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CAFCA practice questions

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Question 1Anti-Money Laundering

A criminal hands a large amount of cash to a casino and buys chips. In the three-stage model of money laundering, which stage does this represent?

  1. Layering
  2. Placement Correct answer.
  3. Repatriation
  4. Integration

Explanation

Placement is the first stage, in which illicit cash enters the financial system or an asset-purchasing environment such as a casino. Layering then obscures the audit trail, and integration returns the value to the criminal as apparently legitimate wealth.

Question 2Anti-Money Laundering

FATF guidance commonly cites which ownership percentage as the threshold for identifying a beneficial owner of a legal person?

  1. 50 percent
  2. 5 percent
  3. 25 percent Correct answer.
  4. 75 percent

Explanation

The FATF Recommendations and their interpretive notes use an ownership interest of 25 percent or more as the common reference point for identifying the natural persons who ultimately own a legal person, although countries may adopt a lower figure.

Question 3Anti-Money Laundering

An employee of a bank informs a client that a suspicious transaction report about the client has been sent to the financial intelligence unit. This conduct is known as:

  1. Commingling
  2. Structuring
  3. Layering
  4. Tipping off Correct answer.

Explanation

Tipping off is the disclosure to the subject of a report, or to a third party, that a suspicious transaction report has been or will be made. Most AML regimes criminalise it because disclosure can compromise an investigation.

Question 4Anti-Money Laundering

A customer makes five cash deposits of 9,000 each on consecutive days to stay below a 10,000 reporting threshold. This behaviour is best described as:

  1. Round-tripping
  2. Cuckoo smurfing
  3. Trade-based laundering
  4. Structuring Correct answer.

Explanation

Structuring, also called smurfing, is the deliberate splitting of transactions to avoid crossing a reporting or record-keeping threshold. The pattern is a red flag even where each individual deposit is lawful in isolation.

Question 5Anti-Money Laundering

Which body is normally responsible at national level for receiving, analysing and disseminating suspicious transaction reports?

  1. The financial intelligence unit Correct answer.
  2. The central bank
  3. The deposit insurance fund
  4. The securities regulator

Explanation

A financial intelligence unit is the national centre responsible for receiving, analysing and passing on suspicious transaction reports and other information relevant to money laundering and terrorist financing.

Question 6Anti-Money Laundering

Which individual meets the FATF definition of a politically exposed person?

  1. A company owned by a foreign government
  2. A person entrusted with a prominent public function Correct answer.
  3. A person previously convicted of tax fraud
  4. A wealthy businessperson with no government role

Explanation

A PEP is an individual who is or has been entrusted with prominent public functions, such as a head of state, senior politician, senior official, judge or military officer. The risk attaches to the public position rather than to wealth or to a criminal record.

Question 7Anti-Money Laundering

The FATF Recommendations require financial institutions to retain customer due diligence and transaction records for at least:

  1. Three years
  2. One year
  3. Twelve years
  4. Five years Correct answer.

Explanation

The FATF standard sets a minimum retention period of five years after the business relationship has ended or the transaction has been carried out. Jurisdictions are free to require longer periods.

Question 8Anti-Money Laundering

Which intergovernmental body issues the Forty Recommendations that form the global standard for anti-money laundering and counter-terrorist financing?

  1. The Egmont Group
  2. The Financial Action Task Force Correct answer.
  3. The International Monetary Fund
  4. The Basel Committee on Banking Supervision

Explanation

The Financial Action Task Force sets the international AML/CFT standards through its Recommendations and assesses jurisdictions through mutual evaluations.

Question 9Anti-Money Laundering

For a cross-border wire transfer, the FATF travel rule requires that the payment message carry:

  1. Only the receiving bank's name and value date
  2. Only the amount and currency of the payment
  3. A full copy of the originator's identification documents
  4. Originator and beneficiary details Correct answer.

Explanation

The travel rule requires originator information (name, account number and address or national identity number, date and place of birth) and beneficiary information to travel with the transfer. The information must be available throughout the payment chain so that the parties can be identified.

Question 10Anti-Money Laundering

Under the FATF standards, banks are prohibited from entering into correspondent banking relationships with:

  1. Credit unions that are not listed companies
  2. Foreign branches of their own banking group
  3. Shell banks with no physical presence anywhere Correct answer.
  4. Banks licensed in jurisdictions with weaker AML laws

Explanation

The FATF requires countries to prohibit banks from entering into or continuing correspondent banking relationships with shell banks, meaning institutions incorporated in one jurisdiction with no physical presence or meaningful management there.

Question 11Anti-Money Laundering

A bank onboards a customer who is identified as a foreign politically exposed person. Beyond standard due diligence, the FATF requires the bank to:

  1. File a suspicious transaction report as soon as the account is opened
  2. Close the account within thirty days of onboarding
  3. Reduce ongoing monitoring because public figures present a low risk
  4. Obtain senior management approval and verify source of wealth Correct answer.

Explanation

For PEPs the FATF requires enhanced measures: senior management approval for establishing or continuing the relationship, reasonable steps to establish source of wealth and source of funds, and enhanced ongoing monitoring of the account.

Question 12Anti-Money Laundering

Which practice is a classic indicator of trade-based money laundering?

  1. Sending funds through an unregistered money transfer operator
  2. Depositing cash repeatedly below the reporting threshold
  3. Over-invoicing or under-invoicing goods on trade documents Correct answer.
  4. Surrendering a life insurance policy early

Explanation

Trade-based money laundering moves value by misrepresenting the price, quantity or quality of goods, so the invoice does not reflect the real value of the shipment and the difference is transferred between the trading parties.

Question 13Anti-Money Laundering

What is the principal money laundering risk associated with hawala-style value transfer systems?

  1. Funds are held in escrow by a regulated custodian
  2. Transactions are always reported to the financial intelligence unit
  3. Identities are verified more strictly than at banks
  4. Settlement occurs outside the formal banking system Correct answer.

Explanation

Hawala and similar informal value transfer systems settle through trust and netting among brokers, often outside the regulated financial sector, leaving little documentary trail and making transactions difficult to reconstruct.

Question 14Anti-Money Laundering

Which statement best distinguishes sanctions screening from PEP screening?

  1. Sanctions screening implements legal prohibitions; PEP screening flags corruption risk Correct answer.
  2. Sanctions screening applies only to individuals while PEP screening applies only to companies
  3. PEP screening is a legal obligation whereas sanctions screening is purely voluntary for banks
  4. Both checks are identical and are applied at exactly the same stage of the onboarding process

Explanation

Sanctions screening enforces legal prohibitions on dealing with designated persons or entities, and a true match must be blocked and reported. PEP screening is a risk-management control that triggers enhanced due diligence rather than an automatic prohibition.

Question 15Anti-Money Laundering

Which event should prompt a bank to review a customer's risk rating?

  1. The bank upgrades its core banking software
  2. A large payment from an unconnected offshore entity Correct answer.
  3. The customer requests a replacement debit card
  4. The customer's salary is credited on the same day of each month as expected

Explanation

Ongoing monitoring requires the institution to keep the customer profile current, and activity inconsistent with the expected pattern is a trigger to reassess risk and consider a suspicious transaction report.

Question 16Anti-Money Laundering

Simplified due diligence is appropriate only when:

  1. The relationship is low risk and no suspicion arises Correct answer.
  2. The customer declines to provide identification documents
  3. The customer is a foreign politically exposed person
  4. The transaction is above a fixed internal threshold

Explanation

Simplified measures are permitted only where the institution has determined the relationship to be low risk and there is no suspicion of money laundering or terrorist financing. They never allow identification to be skipped altogether.

Question 17Anti-Money Laundering

A corporate customer's shares are held by a nominee company in a secrecy jurisdiction. How should the bank respond?

  1. Accept the nominee company as the beneficial owner
  2. Rely on the corporate register entry alone
  3. Decline to open the account without further review
  4. Look through the nominee to the natural persons Correct answer.

Explanation

A nominee arrangement does not remove the need to identify the natural persons who ultimately own or control the customer. The bank should look through the structure and apply enhanced measures where ownership is opaque.

Question 18Anti-Money Laundering

In the AML context, de-risking refers to:

  1. Reducing a customer's transaction limits after a review
  2. Exiting relationships to avoid rather than manage risk Correct answer.
  3. Lowering a risk rating after enhanced due diligence
  4. Sharing risk data with other institutions in the same group

Explanation

De-risking is the practice of terminating or restricting relationships with whole categories of customers in order to avoid risk rather than assess and manage it. Supervisors treat blanket de-risking as harmful because it can exclude legitimate customers from the financial system.

Question 19Anti-Money Laundering

Which pattern in a property purchase most strongly suggests money laundering?

  1. Funding by unrelated third parties and a quick loss-making resale Correct answer.
  2. A mortgage from a regulated bank covering most of the purchase price
  3. Purchase by a couple of a home they intend to live in
  4. Payment from the buyer's own long-standing savings account

Explanation

Use of third-party funds with no apparent link to the buyer, combined with a rapid resale below cost, is inconsistent with a normal property purchase and indicates value being moved or integrated through real estate.

Question 20Anti-Money Laundering

What is the main consequence of a jurisdiction being placed on the FATF's list of jurisdictions under increased monitoring?

  1. The FATF takes over its AML supervision
  2. The jurisdiction is expelled from the IMF
  3. Its banks lose access to all correspondent accounts
  4. It reports progress against an agreed action plan Correct answer.

Explanation

Jurisdictions placed under increased monitoring have committed to an action plan and are expected to report progress against it. The FATF does not assume supervisory responsibility or impose automatic prohibitions on the financial sector.

Question 21Anti-Money Laundering

Which international instrument first established money laundering as an offence at the global level in the context of drug trafficking?

  1. The 2003 Merida Convention
  2. The 2000 Palermo Convention
  3. The 1988 Vienna Convention Correct answer.
  4. The 1999 Terrorist Financing Convention

Explanation

The 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances required states to criminalise the laundering of drug proceeds. Later instruments extended the obligation to organised crime, terrorist financing and corruption.

Question 22Anti-Money Laundering

A respondent bank's customers can transact directly through an account it holds at a correspondent bank. What additional step does the FATF require the correspondent to take?

  1. Treat the arrangement as a normal corporate account with no extra checks
  2. Obtain the customers' consent to share their data
  3. Confirm the respondent can identify its underlying customers Correct answer.
  4. Report every transaction to the financial intelligence unit

Explanation

A payable-through account allows the respondent's customers to conduct business directly, so the correspondent must be satisfied about the respondent's customer due diligence on those customers and be able to obtain relevant information on request.

Question 23Anti-Money Laundering

A bank rates a customer relationship as high inherent risk but applies strong mitigating controls. Which statement is correct?

  1. Residual risk always equals inherent risk for high-risk customers
  2. The relationship must be exited once rated high risk
  3. Residual risk may fall if controls are effective Correct answer.
  4. Inherent risk rises because the controls add complexity

Explanation

Inherent risk is assessed before controls, and residual risk is what remains after mitigation is applied. A high-risk relationship can be acceptable where effective controls reduce the remaining risk to a level the institution is prepared to accept.

Question 24Anti-Money Laundering

Which platform do financial intelligence units use to exchange information securely within the Egmont Group?

  1. The Basel secure line
  2. The Wolfsberg portal
  3. The SWIFT MT202 network
  4. The Egmont Secure Web Correct answer.

Explanation

The Egmont Secure Web is the encrypted communication system through which member financial intelligence units exchange information and requests for assistance.

Question 25Anti-Money Laundering

Which feature most clearly distinguishes terrorist financing from conventional money laundering?

  1. Funds are always moved through the formal banking system
  2. The funds must be derived from a predicate offence
  3. Funds may be lawfully obtained and small in amount Correct answer.
  4. The activity always involves cash couriers

Explanation

Terrorist financing can involve legitimately earned or donated money and very small sums, because the objective is to fund terrorist activity rather than to conceal the origin of criminal proceeds. Money laundering, by contrast, is defined by the handling of proceeds of crime.

Question 26Anti-Money Laundering

In the three-stage model of money laundering, which stage involves placing illicit cash into the financial system?

  1. Layering
  2. Placement Correct answer.
  3. Extraction
  4. Integration

Explanation

Placement is the first stage, where illicit cash or assets enter the financial system. Layering then disguises the origin, and integration reintroduces funds into the legitimate economy. Extraction is not part of the standard three-stage model.

Question 27Anti-Money Laundering

What does the abbreviation CDD stand for in anti-money laundering?

  1. Customer Data Disclosure
  2. Central Deposit Documentation
  3. Compliance Data Declaration
  4. Customer Due Diligence Correct answer.

Explanation

CDD means Customer Due Diligence, the process of identifying and verifying customers, understanding the business relationship, and assessing risk. It is a core obligation under the FATF Recommendations.

Question 28Anti-Money Laundering

Which activity is a core component of customer due diligence?

  1. Verifying the customer's identity Correct answer.
  2. Assigning a credit limit
  3. Preparing the customer's tax return
  4. Setting the customer's interest rate

Explanation

CDD includes identifying the customer, verifying identity using reliable documents or data, identifying beneficial owners, and understanding the purpose of the relationship. Credit decisions, pricing, and tax preparation are separate commercial or tax activities.

Question 29Anti-Money Laundering

What is the primary purpose of a suspicious transaction report?

  1. To obtain a court order
  2. To alert the financial intelligence unit Correct answer.
  3. To notify the customer of an investigation
  4. To freeze the customer's account

Explanation

A suspicious transaction report is submitted to the financial intelligence unit so it can analyse suspected money laundering or terrorist financing. Filing a report does not itself freeze accounts, obtain court orders, or permit the institution to inform the customer.

Question 30Anti-Money Laundering

What does 'tipping off' mean in the AML context?

  1. Closing a customer account without explanation
  2. Telling the customer a suspicious report was filed Correct answer.
  3. Reporting a suspicious transaction to the regulator
  4. Training staff on AML procedures

Explanation

Tipping off is disclosing to the customer, or another unauthorised person, that a suspicious transaction report has been made or that an investigation is underway. It is prohibited because it can prejudice the investigation.

Question 31Anti-Money Laundering

Under a risk-based approach, which customers should receive enhanced due diligence?

  1. Customers assessed as higher risk Correct answer.
  2. Customers who use online banking
  3. Customers who have been with the bank for many years
  4. Customers with low-value accounts

Explanation

Enhanced due diligence is applied when the customer, product, delivery channel, or geography presents higher money laundering or terrorist financing risk. Low-value accounts, long tenure, or online banking alone do not automatically require EDD.

Question 32Anti-Money Laundering

Who is a beneficial owner of a legal entity?

  1. The company's external auditor
  2. The legal entity named on the account application
  3. The natural person who ultimately controls it Correct answer.
  4. The bank officer who opens the account

Explanation

A beneficial owner is a natural person who ultimately owns or controls a legal entity or arrangement. Identifying the beneficial owner is essential because legal entities can obscure who really benefits from a relationship.

Question 33Anti-Money Laundering

What is the primary function of a financial intelligence unit?

  1. To receive and analyze suspicious reports Correct answer.
  2. To set international accounting standards
  3. To prosecute money laundering cases in court
  4. To supervise banks' lending practices

Explanation

A financial intelligence unit receives, analyzes, and disseminates suspicious transaction reports and other financial information to competent authorities. Prosecution and lending supervision are carried out by other bodies.

Question 34Anti-Money Laundering

A customer's source of wealth is best described as:

  1. The value of the customer's home
  2. The customer's current salary
  3. The origin of the customer's total assets Correct answer.
  4. The amount of cash the customer deposits each month

Explanation

Source of wealth explains how the customer's overall assets were accumulated, such as through business ownership, inheritance, or investments. Source of funds is narrower and explains the origin of the funds used in a specific transaction or relationship.

Question 35Anti-Money Laundering

A customer makes several cash deposits of $9,500, each just below a $10,000 reporting threshold. This behavior is best described as:

  1. Cuckoo smurfing
  2. Integration
  3. Structuring Correct answer.
  4. Trade-based laundering

Explanation

Structuring is deliberately splitting transactions to avoid reporting or identification thresholds. Repeated deposits just below a threshold are a classic red flag and may itself be a criminal offence.

Question 36Anti-Money Laundering

Which ongoing monitoring practice is most appropriate for a high-risk customer?

  1. Closing the account immediately without review
  2. Conducting periodic reviews at more frequent intervals Correct answer.
  3. Reviewing the relationship only when the customer complains
  4. Waiting for law enforcement to request a review

Explanation

Ongoing monitoring should be tailored to risk, with high-risk relationships reviewed more frequently and subjected to closer transaction monitoring. Waiting for complaints or law enforcement requests is reactive and does not meet the risk-based approach.

Question 37Anti-Money Laundering

Under FATF guidance, at what ownership or control threshold should a natural person generally be identified as a beneficial owner?

  1. 25% Correct answer.
  2. 10%
  3. 20%
  4. 15%

Explanation

The FATF recommends identifying natural persons who ultimately own or control at least 25% of a legal entity, or who exercise control by other means. Jurisdictions may adopt a lower threshold, but 25% is the international benchmark.

Question 38Anti-Money Laundering

A law firm receives a large cash payment from an unknown third party for a property purchase. What is the most appropriate AML response?

  1. Return the cash without keeping any record
  2. Report the matter only if the purchase later completes
  3. Accept the payment because property purchases are low risk
  4. Conduct enhanced due diligence and consider reporting Correct answer.

Explanation

Law firms are subject to AML obligations when handling real estate transactions. A large cash payment from an unknown third party is high risk, so enhanced due diligence is needed and a suspicious transaction report should be considered.

Question 39Anti-Money Laundering

What is a shell bank?

  1. A bank that operates only through mobile applications
  2. A bank that is owned by a foreign government
  3. A bank with no physical presence in any jurisdiction Correct answer.
  4. A bank that specializes in lending to shell companies

Explanation

A shell bank has no physical presence in any jurisdiction and is not affiliated with a regulated financial group. Banks are generally prohibited from entering into correspondent relationships with shell banks.

Question 40Anti-Money Laundering

Which practice is a trade-based money laundering technique involving issuing more than one invoice for the same shipment?

  1. Carousel fraud
  2. Multiple invoicing Correct answer.
  3. Cuckoo smurfing
  4. Loan-back financing

Explanation

Multiple invoicing occurs when more than one invoice is issued for the same shipment, allowing several payments to be justified for one set of goods. It is a recognised trade-based money laundering technique.

Question 41Anti-Money Laundering

The FATF travel rule for virtual asset transfers requires virtual asset service providers to:

  1. Verify the customer's tax residency
  2. Transmit originator and beneficiary information Correct answer.
  3. Report every transfer to the police
  4. Freeze all transfers above $1,000

Explanation

The travel rule requires virtual asset service providers to collect and transmit originator and beneficiary information with qualifying transfers. This supports traceability and helps identify suspicious activity.

Question 42Anti-Money Laundering

How should a bank treat a domestic politically exposed person under the FATF standards?

  1. Automatically refuse to open an account
  2. Treat the person as low risk in all cases
  3. Apply risk-based measures, enhanced if risk is higher Correct answer.
  4. Apply the same measures as for a foreign PEP in every case

Explanation

The FATF requires a risk-based approach for domestic PEPs, with enhanced measures where the risk is higher. Foreign PEPs are automatically treated as higher risk, but domestic PEPs are not subject to an automatic blanket rule.

Question 43Anti-Money Laundering

When should a suspicious transaction report be filed?

  1. At the end of each calendar year
  2. Only when the transaction exceeds $10,000
  3. Promptly after the institution forms a suspicion Correct answer.
  4. Only after the customer has been convicted of a crime

Explanation

A suspicious transaction report should be filed promptly once the institution has formed a suspicion, without waiting for proof or conviction. There is generally no monetary threshold for reporting suspicion.

Question 44Anti-Money Laundering

What is the main purpose of an independent AML audit?

  1. To negotiate with regulators on penalties
  2. To evaluate the AML program's effectiveness Correct answer.
  3. To prepare the institution's tax returns
  4. To approve new customer accounts

Explanation

Independent testing evaluates whether the AML compliance program is designed and operating effectively. It should be carried out by qualified persons independent of the AML function being tested.

Question 45Anti-Money Laundering

Which statement best describes sanctions screening?

  1. It identifies politically exposed persons only
  2. It checks whether a transaction is unusual for the customer
  3. It compares customers against designated persons lists Correct answer.
  4. It measures the customer's creditworthiness

Explanation

Sanctions screening compares customers, beneficial owners, and transactions against designated persons and entities lists issued by authorities. Transaction monitoring, by contrast, looks for activity that is unusual for the customer.

Question 46Anti-Money Laundering

What is a loan-back scheme?

  1. A customer repays a loan using cash from the same bank
  2. A company borrows from its own employees
  3. Illicit funds are sent abroad and returned as a loan Correct answer.
  4. A bank lends money to a customer who has no account

Explanation

In a loan-back scheme, illicit funds are moved offshore and then returned to the owner as an apparent legitimate loan. The loan documentation creates a false explanation for the funds' origin.

Question 47Anti-Money Laundering

What is cuckoo smurfing?

  1. Depositing cash into many accounts below reporting thresholds
  2. Purchasing real estate with cash and reselling it quickly
  3. Using a shell company to invoice goods at inflated prices
  4. Placing illicit funds into innocent third-party accounts Correct answer.

Explanation

Cuckoo smurfing involves placing illicit funds into the accounts of innocent third parties, often without their knowledge, to disguise the source. The third-party accounts act as a conduit for the laundered money.

Question 48Anti-Money Laundering

What does a FATF mutual evaluation assess?

  1. A country's implementation of FATF standards Correct answer.
  2. A company's internal audit function and controls
  3. A country's credit rating
  4. A bank's profitability

Explanation

A mutual evaluation is a peer review of how well a country has implemented the FATF Recommendations in law and in practice. It assesses both technical compliance and effectiveness.

Question 49Anti-Money Laundering

Why do many jurisdictions provide a safe harbor for institutions that file suspicious transaction reports in good faith?

  1. To guarantee the customer will be prosecuted
  2. To encourage reporting without liability fear Correct answer.
  3. To require institutions to notify the customer promptly
  4. To reward institutions with tax credits

Explanation

Safe harbor provisions protect reporting institutions from civil or criminal liability when they report suspicions in good faith. This encourages timely reporting and supports the effectiveness of the AML regime.

Question 50Anti-Money Laundering

In a trust, which parties are generally relevant to identifying beneficial owners?

  1. Only the bank that holds the trust's account and records
  2. The settlor, trustee, beneficiary, and protector Correct answer.
  3. Only the trustee's external accountant
  4. The trust's registered office landlord

Explanation

For trusts, beneficial ownership identification generally covers the settlor, trustee, beneficiary, and any protector, depending on the trust's structure. These parties can exercise control or benefit from the trust's assets.