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CAMS practice questions

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Question 1Money Laundering and Terrorist Financing Risks

A restaurant owner deposits large amounts of cash into a bank account and then wires the funds to an offshore account. In the three-stage model of money laundering, the initial cash deposit represents which stage?

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

Explanation

Placement is the first stage, in which illicit cash is introduced into the financial system. Depositing cash into an account is the classic placement activity, after which layering and integration may follow.

Question 2Money Laundering and Terrorist Financing Risks

Which stage of money laundering is designed to separate illicit funds from their source by creating complex chains of transactions?

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

Explanation

Layering is the second stage and uses multiple transfers, accounts, or jurisdictions to break the audit trail. Its purpose is to make the funds difficult to trace back to the predicate offense.

Question 3Money Laundering and Terrorist Financing Risks

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

  1. Funds are always laundered through casinos
  2. Funds are always derived from drug trafficking
  3. Funds must always cross an international border
  4. Funds may originate from legitimate sources Correct answer.

Explanation

Terrorist financing can use legitimately earned money, donations, or self-funding, so the origin of funds is not necessarily criminal. Money laundering, by contrast, always involves proceeds of a predicate offense.

Question 4Money Laundering and Terrorist Financing Risks

A customer makes repeated cash deposits of $9,000 to avoid the $10,000 currency transaction reporting threshold. This activity is best described as:

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

Explanation

Structuring, also called smurfing, is the deliberate splitting of transactions to stay below reporting or recordkeeping thresholds. The pattern of repeated just-below-threshold deposits is the key indicator.

Question 5Money Laundering and Terrorist Financing Risks

Which type of business is generally considered to present elevated money laundering risk because it handles large volumes of cash?

  1. A cash-heavy retail business Correct answer.
  2. A residential landscaping services firm
  3. A software licensing and consulting company
  4. A government-funded secondary school

Explanation

Businesses that generate substantial cash receipts can commingle illicit cash with legitimate revenue. This makes it difficult to distinguish criminal proceeds from genuine sales.

Question 6Money Laundering and Terrorist Financing Risks

What is the primary purpose of the Financial Action Task Force (FATF)?

  1. To set AML/CFT standards and assess compliance Correct answer.
  2. To license casinos in member countries
  3. To prosecute money laundering cases in national courts
  4. To insure banks against money laundering losses

Explanation

The FATF is an intergovernmental body that issues recommendations and evaluates countries against them. It does not prosecute cases or license businesses.

Question 7Money Laundering and Terrorist Financing Risks

In AML terminology, a predicate offense is:

  1. A transaction structured to avoid currency reporting
  2. A penalty imposed for failing to report a transaction
  3. A crime committed by a financial institution's employee
  4. The crime that generates proceeds to be laundered Correct answer.

Explanation

A predicate offense is the underlying criminal activity, such as fraud or drug trafficking, that produces the proceeds later laundered. Money laundering is generally defined by reference to such offenses.

Question 8Money Laundering and Terrorist Financing Risks

Which party is the beneficial owner of a company?

  1. The bank that maintains the corporate account
  2. The natural person who ultimately owns it Correct answer.
  3. The nominee director listed in the registry
  4. The law firm that incorporated the company

Explanation

A beneficial owner is the natural person who ultimately owns or controls a legal arrangement, even if another name appears on records. Nominees and service providers act on that person's behalf.

Question 9Money Laundering and Terrorist Financing Risks

A customer in one country instructs a broker to pay a counterpart in another country, relying on trust and informal records rather than a licensed bank. This arrangement is best known as:

  1. Factoring
  2. Custody
  3. Correspondent banking
  4. Hawala Correct answer.

Explanation

Hawala is an informal value transfer system in which brokers settle obligations through trust and netting rather than formal banking channels. It leaves limited documentary records and is therefore attractive for illicit transfers.

Question 10Money Laundering and Terrorist Financing Risks

A trading company invoices imported goods at a price well above their market value, allowing the buyer to move value abroad. This is an example of:

  1. Informal value transfer through hawala brokers
  2. Structuring of currency deposits
  3. Cuckoo smurfing through nominee accounts
  4. Trade-based money laundering Correct answer.

Explanation

Trade-based money laundering uses mispricing, over-shipment, or misdescription of goods to move value across borders. Over-invoicing lets the buyer transfer excess funds to the seller under the cover of trade.

Question 11Money Laundering and Terrorist Financing Risks

Which characteristic is most typical of a shell company used in money laundering?

  1. It has no substantive business operations or assets Correct answer.
  2. It has a large staff and physical production facilities
  3. It is always listed on a major stock exchange
  4. It files detailed audited statements each quarter

Explanation

Shell companies exist mainly on paper, with no real operations, employees, or assets. That makes them useful for holding accounts and moving funds while concealing the true controller.

Question 12Money Laundering and Terrorist Financing Risks

A foreign official with authority over public procurement opens an account and receives large transfers from companies bidding on government contracts. This person is best classified as:

  1. A politically exposed person Correct answer.
  2. A beneficial owner of the account
  3. A nominee shareholder of record
  4. A money services business operator

Explanation

A politically exposed person holds a prominent public function and presents heightened corruption risk. Receiving payments from parties bidding for government contracts is a classic PEP risk indicator requiring enhanced due diligence.

Question 13Money Laundering and Terrorist Financing Risks

Which method involves physically moving currency across a border to place it in another jurisdiction?

  1. Loan-back financing
  2. Microcap manipulation
  3. Wire transfer layering
  4. Bulk cash smuggling Correct answer.

Explanation

Bulk cash smuggling is the physical concealment and transport of currency across borders. It removes cash from the domestic financial system so it can be deposited in another jurisdiction.

Question 14Money Laundering and Terrorist Financing Risks

A buyer purchases real estate with cash through a law firm and quickly resells it to a related party at a much higher price. Which risk does this illustrate?

  1. Sanctions evasion through insurance
  2. Real estate used to layer and integrate funds Correct answer.
  3. Misuse of correspondent accounts
  4. Abuse of securities settlement systems

Explanation

Real estate can absorb large sums and be resold at manipulated prices, allowing value to be moved and profits to appear legitimate. Rapid resale to a related party at an inflated price is a recognized indicator.

Question 15Money Laundering and Terrorist Financing Risks

Why do correspondent banking relationships present elevated AML risk?

  1. They remove the need for customer due diligence
  2. They require all transactions to be reported to FATF
  3. They apply only to domestic retail customers
  4. They provide access without direct customer contact Correct answer.

Explanation

A correspondent relationship lets a foreign institution process transactions through a bank without that bank having a direct relationship with the underlying customers. This reduces visibility, so due diligence on the respondent institution and its AML controls is essential.

Question 16Money Laundering and Terrorist Financing Risks

Which feature of virtual asset transfers creates particular AML challenges?

  1. Ownership records are publicly audited each day
  2. Pseudonymity and rapid cross-border movement Correct answer.
  3. Transactions are always settled in physical cash
  4. Transfers are limited to licensed banks

Explanation

Virtual asset transfers can move value quickly across borders with limited identification of the parties. This pseudonymity and speed make origin and ownership harder to verify.

Question 17Money Laundering and Terrorist Financing Risks

How is the charitable sector most commonly exploited for terrorist financing?

  1. By issuing false letters of credit for imports
  2. By diverting donated funds to support violent causes Correct answer.
  3. By using charity bank accounts to launder narcotics proceeds
  4. By manipulating stock prices of listed charities

Explanation

Charities raise funds publicly and often transfer money to difficult or conflict-affected regions, which can be exploited to divert donations. The misuse may involve false beneficiaries or co-opted local partners.

Question 18Money Laundering and Terrorist Financing Risks

A casino customer buys chips with cash, plays minimally, and later redeems the chips for a check. This behavior is a concern because it:

  1. Indicates structuring of currency reports
  2. Violates securities registration rules
  3. Can convert cash into a seemingly legitimate payment Correct answer.
  4. Shows the customer is a PEP

Explanation

Minimal play followed by redemption lets a customer exchange cash for a check from the casino, creating an apparent legitimate source. Casino cash handling therefore carries elevated laundering risk.

Question 19Money Laundering and Terrorist Financing Risks

An offshore company lends money to its own beneficial owner, who uses the funds to buy assets locally and repays the loan with the same funds. This technique is known as:

  1. Cuckoo smurfing
  2. Smurfing
  3. Loan-back laundering Correct answer.
  4. Carousel fraud

Explanation

In loan-back laundering, illicit funds are moved offshore and returned as a purported loan, creating a legitimate-looking paper trail. The borrower then repays with the same or related funds to complete the appearance of a genuine transaction.

Question 20Money Laundering and Terrorist Financing Risks

How does a sanctions screening program differ from AML transaction monitoring?

  1. It targets designated persons regardless of legitimacy Correct answer.
  2. It is designed to detect only tax evasion offences
  3. It is applied exclusively to physical cash transactions
  4. It is performed only when an account is closed

Explanation

Sanctions screening compares customers and transactions against designated-party lists and applies even when the underlying activity is otherwise lawful. AML monitoring instead looks for suspicious patterns suggesting criminal proceeds.

Question 21Money Laundering and Terrorist Financing Risks

In a black market peso exchange, how are drug proceeds typically converted into local currency for the trafficker?

  1. By declaring the cash at customs and paying duty
  2. By depositing the cash directly into a central bank account
  3. By using only formal wire transfers through correspondent banks
  4. By buying local goods with laundered currency for export Correct answer.

Explanation

Black market peso exchange uses the value of narcotics proceeds to purchase goods in one country that are exported and sold in another. The trafficker is paid in local currency from the sale proceeds, so no physical cash crosses the border.

Question 22Money Laundering and Terrorist Financing Risks

A bank observes multiple unrelated customers depositing funds into a single account, with the funds later withdrawn abroad. Which typology does this most closely match?

  1. Loan-back financing
  2. Pump and dump
  3. Cuckoo smurfing Correct answer.
  4. Carousel fraud

Explanation

Cuckoo smurfing involves third parties depositing funds into another person's account, often without that account holder's knowledge. The account holder then moves the funds onward, blending them with legitimate balances.

Question 23Money Laundering and Terrorist Financing Risks

Why is terrorist financing often difficult to detect through threshold-based monitoring?

  1. It is conducted only through virtual assets
  2. It often involves small sums below reporting thresholds Correct answer.
  3. It always involves amounts above reporting thresholds
  4. It never uses the formal financial system

Explanation

Terrorist financing frequently requires only modest amounts for logistics, recruitment, or attacks. Small transfers may fall below fixed reporting thresholds, so pattern-based and intelligence-led approaches are important.

Question 24Money Laundering and Terrorist Financing Risks

In a trade-based money laundering scheme, a company exports goods at a price far below market value to a related buyer abroad. What is the primary effect?

  1. Value moves to the buyer's jurisdiction for resale Correct answer.
  2. The shipment is automatically flagged as sanctioned
  3. The exporter records an inflated profit at home
  4. The importer pays excess duties to customs

Explanation

Under-invoicing lets the buyer obtain goods cheaply, so value effectively moves from the exporter's country to the buyer. The buyer can then resell at market price and retain the difference.

Question 25Money Laundering and Terrorist Financing Risks

A bank is assessing the risk of a product that allows anonymous cross-border transfers with no account relationship. Which risk factor is most relevant?

  1. Product and service risk Correct answer.
  2. Employee training level
  3. Branch location
  4. Customer occupation

Explanation

Product and service risk considers how a product's features, such as anonymity and ease of cross-border transfer, can facilitate laundering or terrorist financing. Anonymity combined with no account relationship reduces the bank's ability to identify the parties.

Question 26Money Laundering and Terrorist Financing Risks

Which stage of the money laundering process is designed to separate illicit proceeds from their source by moving funds through multiple accounts, entities and jurisdictions?

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

Explanation

Layering is the stage in which the launderer creates a complex series of conversions, transfers and transactions so that the audit trail becomes difficult to follow. Placement introduces the cash into the financial system and integration returns the funds to the economy as apparently legitimate assets. Repatriation is not one of the three recognised stages.

Question 27Money Laundering and Terrorist Financing Risks

At which stage of the laundering process are illicit funds generally most exposed to detection by a financial institution?

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

Explanation

Placement forces the launderer into direct contact with the financial system through cash deposits, purchases or transfers, which triggers identification requirements, cash-handling limits and reporting obligations. Once funds have been layered, the trail is harder to reconstruct and detection becomes more difficult.

Question 28Money Laundering and Terrorist Financing Risks

A customer divides a large cash sum into several smaller deposits, each deliberately kept below the applicable reporting threshold. This technique is known as:

  1. Round-tripping
  2. Netting
  3. Commingling
  4. Structuring Correct answer.

Explanation

Structuring, also called smurfing, is the deliberate splitting of transactions to stay under reporting and identification thresholds. It is a recognised indicator of money laundering and is itself frequently a criminal offence separate from the underlying predicate crime.

Question 29Money Laundering and Terrorist Financing Risks

Which customer characteristic is normally treated as a geographic risk factor in an AML risk assessment?

  1. The channel through which the account was opened
  2. The length of time the customer has held the account
  3. Residence in a poorly supervised jurisdiction Correct answer.
  4. The customer's stated occupation and source of wealth

Explanation

Geographic risk relates to the countries a customer is connected with, including residence, nationality, source of funds and transaction counterparties. Jurisdictions with weak AML supervision, corruption or sanctions exposure raise the risk rating of the relationship.

Question 30Money Laundering and Terrorist Financing Risks

In an AML risk framework, residual risk is best described as:

  1. Risk that remains after controls are applied Correct answer.
  2. The risk attached to a single high-risk customer
  3. The risk a supervisor assigns to an institution
  4. The level of risk before any controls are applied

Explanation

Residual risk is what is left once the institution's mitigation measures, such as due diligence and monitoring, have been applied to the inherent risk. Comparing inherent and residual risk shows whether the control environment is actually reducing exposure to an acceptable level.

Question 31Money Laundering and Terrorist Financing Risks

Which group is commonly described as 'gatekeepers' to the financial system in the context of money laundering?

  1. Credit rating analysts
  2. Retail bank tellers
  3. Central bank examiners
  4. Lawyers and accountants Correct answer.

Explanation

Lawyers, accountants, notaries and trust and company service providers are called gatekeepers because they control access to structures and services that launderers need, such as company formation, client accounts and property transfers. Their involvement gives illicit funds an appearance of professional legitimacy.

Question 32Money Laundering and Terrorist Financing Risks

Which statement best captures a fundamental difference between terrorist financing and money laundering?

  1. Terrorist financing can be funded from legitimate sources Correct answer.
  2. Terrorist financing is confined to jurisdictions with weak AML laws
  3. Money laundering always requires cash to cross a border
  4. Terrorist financing only concerns funds for a single planned attack

Explanation

Money laundering always involves the proceeds of a predicate crime, whereas terrorist financing can draw on legally earned income, donations or self-funding as well as criminal proceeds. The concern in terrorist financing is the intended purpose of the funds rather than only their origin.

Question 33Money Laundering and Terrorist Financing Risks

Bearer shares are an AML concern primarily because:

  1. They can only be issued to corporate rather than individual holders
  2. Whoever physically holds the certificate is the owner Correct answer.
  3. The holder must be identified to the issuing company each year
  4. They are subject to mandatory public disclosure in most company laws

Explanation

With bearer shares, ownership transfers with physical delivery of the certificate and no register records the holder. This allows control of a company to change anonymously, defeating beneficial ownership identification.

Question 34Money Laundering and Terrorist Financing Risks

A 22-year-old student answers an online advertisement offering payment for receiving transfers into a personal account and forwarding them to beneficiaries abroad. Which term best describes this activity?

  1. Smurf
  2. Front company
  3. Money mule Correct answer.
  4. Nominee director

Explanation

A money mule receives and forwards funds on behalf of someone else, often in return for a fee and sometimes without understanding the criminal purpose. Mules give launderers access to ordinary personal accounts that attract less scrutiny than the accounts of the organisers.

Question 35Money Laundering and Terrorist Financing Risks

Which life insurance feature presents the greatest money laundering vulnerability?

  1. Monthly renewable term cover with no cash value
  2. Group term cover paid by employer payroll deduction
  3. Policies naming a registered charity as beneficiary
  4. Single premium policies with early surrender options Correct answer.

Explanation

A single premium policy allows a large sum, potentially of illicit origin, to enter the insurance sector in one payment, and an early surrender returns the value as an apparently legitimate payout from a regulated firm. Term products without cash value do not offer the same route.

Question 36Money Laundering and Terrorist Financing Risks

An investor places matching buy and sell orders in the same security through two accounts they control, creating apparent trading activity and shifting value between the accounts. This is best described as:

  1. Front running
  2. Churning
  3. Wash trading Correct answer.
  4. Insider dealing

Explanation

Wash trading involves offsetting transactions in which beneficial ownership does not really change, so no genuine market exposure is created. It is used to generate apparent profits or losses that can justify the movement of value between accounts.

Question 37Money Laundering and Terrorist Financing Risks

A shell bank is best described as a bank that:

  1. Provides banking services only to other financial institutions
  2. Is licensed in several jurisdictions at the same time
  3. Operates online but maintains a fully licensed head office
  4. Has no physical presence in any country Correct answer.

Explanation

A shell bank has no physical presence in any jurisdiction and is unaffiliated with a regulated deposit-taking group, so there is no supervisor with effective oversight of its activities. FATF standards prohibit institutions from entering into or continuing correspondent relationships with such banks.

Question 38Money Laundering and Terrorist Financing Risks

Which characteristic of prepaid and stored-value cards raises AML concerns?

  1. Cards that carry a stored photograph of the holder
  2. Anonymous purchase and loading without identification Correct answer.
  3. Cards linked to a verified account holder
  4. Cards issued only to customers who attend a branch

Explanation

Where cards can be bought and loaded anonymously, and used in ways that are not linked to an account relationship, they provide a portable and largely untraceable store of value. This makes them attractive for placement and for moving funds across borders.

Question 39Money Laundering and Terrorist Financing Risks

Private banking relationships are generally assessed as higher risk for money laundering mainly because they:

  1. Are offered only to citizens of the bank's home country
  2. Are limited to customers holding one domestic savings account
  3. Combine high-value services with discretion and offshore structures Correct answer.
  4. Require full source-of-wealth proof for each transaction

Explanation

Private banking involves relationship managers acting for wealthy clients, often with multi-jurisdictional structures, delegated authority and a culture of discretion. These features can allow large sums to be moved with limited independent scrutiny.

Question 40Money Laundering and Terrorist Financing Risks

Trust and company service providers increase money laundering risk because:

  1. They can create legal entities without identifying the true owners Correct answer.
  2. They are the only professions permitted to open bank accounts for clients
  3. They are required by law to approve every transaction above a set amount
  4. They act as sole supervisor of all trust companies in a jurisdiction

Explanation

Trust and company service providers can form companies, trusts and foundations and may act as nominee shareholders or directors, placing a layer between the financial institution and the real owner. Where beneficial ownership is not identified, the institution cannot assess the true risk of the relationship.

Question 41Money Laundering and Terrorist Financing Risks

An exporter ships scrap metal, but the bill of lading and invoice describe the consignment as high-grade refined copper. Which trade-based money laundering technique does this illustrate?

  1. Misrepresenting the goods Correct answer.
  2. Over-invoicing the shipment
  3. Multiple invoicing of the shipment
  4. Under-invoicing the shipment

Explanation

Falsely describing the quality, quantity or type of goods allows a trader to justify a payment that does not match what was actually shipped. The discrepancy between the documentation and the real consignment transfers value between the parties.

Question 42Money Laundering and Terrorist Financing Risks

Which factor most increases the money laundering risk associated with an offshore financial centre?

  1. A requirement that all companies file audited accounts
  2. Strict secrecy provisions and light supervision Correct answer.
  3. Restriction of company formation to resident nationals
  4. Participation in automatic exchange of tax information

Explanation

Where company ownership is shielded by secrecy rules and supervisory resources are limited, launderers can establish structures that are hard for authorities to penetrate. Transparency measures such as audited filings and information exchange reduce, rather than increase, this risk.

Question 43Money Laundering and Terrorist Financing Risks

Online gambling operators present elevated money laundering risk mainly because they:

  1. Are required to report every wager to the financial intelligence unit
  2. Require customers to attend a licensed venue in person
  3. Permit rapid deposits, minimal play and withdrawals abroad Correct answer.
  4. Prohibit the use of third-party payment methods

Explanation

Online platforms allow funds to be deposited, briefly staked and withdrawn quickly, often to a different account or jurisdiction, which converts the source of the funds with little genuine gambling exposure. The absence of face-to-face contact further weakens identification.

Question 44Money Laundering and Terrorist Financing Risks

In addition to donations and state sponsorship, which activity is recognised as a common funding source for terrorist groups?

  1. Paying corporate income tax
  2. Issuing government bonds
  3. Kidnapping for ransom Correct answer.
  4. Depositing funds in escrow

Explanation

Terrorist organisations raise funds through a wide range of criminal activity, including kidnapping for ransom, extortion, robbery, smuggling and drug trafficking, as well as through legitimate income and donations. Ransom payments in particular can be large and are often moved quickly across borders.

Question 45Money Laundering and Terrorist Financing Risks

A 'nested' correspondent account arrangement arises when:

  1. Two banks in the same country open accounts for each other
  2. A bank provides services to an affiliate within the same group
  3. A customer holds accounts at several banks in the same country
  4. Clients reach a correspondent account through another bank Correct answer.

Explanation

Nesting occurs when a bank uses another institution's correspondent relationship to clear transactions for its own customers, so payments reach a correspondent account indirectly. The correspondent bank may have little visibility of the underlying clients and their jurisdictions.

Question 46Money Laundering and Terrorist Financing Risks

Which technique is used to break the traceability of virtual asset transactions?

  1. Routing funds through mixers and privacy coins Correct answer.
  2. Holding funds in a custodial account for a year
  3. Converting funds into physical gold before deposit
  4. Splitting deposits between accounts at one bank

Explanation

Mixers and privacy-enhancing assets pool or obscure the link between sending and receiving addresses, defeating blockchain analytics. Launderers may also convert between assets to make the trail harder to follow.

Question 47Money Laundering and Terrorist Financing Risks

Cuckoo smurfing is characterised by:

  1. The transfer of value through overstated trade invoices
  2. Deposits made only in amounts below the threshold by one person
  3. Deposits by third parties replacing an expected incoming transfer Correct answer.
  4. The purchase of insurance policies that are surrendered early

Explanation

In cuckoo smurfing, an expected international transfer is not sent through normal channels; instead, third parties deposit equivalent funds into the beneficiary's account, often in small amounts, so the beneficiary receives what appears to be a routine payment. The technique exploits legitimate accounts without the holders' knowledge.

Question 48Money Laundering and Terrorist Financing Risks

Missing trader (carousel) fraud typically involves:

  1. Using bogus charities to collect donations for fighters abroad
  2. Understating the value of imported goods to reduce customs duty
  3. Depositing cash in small amounts across multiple bank branches
  4. Goods traded across borders and VAT collected but not remitted Correct answer.

Explanation

In carousel fraud, goods are traded across borders in a loop so that VAT is charged and collected on sales but the defaulting trader disappears without remitting it to the tax authority. The resulting proceeds are criminal property that must then be laundered.

Question 49Money Laundering and Terrorist Financing Risks

Which indicator most strongly suggests that a trade finance relationship may involve trade-based money laundering?

  1. A long-standing importer whose shipment values match world prices
  2. Shipments inconsistent with the trader's known business Correct answer.
  3. A trader who uses one bank for all documentary credits
  4. A firm that insures every consignment with a local insurer

Explanation

Goods that do not match the customer's stated line of business, or quantities and values that are inconsistent with the market and with past activity, are classic trade-based money laundering red flags. The mismatch suggests the documents are being used to move value rather than to record a genuine sale.

Question 50Money Laundering and Terrorist Financing Risks

Freeports are attractive for laundering the proceeds of high-value crime mainly because they:

  1. Store valuables with little transparency and deferred tax Correct answer.
  2. Report all stored items to the financial intelligence unit
  3. Require the owner of every item to be publicly registered
  4. Prohibit the storage of art and other collectibles

Explanation

Freeports allow high-value movable goods such as art, jewellery and wine to be stored indefinitely with duties deferred and, in some cases, limited disclosure of the true owner. Ownership can be transferred while the item never leaves the warehouse, leaving little documentary evidence of the transactions.