According to the FATF Recommendations (2012), page 111, the FATF calls on its members and urges all jurisdictions to apply enhanced due diligence and, in the most serious cases, countermeasures to protect the international financial system from the money laundering, terrorist financing, and proliferation financing risks emanating from countries with significant strategic AML/CFT deficiencies. Countermeasures are proportionate and effective actions that can be applied by countries individually or collectively to protect their financial systems from these risks. Examples of countermeasures include restricting or prohibiting financial transactions with the high-risk country, requiring financial institutions to review and terminate correspondent relationships with the high-risk country, or applying enhanced reporting mechanisms or systematic reporting of financial transactions with the high-risk country.
References:
FATF Recommendations (2012), page 111
FATF Public Statement on High-Risk Jurisdictions subject to a Call for Action, February 20232 FATF Guidance on Countermeasures, October 20103

According to the Basel Committee on Banking Supervision, banks should adopt a risk-based approach to customer due diligence, which includes four essential elements1:
A customer acceptance policy that defines the types of customers that are likely to pose a higher than average risk to the bank.
A customer identification program that collects and verifies information about the customer's identity, beneficial ownership, and purpose of the account or relationship.
An on-going monitoring of high-risk accounts to detect and report any unusual or suspicious activity, and to keep customer information up-to-date.
A risk management program that ensures that the bank's policies and procedures are implemented effectively, and that the bank's staff are trained and aware of their AML/CFT obligations.
Therefore, documenting a customer acceptance policy and establishing on-going monitoring of high-risk accounts are the correct choices for the essential elements that should be included in the program based on Basel's KYC principles.
References: 1: Basel Committee on Banking Supervision, Customer due diligence for banks, October 2001, page 8.

According to the ACAMS CAMS Certification Study Guide (6th edition), one of the red flags for money laundering is the transfer of large sums of money to or from high-risk jurisdictions, especially if the transactions are inconsistent with the customer's profile or business activity. Large payments to a beneficiary in a high-risk jurisdiction may indicate that the originator is involved in illicit activities such as tax evasion, fraud, corruption, or terrorism financing. Therefore, such payments should be escalated for further investigation and reporting1 References: 1: ACAMS CAMS Certification Study Guide (6th edition), page 64.

The bank's current anti-money laundering program is inadequate because it does not include a process for monitoring customer account activity, which is a key component of detecting and reporting suspicious transactions. The fact that the consultant and the bank have mutual clients does not affect the risk rating of those customers, nor does it justify a lower level of scrutiny. The bank should revise its procedures to ensure that it has a comprehensive and risk-based approach to customer due diligence, transaction monitoring, and reporting.
References:
* CAMS Certification Package - 6th Edition, Chapter 3: Compliance Standards for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT), pp. 67-69.
* FATF Guidance for a Risk-Based Approach: Legal Professionals, pp. 10-11, 19-20.
* BSA/AML Internal Audit: PwC, pp. 1-2.

According to the FFIEC BSA/AML Manual1, a U.S. bank should have policies, procedures, and processes to monitor and report suspicious activity associated with U.S. dollar drafts, which are bank drafts or checks denominated in U.S. dollars and made available at foreign financial institutions. These drafts are drawn on a
U.S. correspondent account by a foreign financial institution and can be used to facilitate money laundering or terrorist financing. The manual states that "[t]he potential for facilitating money laundering or terrorist financing, OFAC violations, and other serious crimes increases when a U.S. bank is unable to identify and adequately understand the transactions of the ultimate users (all or most of whom are outside of the United States) of its account with a foreign correspondent."2 Therefore, the compliance officer should notify Foreign Bank A of the discovery and seek documentation supporting Foreign Bank A was collusive and a willing partner with Foreign Bank B in the activity, as this would indicate a breach of the correspondent banking agreement and a possible violation of U.S. laws and regulations. The compliance officer should also document the findings and actions taken, and escalate the matter to senior management and the board of directors as appropriate.
The other options are not the best steps for the compliance officer to take. Option A is not relevant, as the issue is not related to tax evasion, but to money laundering or terrorist financing. Option B is premature, as the compliance officer should first verify the nature and extent of the suspicious activity and the involvement of Foreign Bank A before deciding whether to terminate or restrict the correspondent relationship. Option D is not feasible, as the compliance officer does not have the authority or the means to notify other U.S. financial institutions who maintain U.S. dollar correspondent accounts for Foreign Bank A and Foreign Bank B, and this could also interfere with ongoing investigations or law enforcement actions.
References:
* FFIEC BSA/AML Manual, Risks Associated with Money Laundering and Terrorist Financing, U.S.
Dollar Drafts
* Denting Dirty Dollar-Clearing: US Court of Appeals Upholds Money-Laundering Convictions Based on the Use of US Correspondent Banking Accounts, Freshfields Blog
* AMLA Expands DOJ Grand Jury Subpoena Power Over Correspondent Bank Accounts and Foreign Banks, Money Laundering News