Importance of Coverage Assessment:

Coverage assessment ensures that the TM scenarios address the full spectrum of identified money laundering (ML) and terrorist financing (TF) risks relevant to the organization.

This aligns with FATF Recommendations on risk-based approaches and the effectiveness of transaction monitoring systems​​.

Key Reference Justification:

Basel Committee guidelines stress that financial institutions must regularly review their transaction monitoring coverage to ensure alignment with the risk landscape​​.

Response to Deficiencies:

Engaging a third party ensures an independent, expert evaluation of deficiencies and the creation of a robust remediation plan​​.

This aligns with regulatory expectations for addressing material AML program weaknesses effectively​​.

Comparison Against Past Suspicious Activity Reported:

This evaluates whether the new thresholds are identifying similar or improved patterns of suspicious activity compared to prior thresholds.

Helps validate that the updated thresholds align with the institution's AML risk profile and regulatory expectations.

Above-the-Line and Below-the-Line Testing:

Above-the-line tests verify that alerts generated by the thresholds include expected suspicious transactions.

Below-the-line tests assess transactions below the threshold to ensure no significant suspicious activities are missed.

CAMS-Audit Reference:

Advanced CAMS-Audit frameworks emphasize the importance of both historical comparison and robust testing methodologies to validate transaction monitoring system updates​​.

Filing an SAR based on reasonable grounds for suspicion ensures compliance with AML obligations and demonstrates the effectiveness of the investigative process.

Importance of Statistical Sampling in Transaction Monitoring Testing:

Statistical sampling is the most suitable method when dealing with stratified populations, as it ensures a representative sample is drawn from each distinct category​​.

This method allows auditors to achieve reliable results by applying mathematical and probabilistic models to calculate the required sample size, ensuring unbiased and valid conclusions​.

Relevance to Stratified Populations:

When the transaction monitoring population is divided into distinct categories, statistical sampling ensures that each category is proportionately represented based on its size or risk level within the overall population​​.

Evaluation of Other Options:

Judgmental Sampling:Relies on auditor discretion and may introduce bias, making it unsuitable for ensuring proportional representation in stratified populations.

Proportional Sampling:Focuses only on proportional representation but does not leverage statistical tools to determine the optimal sample size or confidence levels.

Risk-Based Sampling:While effective in certain contexts, it is better suited for focusing on high-risk categories rather than ensuring comprehensive representation of all strata.

Alignment with Advanced CAMS-Audit Standards:

Advanced CAMS-Audit recommends statistical sampling for stratified populations to ensure that all categories are adequately tested and results are statistically valid for compliance and performance assessments​​.

Conclusion:The auditor should usestatistical samplingto identify the sample size when testing a stratified population for transaction monitoring. This ensures a reliable, unbiased, and mathematically sound basis for the audit.

Purpose of Model Validation:

Model validation ensures that the transaction monitoring model is functioning as intended, effectively identifying suspicious transactions and mitigating AML/CFT risks​​.

It encompasses testing data accuracy, parameter relevance, threshold efficacy, and compliance with regulatory requirements​​.

Process:

Validation includes end-to-end reviews, statistical evaluations, and expert assessments of model outputs.

According to FATF and Basel Committee standards, model validation is a critical component of the AML framework​​.

Irrelevance of Other Options:

Audit continuous monitoringfocuses on ongoing oversight, not the specific confirmation of initial model functionality.

Data validationaddresses data quality but does not verify operational model performance.

Regulatory approvalsare necessary for compliance but are not a step in verifying model functioning.

Impairment of Independence and Objectivity:

Auditors must remain independent and objective. Direct involvement in designing and implementing controls creates a conflict of interest.

Guidelines from CAMS-Audit:

CAMS-Audit emphasizes that auditors should limit their role to evaluating controls and avoid involvement in operational tasks​​.

Standards of Professional Conduct:

Independence is a cornerstone of effective auditing, ensuring unbiased findings and recommendations.