Anti-Money Laundering: Core Concepts and Controls
The Three Stages and the Control Environment
AML questions test whether you understand money laundering as a process, not a single act. The classic staging is placement (introducing illicit cash into the financial system), layering (obscuring origin through transfers, conversions, and pass-through entities), and integration (reintroducing funds as apparently legitimate wealth). A frequent trap is asking which stage a fact pattern represents when the activity spans stages - answer with the stage where the primary risk sits, not every stage mentioned.
Candidates must know the pillars of an AML program: customer identification and verification (KYC/CDD), beneficial ownership identification, enhanced due diligence (EDD) for higher-risk relationships, ongoing monitoring, recordkeeping, and suspicious activity/transaction reporting. Understand risk-based approach: controls should be proportionate to customer, product, channel, and geographic risk. Know that PEPs (politically exposed persons) and their close associates/family require enhanced scrutiny, and that correspondent banking and nested relationships carry elevated risk.
Traps and Rule of Thumb
Common traps: confusing suspicious activity reporting with proving a crime (reporting is not an accusation; no tipping off); assuming a threshold triggers reporting when the obligation is suspicion-based; treating low-value transactions as automatically low-risk (structuring and smurfing involve small amounts). Another trap: source of funds versus source of wealth - the former is where this transaction's money came from, the latter is how the person built overall wealth.
Rule of thumb: Ask three questions in order - Who is the real person behind this? Where did the money originate? Does the pattern fit the stated purpose? If any answer is unsatisfactory and unexplained, escalate.
Worked example: A shell company opens an account, deposits many round-number cash amounts just under the reporting threshold, then wires funds to an unrelated jurisdiction. Placement = cash deposits; layering = wires through an entity with no apparent business; red flags = structuring, mismatch between stated business and activity.