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Thethird line of defense (internal audit)is responsible forproviding independent assurance to the Board of Directorsaboutthe effectiveness of AML/CFT controls.

Option C (Correct):Theinternal audit function provides independent review and oversight of AML risksto theboard.

Option A (Incorrect):There is no "fourth line of defense" in AML risk management frameworks.

Option B (Incorrect):Thesecond line (compliance & risk management)is responsible formonitoring AML processes but does not provide direct board assurance.

Option D (Incorrect):Thefirst line (business units) manages AML risks dailybut does not provide board assurance.

Best Practices for Internal Audit in AML Programs:

Ensure audits are risk-based and independent.

Report findings directly to the board’s audit committee.

Regularly test AML controls to assess effectiveness.

In anEnterprise-Wide Risk Assessment (EWRA),residual riskis the level of risk that remains after applying mitigating controls to theinherent risk(the risk present before controls are applied).

In this scenario, theinherent risk is highdue to the nature of private banking—high net worth clients,cross-border transactions,complex ownership structures, andhigh-value financial products. However, the institution has implementedrobust CDD and EDD, as well asadvanced transaction monitoring systems.

According to the CAMS Study Guide – 6th Edition, wheneffective and properly implemented controlsare in place, they cansignificantly reducethe residual risk—even in high-risk business areas like private banking. However, no control framework caneliminate all riskentirely.

Option Ais correct: Controls can significantly reduce the residual risk when strong, effective systems and procedures are in place.

Option Bis partially true but suggests inadequacy, which is not indicated here.

Option Cincorrectly assumes residual risk cannot be lowered even with controls.

Option Dis incorrect because residual riskcannot be eliminated entirely.

Lawyers and legal professionalsare frequently used inmoney laundering schemes, particularly throughtrust accountsthat offeranonymity and client privilege protections.

Option A (Correct):Repeated wire transfers from unknown sources followed by immediate outward transferssuggest that the lawyer’s trust accountis being used as a pass-through account for laundering funds.

Option B (Incorrect):If legal services were actually rendered,this is a normal transactionunless other risk factors exist.

Option C (Incorrect):Receiving funds from aregulated insurance companyisnot inherently suspicious, unless the transaction isinconsistent with the lawyer’s usual business activity.

Option D (Incorrect):Large transactions are normal inreal estate purchases, as long as proper documentation exists.

Red Flags in Legal Sector Money Laundering:

Use of lawyer trust accounts to move funds with no legitimate business purpose.

Frequent transactions from high-risk jurisdictions.

Transactions that are inconsistent with the lawyer’s area of practice.

Clients who refuse to disclose the source of funds.

Best Practices:

Apply AML measures to law firmshandling financial transactions, as required by FATF’sDesignated Non-Financial Businesses and Professions (DNFBPs)guidelines.

Require enhanced due diligence (EDD) for high-risk clientsandunusual transactions.

TheAML supervisory authorityis responsible for overseeing financial institutions' compliance with AML/CFT regulations.

Option D (Correct):AML supervisory authorities, such as theFinancial Conduct Authority (FCA) in the UK,FinCEN in the US, orEuropean Central Bank (ECB) for EU institutions, conduct inspections, issue reports, and enforce penalties when AML deficiencies are found.

Option A (Incorrect):Self-regulatory bodies provide guidelines butdo not have legal authorityto withdraw banking licenses.

Option B (Incorrect):Law enforcement may investigate criminal conduct, butregulatory compliance issuesfall under AML supervisory authorities.

Option C (Incorrect):FATF provides guidance and assessments but doesnot directly enforcecompliance at individual financial institutions.