Financial Sector Regulation Exam 1
exposure effect
interconnectedness of insurance companies can have contagious effect on the remainder of financial markets and related FI in the event of a catastrophic event on the insurance company
components of market risk
interest rate risk foreign exchange risk commodities risk equities risk
largest asset for securities firms
investment portfolios
largest asset for insurance companies
investments
The pieces of properties used to collateralize the mortgages of some borrowers in CA have fallen significantly due to the recent fires is the ___________ effect.
liquidation
largest asset for commercial banks
loans
supervision
monitoring, examining, and inspecting the activities of FI (onsite and offsite) to evaluate their risk management systems, financial conditions, and compliance with applicable laws and regulation
Report of International Transportation of Currency or Monetary Instruments (CMIR)
moving more that 10,000 between countries? must declare
BSA Compliance Officer
must be senior position with sufficient authority to report directly to Board of Directors must have knowledge of AML/CFT/CPL tools and activity must understand responsibilities of AML/CFT/CFP must operate as independent function of other operating functions only banking position written in law
Member Banks
national banks and state member banks
The demand for property insurance in Puerto Rico has increased significantly since hurricane Maria in 2017 is ___________ effect.
net growth effect
If FI is unable to verify identity or CDD reveals adverse results, the FI should
not open the account or commence business relations not perform the transaction terminate the business relationship consider making a suspicious transactions report in relation to the customer
enhanced due dilligence
obtaining additional information on customers more frequent updating of CIP obtaining additional information about the intended nature of the business relationship; reasons for intended or performed transactions obtaining the approval of senior management to commence or continue the business relationship
BSA: Compliance Program
provide a system of internal controls to assure continuous compliance with BSA requirements provide independent testing for compliance with BSA requirements Designate an individual responsible for coordination and monitoring day to day compliance with BSA requirements (BSA compliance officer) Provide training for appropriate personnel Adopt a risk based customer identification program
Suspicious Activity Report (SAR)
required within 30 days of detection of certain known or suspected violations of federal law OR suspicion of money laudering activity or violation of the BSA
financial system stability
the continued resilience and sustainability of a country's financial system to facilitate and enhance economic processes (financial intermediation), manage risks, and absor shocks)
physical risk
the economic consequences from increases in the frequency and intensity of natural disasters and other environmental changes
transitional risk
the economic consequences of transitioning to or adjusting the policy or framework and tech to minimize emissions and facilitate a greener economy
Identifying unusual or suspicious transactions
the nature of the transaction itself the parties involved in the transaction the pattern of transactions or activities on the account over time
Climate Risk
the potential future effects to FI that changes in climate conditions which will likely adversely affect FI's borrowers and depositors, and the wider financial markets or economy systemic risk that has implications for financial stability ownership for financial stability resides with the FRB (Federal Reserve Board) and the Financial Stability Oversight Council (FSOC)
exposure risk
the risk of default and credit losses because of climate risk on loans
regulation and supervision: climate risk
to ensure that banks have systems in place that appropriately identify, measure, control, and monitor all their material risk
monetary policy
to insulate the economy from shocks that would affect maximum employment and profitability
unusual transactions
transactions which appear outside the normal profile of the customer might be unusual in size or pattern NOT illegal
suspicious transactions
transactions which are suspected to be financed from the proceeds of crime ARE illegal
threshold reportable transactions
transactions which meet or exceed the threshold sent through the BSA for reporting to FinCen
Which characteristic of money refers to "the basis to which all items of value are measured or compared?"
unit of account
3 types of transactions monitored under the BSA
unusual suspicious threshold reportable
A SAR must be submitted to FinCen within _________ days after detection.
30 days
More BSA Reporting Requirements
Report of Foreign Bank and Financial Accounts (FBAR) Suspicious Activity Report (SAR) Designation of Exempt Person Form
Formal AML/CFT Regulatory Enforcements
Cease and Desist Orders Civil Money Penalties Forfeiture Orders
Financial Institutions: SWOT
S: business model: financial leverage; financial intermediation W: business model: profitability; risk management O: digitization and blockchain; financial innovation T: competition from NFIs; financial crimes
insurance risk
insurance companies may decide to withdraw portection from certain geographic areas, certain types of assets, or certain types of csutomers
CDD for non face to face customers
FI are discouraged from this, but can use two factor identification or have customers submit documents
BSA Examination Procedures
Financial Sector Regulators will review entities: Customer Identification Program Customer Due Diligence Suspicious Activity Reporting Currency Transaction Reporting Funds Transfer Recordkeeping Private Banking Due Diligence Foreign Bank and Foreign Accounts Reporting
Consumer Identification Program (CIP) for natural persons
Name DOB Address Identification Number (social security, taxpayer id number)
Consumer Identification Program (CIP) for Legal Persons or arrangements
Name, legal form and proof of existance (certificates, articles of incorporation, partnership agreement, deed or trust, or other documentation) Names of senior managers Address of the registered office
BSA Regulatory and Supervisory Objectives
To ensure that FIs identify, understand, and assess the money laundering and terrorist financing risks to which they are exposed Asses the adequacy of FI's AML/CFT policies and systems, compliance with regulation. has not been updated to include proliferation financing
Which of the following would be unacceptable evidence supporting the identification and existence of a business customer? a. business card b. google search c. certificate of incorporation d. partnership agreement e. trust deed
a
Which of the following is not a transitional risk? a. manufacturing sedans instead of sport utility vehicles b. manufacturing paper-made straws instead of plastic-made straws c. levying a consumer tax penalty on the purchase of plastic bottles d. prohibiting the use of plastic bags e. establishing minimum emission standards for all motor vehicles
a
Which of the following is not a PEP? a. Chair of the Federal Reserve Bank b. Supreme Court Judge c. Treasury Secretary d. The President e. Members of Congress
a
physical risk effects
inflation monetary policy production/output employment property prices insurance costs
Why are financial regulators concerned about FI's KYC obligations regarding cryptoassets? a. CA provide a degree of anonymity b. there is limited pricing data on CAs c. CA do not have a financial claim d. CA do not have a guarentee of payment e. CA do not have cash flows
a
currency transaction report (CTR)
a bank must electronically file a CTR for every transaction in currency of more than 10,000 by, through, or to the FI
FI that invest in cryptoassets are exposed to _________________ if the value of cryptoassets falls significantly causing the FI to have trouble in meeting its liability obligations. a. credit risk b. liquidity risk c. market risk d. operational risk e. reputational risk
b
The increased prevalence and costliness of natural disasters and other environmental changes is regarded as: a. weather risk b. physical risk c. disaster risk d. hurricane risk e. transitional risk
b
Which financial sector regulatory body has ultimate responsibility for financial stability? a. FDIC b. FRB c. FSOC d. OCC e. FinCen
b
Which of the following explains a FI's KYC obligations? a. The FI must verify from which university its customers obtained their college degrees b. The FI must obtain information on its customers' source of wealth and funds c. The FI must confirm the number of children its customers claimed on their tax return d. The FI should audit the inventory of its business customers e. The FI should periodically take their customers out to lunch or dinner in order to get to know them better
b
Which of the following roles of the Federal Reserve System should be concerned with the contagion effect of CA risk on the financial system? a. monetary policy b. financial stability c. regulation and supervision d. payments and settlements e. consumer rights and protection
b
Financial institutions that invest in cryptoassets are exposed to _____________ if their price volatility results in net losses. a. credit risk b. liquidity risk c. market risk d. operational risk e. reputational risk
c
Identify the best tool a FI should use to conduct CDD on non-face to face customers (i.e. customers who are not physically present when engaging in a transaction: a. Request the customer to upload a copy of his driver's license. b. Request the customer to provide an electronic signature c. Request the customer to provide 2 factor verification, which includes a real time photo to be taken and uploaded at the time of the transaction, and input his TIN. d. Request the customer to state his name, DOB, and address. e. Request the customer to ask his friend to verify his identity.
c
In what way may a FI minimize its contribution to climate risk? a. providing a loan to a corporate involved in offshore drilling b. purchasing shares in a company which has multiple citations from the Environmental Protection Agency. c. Investing in a corporate bond issued by a company with known low carbon footprint. d. Insuring the assets of a fossil-fuel intensive company e. Refusing to engage in any business relationship with corporate customers that produce low carbon emissions.
c
Which of the following is not a BSA required component of a compliance program? a. Independent testing of the FI's compliance program b. An AML/CFT training program for relevant employees of the FI c. A compliance department in the FI responsible for identifying and investigating suspicious activities d. A Customer Identification Program to identify and validate the identity of customers. e. A system of internal controls to prevent the FI being used as a conduit for ML and FT
c
Which of the following roles of the Federal Reserve System should be concerned about the effectiveness of an FI's risk management system to identify and evaluate its exposure to cryptoasset risk? a. monetary policy b. financial stability c. regulation and supervision d. payments and settlements e. consumer rights and protection
c
Which of the following tools can financial sector regulators use to regulate FI's exposure to CA risk? a. establish a minimum investment amount that FI must hold in CA b. create a path for FI to collaborate with FINTECH enterprises c. require FI to disclose their exposure to CA risk d. remove any barriers for FI to engage in CA trading e. waive FI's KYC requirements for CA
c
Informal AML/CFT Enforcements
informal discussions written communications (supervisory letter, findings in examination reports)
Supervisory ratings CAMELS
capital adequacy asset quality management earnings liquidity sensitivity to market risk
Basel Committee on Banking Supervision: 2020 Regulatory and Supervisory Priorities
capital risk operational risk technology risk
high risk persons and entities
cash intensive businesses embassies, foreign consultates, and foreign missions nongovernmental organizations and charities politically exposed persons professional service providers (lawyers, accountants, real estate agents, consultants)
financing effect
catastrophe risk can increase in the cost of financing as debt and equity holders demand higher returns due to the greater probability for bankrupty; which will lower firm value
financing ris
catastrophe risk can increase the cost of financing
national banks
chartered by the federal gov through the Office of the Comptroller of the Currency
state member banks
chartered by the state that are members of the Federal Reserve System state banks can only operate in the state in which it is chartered
State nonmember banks
chartered by the state which are not members of the Federal Reserve system
Forfeiture Orders
confiscation by the government of the proceeds or assets from criminal activities issued with the intent to remove the proceeds from the books of the FI
high risk products and services
correspondent accounts fund transfers insurance loans payable through accounts prepaid access privately owned ATMs trust and asset management services
FI specialness to the overall economy
credit allocation intergenerational wealth transfer money supply transmission payment services
European Central Bank: 2020 Regulatory Supervisory Priorities
credit risk capital risk market risk liquidity risk technology risk
Office of the Comptroller of the Currency: 2020 Regulatory and Supervisory Priorities
credit risk interest rate risk operational risk technology risk
A customer that provides misleading information to a FI in order to avoid detection from criminal wrongdoing is engaged in a: a. unusual transaction b. infrequent transaction c. threshold reportable transaction d. suspicious transaction e. normal transaction
d
BSA requires every FI to employ ___________ when dealing with high risk customers. a. a watchful eye b. a private investigator c. closed circuit cameras d. enhanced due dilligence e. armed bodyguards
d
FI that invest in CA are exposed to ________________ as money launderers and financiers of terrorism are increasing using CA as part of their criminal activities a. credit risk b. liquidity risk c. market risk d. operational risk e. reputational risk
d
Which of the following roles of the Federal Reserve System should be concerned with the replacement of cash with crypotassets in financial transactions? a. monetary policy b. financial stability c. regulation and supervision d. payments and settlements e. consumer rights and protection
d
Which of the following senior functional position in a FI should be responsible for ensuring the entity's compliance with its AML/CFT legal obligations? a. Chief Executive Officer b. Chief Financial Officer c. Chief Operating Officer d. Chief Compliance Officer e. Chief Treasury Officer
d
liquidation effect
insurers will be forced to sell assets to meet claim demands, the fire sale which can dilute market prices and adversely affect other asset holders
SAR Reportable activities
insider abuse regardless of the amount where there is a money laundering suspicion involving 5k or more where there is no suspicion but the transaction involves 25,000 or more
FI specialness to providers of funds
denomination and maturity intermediation increase liquidity lower price risk reduce monitoring and information costs, delegated monitoring reduce information asymmetries risk diversification
Cease and Desist order
directive issues to FI to act in a specific manner issued for failure to establish and maintain compliance program or correct previously identified deficiencies
money laundering
disguising the illegal sources of funds which are generated to give the impression that such funds are earned from legitimate sources
All FI are required to retain records of transactions for a period of ______________ under the BSA. a. 12 months b. 18 months c. 36 months d. 50 months e. 60 months
e
Cryptoasset risk may affect financial stability if FI: a. hold investments in cryptoassets b. provide financing to borrowers to acquire cryptoassets which is used to collateralize the financing c. receive payments or make settlements in cryptoassets d. manage the cryptoasset portfolio of clients e. all of the aboce
e
__________ should have the primary responsibility to manage climate risk. a. depositors b. borrowers c. FI d. financial sector regulators e. All of the above
e
transitional risk effects
economic losses from changes in greenhouse gas emmissions carbon taxes production costs associated with more environmentally friendly tech and production processes changes in consumer demand and preferences
tipping off
entities are prohibited by law from disclosing to anyone regarding the submission of a SAR or related information to FinCen
BSA: AML Requirements
establish effective BSA compliance programs establish effective CDD systems and monitoring programs screen againts Office of Foreign Assets Control (OFAC list) and other government lists Establish an effective suspicious activity monitoring and reporting processes develop risk-based AML programs
Bank Secrecy Act
established threshold reporting requirements
Customer Due Dilligence (CDD)
establishes KYC principles customer info that allows the FI to understand the nature and purpose of the relationship which assits the entity in determining potentially suspicious transactions customer occupation or economic activity personal or business financial track recods sources of wealth or funds contact information
employee due dilligence
establishes KYE principles comprehensive screening and monitoring process (employment history, financial history, criminal historu, honesty, competence, integrity, lifestyle changes) continuous education and training (at least annuallY)
regulation
establishing rules within which FI must operate laws, guidance, regulations, standards, policies
A prolonged drought in CA prevented many farmers from repaying their loans is the __________________ effect.
exposure effect
Market value of PG&E fell from $25B to below $4B after more than 750 lawsuits were leveled against the company for potentially causing the largest forest fires in CA in 2019. The company filed for bankruptcy causing many creditors including FI to lose their investment is __________ effect.
exposure effect
politically exposed persons
federal and state government officials senior executives of federal and state government agencies
terrorist financing
financial contribution and support to any person or organization engaged in acts of terrorism
proliferation financing
financial contribution and support to persons and organizations that intend to acquire or manufacture weapons of mass destruction
The risk that a major category 5 hurricane will cause the investing market to perceive an insurance company as riskier thus demanding a higher rate of return on their investments is the _______________ effect.
financing
Civil Money Penalties
fines or monetary penalties charged to FI issued for egregious or repetitive violations of the AML/CFT framework
liquidation risk
fire sale to cover liabs, can dilute market prices
net growth effect
gain from loss hypothesis increases in demand for insurance will increase insurance's premium revenues and profitability and cause stock prices to increase
costliest physical risks in US history
hurricane katrina, hurricane harvey, hurricane sandy (closed NYSE for two days)
net claim effect
increases in insurance claims will increase insurer's expenses, reduce profitability, and cause stock prices to decrease
