Mastering KYC & AML Interview Ques ons

1.What is the purpose of AML and KYC regula ons?

Answer) AML (an -money laundering) is an umbrella term for the range of measures, controls, and
processes that firms must put in place in order to achieve regulatory compliance.

An -Money Laundering regula ons are in place to mi gate the risk of money laundering and
terrorism financing. Financial ins tu ons are required to monitor their clients to prevent money
laundering and report any financial crime they detect to relevant regulators.

KYC is a component part of AML, and refers specifically to the means by which firms establish and
verify their customers’ iden es, and monitor their financial behavior. Typically, the KYC process
involves the collec on and verifica on of a range of iden fying informa on from customers
including:

• Name

• Address

• Date of birth

Purpose of AML and KYC regula ons:

AML (An -Money Laundering) and KYC (Know Your Customer) regula ons are crucial components of
financial oversight and risk management, these designed to prevent and combat illegal financial
ac vi es.

Federal Reserve is an important en ty in the United States as RBI in India, AML and KYC regula ons
are typically overseen by various regulatory bodies, including the Financial Crimes Enforcement
Network (FinCEN).

AML (An -Money Laundering) Purpose:

➢ Detect and prevent the conversion of illegally obtained funds (from ac vi es such as drug
trafficking, corrup on, or fraud) into legal assets

➢ Iden fy and prevent the flow of funds to support terrorist ac vi es.

➢ Protect financial ins tu ons from being unwi ngly involved in illegal financial transac ons,
safeguarding their reputa on and stability.

KYC (Know Your Customer) Purpose:

➢ Verifying the iden ty of customers to ensure that financial ins tu ons are dealing with legi mate
individuals or en es.

➢ Understanding their customers, financial ins tu ons can assess the risk associated with each
customer and tailor their services.

➢ Preven ng iden ty the and fraud by confirming the authen city of customer informa on.

2. How do you verify a customer's iden ty during the onboarding process?

Answer) 1. Document Verifica on:

Reques ng customers to upload a photo or scanned copy of government-issued iden fica on, such
as a driver's license or passport or state issued ID. This helps establish their iden ty.

Few examples of document verifica on methods:

➢ OCR-Based Verifica on: Leveraging Op cal Character Recogni on (OCR) technology to extract
and verify informa on from iden ty documents.

➢ Image Authen ca on: Authen ca ng images of government-issued ID documents with

Government Website.

2. Biometric Authen ca on: Implement facial recogni on technology to match a selfie taken by the
customer with the photo on their government-issued ID.

3. Video Verifica on: Live video calls with customers where they can display their ID and answer
iden ty verifica on ques ons in real- me.

4.Two-Factor Authen ca on (2FA): SMS or email verifica on as part of a two-factor authen ca on

process, sending a one- me code to the customer's registered mobile number or email address.

3. What are some red flags that could indicate poten al money laundering ac vity?

Answer) Red flags indica ng poten al money laundering ac vity:

➢ Unusually large transac ons or a series of transac ons that exceed typical pa erns could signal
money laundering.

➢ A empts to evade repor ng requirements through structuring or layering transac ons may
indicate illicit financial ac vi es.

➢ Funds coming from unexpected or suspicious sources, especially if linked to high-risk jurisdic ons.

➢ Clients avoiding personal contact or providing limited informa on during onboarding.

➢ Abrupt and unexplained shi s in a customer's transac on behaviour or pa erns.

➢ Engaging in ac vi es inconsistent with the business's stated purpose.

4. How do you stay up-to-date with changes in AML and KYC regula ons and requirements?

Answer) For US based banking , we can stay updated on AML KYC norms by :

Government and Regulatory Websites:

FinCEN (Financial Crimes Enforcement Network): The primary US agency responsible for AML and
KYC, I regularly access their website for updates, advisories, and rule changes.

1. Federal Register: Monitor the Federal Register for any new or proposed regula ons related to AML
and KYC.

Other Relevant Agencies and track relevant informa on from other agencies like the Department of
the Treasury, the Federal Reserve and state-level financial regulators.

2. Financial Industry Associa ons and Publica ons:

American Bankers Associa on (ABA): Publica ons and updates from the ABA for their insights on
regulatory developments.

Financial Industry Regulatory Authority (FINRA): Relevant FINRA resources for member firms on
AML and KYC compliance.

Trade Publica ons: Monitor leading financial publica ons like American Banker, Wall Street Journal,
and others for news and analysis on regulatory changes.

3. Legal Resources:

Law Firms and Consul ng Firms: Reports and ar cles from legal and consul ng firms specializing in
financial compliance for their expert perspec ves.

Court Decisions: Monitor relevant court decisions that could impact the interpreta on or applica on
of AML and KYC regula ons.

5. What are the consequences of non-compliance with AML and KYC regula ons?

Answer) Financial Crimes Enforcement Network (FINCEN) plays a key role in enforcing An -Money
Laundering (AML) and Know Your Customer (KYC) regula ons in the US, Penal es and fines are
imposed by FINCEN in US Banking, please find the details on the consequences might be faced by
Banks

 Financial Penal es: Civil Money Penal es: FINCEN has the authority to impose civil
monetary penal es of up to $2.5 million per viola on, or twice the amount of funds involved
in the viola on, whichever is greater. These penal es can quickly escalate, especially for
repeated or egregious viola ons.
 Criminal Penal es: Inten onal viola ons of AML/KYC regula ons can be prosecuted as
criminal offenses, carrying poten al fines of up to $5 million and imprisonment for up to 30
years.
 Reputa onal Damage: Public Enforcement Ac ons: FINCEN publicly names and shames
ins tu ons found in viola on of AML/KYC regula ons, leading to significant reputa onal
damage and loss of trust from customers, partners, and investors.
 Other Consequences:

Exclusion from Government Contracts: Federal agencies may exclude your ins tu on from bidding
on government contracts if you are found in viola on of AML/KYC regula ons.

Professional Sanc ons: Regulatory bodies can suspend or revoke professional licenses of individuals
involved in non-compliant ac vi es.

Example :

Global Bank AML Fines:

In 2022, global banks faced significant AML fines, with civil monetary penal es exceeding $2 billion.
These fines serve as examples of the interna onal impact of AML viola ons.

BSA-Related Criminal Penalty:

In the USA, a viola on of the Bank Secrecy Act (BSA) can lead to a maximum criminal penalty of
$250,000 and up to five years' imprisonment.
6. Can you describe the steps involved in conduc ng a risk assessment for a customer or
transac on?

Answer) FinCEN provides guidance on conduc ng a basic BSA/AML risk assessment to determine the
level of risk associated with customer accounts, contribu ng to the overall regulatory framework.

Few steps which are involved in Risk assessment are:

1.Gather Informa on:

Customer informa on: Collect and verify detailed informa on about the customer, including:

1. Full name and aliases

2. Na onality and residency

3. Date of birth and place of birth

4. Address and any known affiliated addresses

5. Business ac vi es and nature of the transac on

6. Beneficial ownership structure

7. Any poli cal affilia ons or government posi ons held

Transac on informa on:

Obtain specifics about the transac on, such as:

1. Amount of money involved

2. Purpose of the transac on

3. Origin and des na on of funds

4. Payment methods used

5. Any intermediary par es involved

2. Screen Against Sanc ons Lists:

Resources like the OFAC Specially Designated Na onals and Blocked Persons List (SDN List) and other
relevant sanc ons lists to compare the gathered informa on with known sanc oned individuals and
en es.

Sophis cated screening tools that can iden fy poten al matches based on phone c and
typographical varia ons.

3. Risk Analysis & Classifica on:

Checking the poten al for viola ons: Consider factors like the customer's loca on, industry,
transac on type, and any red flags iden fied during informa on gathering.

Assign a risk level: Categorize the customer or transac on as low, medium, or high risk based on
your analysis.

4. Enhanced Due Diligence (EDD) for High-Risk:

If the risk assessment iden fies a high-risk scenario, implement enhanced due diligence measures.
This may involve:

1. Gathering addi onal informa on about the customer and transac on

2. Verifying the legi macy of business ac vi es

3. Obtaining independent informa on sources to corroborate customer details

4. Conduc ng enhanced screening on addi onal par es involved

5. Con nuous Monitoring:

Monitor ongoing customer ac vity and transac ons for any suspicious behavior or changes in risk
profile. Regularly perform rescreening’s against updated sanc ons lists.

6. Documenta on & Repor ng: Document all steps taken during the risk assessment process.

Report any poten al or actual viola ons to OFAC as required by regula ons.

7.How do you iden fy poli cally exposed persons (PEPs) and high-risk customers?

Answer) Iden fying PEPs -

Categories of PEPs:

There are three main categories:

1. Foreign PEPs: Individuals holding prominent posi ons in foreign countries.

2. Domes c PEPs: People in significant government roles in your country.
3. Interna onal Organiza on PEPs: High-ranking officials in organiza ons like the UN or World
Bank.

PEP Screening Tools: U lize sanc on screening so ware or specialized PEP databases for
comprehensive and updated informa on on global PEPs.

Publicly Available Resources: Government websites, news ar cles, and public registries can also be
helpful in iden fying PEPs.

Risk-Based Approach: Not all PEPs pose the same risk. Assess the individual's specific role, country of
exposure, and poten al for misuse of funds.

Iden fying High-Risk Customers -

Red Flags: Look for indicators that suggest a higher risk of money laundering or terrorist financing.
This could include:

 Complex ownership structures of businesses.

 Inconsistent informa on during onboarding.
 Transac ons from high-risk countries or industries.
 Unusual account ac vity or large cash transac ons.

Customer Due Diligence (CDD): Perform enhanced due diligence for high-risk customers. This
involves gathering more detailed informa on about the customer, their business ac vi es, and
source of funds.

Transac on Monitoring: Con nuously monitor customer transac ons for suspicious ac vity.
Addi onal Tips
PEP Lists: PEP lists are not exhaus ve, so rely on a combina on of resources for accurate
iden fica on.

Ongoing Monitoring: PEP status can change, so regularly rescreen customers against PEP lists.

Tools used for PEP Check:

Complyadvantage, Namescan, Dow Jones etc.

Tools used for High-Risk En ty/Individual/Geography

OFAC sanc ons list, EU Consolidated Sanc ons List, UK HM Treasury Consolidated List, Forces etc.

8.Can you explain the difference between transac on monitoring and suspicious ac vity
monitoring?

Answer)

Transaction Monitoring Suspicious Activity Monitoring

Continuous scrutiny of customer
Involves the systematic analysis of financial behaviour and
transactions in real-time or historically to detect transactions to identify specific activities
patterns or behaviours that may indicate illegal that appear
activities, such as money laundering or fraud. unusual or suspicious, triggering further
investigation.
Often involves real-time analysis of transactions Analyses patterns and behaviours over a
as more
they occur, aiming to identify anomalies extended period, aiming to detect trends
or
consistent suspicious activities that may
not be
apparent in individual transactions
Detection of irregular patterns or deviations Targets specific activities that may be
from indicative of
normal customer behaviour based on money laundering, fraud, or other illicit
transactional financial
data behaviours
Example: Flagging a large cash deposit by
a
customer with no history of such
transactions.
Example: Investigating repeated money
transfers to
Example: Flagging a large cash deposit by a
high-risk jurisdictions or transactions
customer with no history of such transactions.
involving known
shell companies.
9. Can you describe a me when you had to handle a complex AML or KYC issue?

Answer) One instance that comes to mind involved a high-value client onboarding. The client was a
foreign na onal applying to open a business account for a newly established import-export company.

Here's what made it complex:

Ownership Structure: The company ownership structure was intricate, with a chain of shell
companies registered in various offshore jurisdic ons. Tracing the ul mate beneficial owners (UBOs)
proved challenging.

Discrepancies: There were minor discrepancies between the informa on provided by the client and
public records on some of the shell companies.

High-Risk Source of Funds: The client intended to import goods from a country with a history of
money laundering ac vi es.

My Approach:

Enhanced Due Diligence (EDD): I ini ated EDD procedures, reques ng addi onal documenta on to
verify the legi macy of the ownership structure and source of funds. This included company
registra on documents, financial statements, and details on the nature of import-export
transac ons.

Collabora on: I collaborated with internal teams, including inves gators who could delve deeper
into the shell companies and source of funds. We also consulted with legal counsel to ensure
compliance with AML regula ons for high-risk countries.

Sanc ons Screening: The client and all iden fied beneficial owners were thoroughly screened
against global sanc ons lists.

Scenario Analysis: We conducted a scenario analysis to assess poten al money laundering risks
associated with the complex ownership structure, high-risk source of funds, and the nature of the
import-export business.

Resolu on:

The inves ga on took extra me, but ul mately, we were able to verify the legi macy of the client's
business and iden fy the ul mate beneficial owners. We also obtained a clear understanding of the
source of funds and the nature of import-export transac ons. A er careful considera on and
following risk-based mi ga on strategies, the client was onboarded with enhanced monitoring
procedures in place for their transac ons.

This case highlighted the importance of being me culous during KYC/AML processes, especially
when dealing with complex ownership structures, high-risk countries, and large transac ons. It also
emphasized the value of collabora on and a risk-based approach in making informed decisions.