Which aspect of a money services business (MSB) can increase its financial crime risk?

• A. Frequent external audits
• B. Strict regulatory compliance
• C. Limited customer identification procedures
• D. Lack of effective internal controls

Answer: (D)

Verified step by step guidance

1. Understand the context of the question: A money services business (MSB) is a financial institution that provides services such as currency exchange, money transfers, and check cashing. These businesses are often at risk for financial crimes like money laundering if proper controls are not in place.
2. Analyze the options provided: Frequent external audits and strict regulatory compliance are measures that reduce financial crime risk. On the other hand, limited customer identification procedures and lack of effective internal controls can increase the risk.
3. Focus on the key concept: 'Lack of effective internal controls' refers to the absence of policies, procedures, and systems designed to detect and prevent financial crimes. This can lead to vulnerabilities in the MSB's operations.
4. Relate the concept to financial crime risk: Without effective internal controls, an MSB may fail to monitor transactions, identify suspicious activities, or comply with anti-money laundering (AML) regulations, thereby increasing its exposure to financial crime.
5. Conclude the reasoning: The correct answer is 'Lack of effective internal controls' because it directly contributes to an increased financial crime risk by creating gaps in oversight and compliance mechanisms.