A KYC analyst notices frequent use of letters of credit as a method of trade finance. It further appears that trades covered by letters of credit are…

The KYC analyst has identified a significant red flag for potential trade-based money laundering (TBML): the use of letters of credit for transactions that are inconsistent with the customer's normal business profile. The analyst's primary responsibility at this stage is not to make a final determination of guilt or to take executive action, but to escalate the findings through the proper internal channels. The standard and correct procedure is to refer the matter to the designated internal authority, such as the Money Laundering Reporting Officer (MLRO) or the compliance investigations team. This referral initiates a formal review to determine if a suspicious transaction report (STR) should be filed with the relevant Financial Intelligence Unit (FIU).

A. Notifying the Board of Directors is an inappropriate escalation. The Board oversees governance, while the decision to file an STR is an operational function managed by the MLRO/compliance department.

C. A financial institution's role is to report suspicion of a crime, not to "establish" its existence. That determination is the responsibility of law enforcement and the judiciary.

D. Preparing to close the account is premature. An internal investigation must first be conducted. A decision on account closure would follow that investigation and risk assessment.

1. ACAMS Certified Know Your Customer Associate (CKYCA) Study Guide

First Edition. Chapter 4

"Responding to Red Flags

" Section: "Escalating Suspicious Activity." This section outlines the standard operating procedure for a KYC analyst upon identifying red flags. It specifies that the analyst's role is to escalate the matter internally to the compliance officer or MLRO for further investigation and a decision on filing a STR.

2. Financial Action Task Force (FATF). (2021). Trade-Based Money Laundering: Risk Indicators. This guidance details red flags associated with TBML. Inconsistencies between the customer's declared business and the actual trade activities

especially involving trade finance instruments like letters of credit

are highlighted as key indicators requiring further scrutiny and reporting (p. 12-14).

3. Wolfsberg Group. (2017). The Wolfsberg Group Trade Finance Principles. Section 4

"Control Framework – Policies and Procedures

" emphasizes the need for clear escalation policies for any activity identified as unusual or potentially suspicious. The principles mandate that such findings be reported to the appropriate internal functions (e.g.

compliance) for review.