Anti Money Laundering: The Framework, Stages, and Obligations
The three stages
Placement (introducing illicit cash into the financial system), layering (obscuring origin through complex transactions), and integration (reintroducing funds as apparently legitimate). Questions often ask which stage a scenario represents; note that trade finance can serve all three, and layering is the most common in trade contexts.
The obligations framework
Candidates must know the pillars: a risk-based approach, customer due diligence, ongoing monitoring, recordkeeping, suspicious activity/transaction reporting, a nominated compliance officer, staff training, and an independent audit function. The risk-based approach means controls are proportionate to assessed risk - not that high-risk customers can be declined automatically, nor that all customers receive maximum scrutiny.
Reporting and tipping off
Suspicious transaction reports are made to the financial intelligence unit. Tipping off - disclosing to the customer that a report has been or may be made - is generally prohibited. Know the difference between an internal escalation and an external report; the internal decision to escalate is not itself a report to the FIU.
Traps
- Confusing monitoring (ongoing, system- and risk-driven) with CDD (point-in-time identity and risk understanding).
- Assuming a suspicious transaction must be proven illegal before reporting - reasonable suspicion suffices.
- Forgetting that recordkeeping obligations typically extend years beyond the end of the relationship.
Rule of thumb
When in doubt about whether to report: suspicion, not proof is the threshold. Document the reasoning and escalate.
Worked example: A customer with no trade background begins receiving many small third-party payments that are consolidated and wired onward to a high-risk jurisdiction. This is layering behaviour; the correct action is escalation and a suspicious transaction report, not simply a request for more invoices.