, and integration.

How can financial institutions mitigate money laundering risks associated with complex ownership structures?

By implementing robust customer due diligence (CDD) and verification processes to identify beneficial ownership.

What are shell and shelf companies?

Shell companies have no significant operations or assets while shelf companies have no activity and can be sold later to appear legitimate.

What was the outcome of the Danske Bank scandal?

Danske Bank faced significant regulatory scrutiny, leading to the resignation of top executives, and paid fines of more than US$2 billion.

What defines a politically exposed person (PEP)?

A PEP is an individual with prominent public functions, including their immediate family and close associates.

What is the difference between a beneficial owner (BO) and an ultimate beneficial owner (UBO)?

A BO is an individual or entity that owns a legal entity, while a UBO is a natural person who ultimately owns a substantial percentage of that entity.

How might financial institutions determine the threshold for beneficial ownership?

Using a risk-based approach, with thresholds potentially as low as 5% for high-risk customers.