The risk-based approach requires understanding the customer and their activity. The scenario contains multiple red flags: a transaction inconsistent with the known business, a high-risk jurisdiction, a vague payment description, and a questionable contract provided after the fact. The correct step is to conduct further due diligence to obtain a clear, legitimate economic purpose before deciding on any further action (like filing a SAR or updating the risk rating). Filing an SAR immediately may be premature without further inquiry, while closing the alert or lowering the risk rating ignores the obvious red flags.

An effective AML program is fundamentally risk-based. Its core purpose is to manage the institution’s specific ML/TF risks. While filing reports and avoiding fines are important outcomes, they are not the primary measure of effectiveness. A high number of SARs could indicate good detection or a poorly calibrated system, and a lack of fines could be due to luck or insufficient scrutiny. The true measure is whether the program’s components (risk assessment, controls, training, etc.) are working together to manage the institution’s unique risk profile.

A robust CIP and risk assessment form the foundation of a risk-based CDD program. Before monitoring transactions or training on specific red flags, the institution must have a reliable way to identify who its customers are (CIP) and to understand the risk they present based on factors like geography, product type, and transaction patterns. This risk scoring then informs the level of due diligence and monitoring applied. The other options are important subsequent steps, but they depend on this foundational element.

The scenario describes classic smurfing or structuring—breaking down a large sum of cash into multiple deposits below the reporting threshold to avoid the filing of a CTR. The key is not just the pattern but understanding why it’s happening. The investigative step must challenge the business owner’s explanation by comparing the volume of cash to reasonable sales expectations and, crucially, investigating the ultimate source of the cash to determine if it is legitimate business revenue or illicit proceeds.

Nesting occurs when a respondent bank (Bank A) provides access to its correspondent account to other, smaller banks (Bank B and C) that do not have their own direct correspondent relationship. This creates a significant transparency gap. The primary correspondent bank has a direct relationship and conducts due diligence only on Bank A. It has little to no visibility or control over the identities, activities, or AML controls of the nested banks (B and C) that are ultimately using its clearing services, creating a major blind spot for illicit activity.

FATF’s risk-based approach for NPOs focuses on protecting them from abuse, not unduly restricting their legitimate charitable work. The most effective control is promoting transparency and accountability within the NPO itself. This includes clear governance, detailed and audited financial records, knowledge of beneficiaries, and oversight of projects. This makes it harder for funds to be diverted. An outright ban on cash may be impractical in some regions, and registering as an MSB or restricting operations are not proportionate or primary FATF-recommended mitigants.

The core purpose of EDD for PEPs is to manage the higher risk of potential bribery, corruption, and embezzlement. Investigating the source of wealth (how the client’s total wealth was accumulated) and source of funds (the origin of the money for a particular transaction) is aimed at distinguishing between legitimate, lawfully derived assets and those that may constitute illicit proceeds. This determination is critical for deciding whether to maintain the relationship and for reporting suspicions via an SAR if illegitimacy is suspected.

The scenario describes a potential layering transaction common in casinos: using the casino to convert one instrument (a cashier’s check) into another (a casino check) made out to a different entity, with minimal gambling to create a veneer of legitimacy. The minimal play indicates the purpose is not gambling. This is a classic red flag for money laundering. The most direct regulatory response is to file a SAR to report the suspicious activity. A CTR is for cash transactions, and the instrument here is a cashier’s check. Tax forms and credit checks are not the primary AML concern in this context.

The Wolfsberg Group is an association of global banks that developed and maintains a series of voluntary, industry-led frameworks and guidance (like the Wolfsberg Principles) to help manage financial crime risks. They are particularly influential in areas like private banking and correspondent banking due diligence. They are not binding law, enforcement actions, or a government examination manual, but they represent a key industry standard that often informs regulatory expectations and institutional best practices.

The risk-based approach requires understanding the customer and their activity. The scenario contains multiple red flags: a transaction inconsistent with the known business, a high-risk jurisdiction, a vague payment description, and a questionable contract provided after the fact. The correct step is to conduct further due diligence to obtain a clear, legitimate economic purpose before deciding on any further action (like filing a SAR or updating the risk rating). Filing an SAR immediately may be premature without further inquiry, while closing the alert or lowering the risk rating ignores the obvious red flags.0