Under the Egmont Group Principles, information exchange among financial intelligence units (FIUs) should be conducted freely, spontaneously, and upon request, on the basis of reciprocity. This means that FIUs should be willing to share information without the expectation of reciprocity on how the information will be used.
The goal is to facilitate the cooperation and exchange of information among FIUs to combat money laundering, terrorist financing, and other financial crimes.

Predicate offenses are the criminal activities that generate the proceeds that are later laundered through money laundering schemes. A country that does not have strong predicate offenses and is lax in prosecuting AML cases could suffer from increased organized crime and corruption, as criminals would have more opportunities and incentives to engage in illicit activities and evade detection and punishment. Organized crime and corruption can have serious social and economic consequences for a country, such as undermining the rule of law, eroding public trust, threatening national security, harming human rights, reducing economic growth, and distorting market competition123.
References:
CAMS Certification Package - 6th Edition | ACAMS
Understanding Predicate Offences: The Hidden Web of Money Laundering
Predicate Offenses In Money Laundering - Financial Crime Academy
AML Terms Easily Confused: Predicate Offense vs. Money Laundering

This action is the most appropriate because it demonstrates the local manager's responsibility and accountability for the sanctions compliance program. Sanctions screening is an important part of the Know Your Customer (KYC) and Anti-Money Laundering (AML) processes, as it helps to identify and prevent transactions with sanctioned individuals or entities, which could expose the financial institution to legal, regulatory, and reputational risks. Failing to perform sanctions screening could result in violations of sanctions laws and regulations, which could lead to fines, penalties, sanctions, or even criminal prosecution.
Therefore, the local manager should immediately inform senior management of the issue, so that they can take corrective actions, such as implementing screening procedures, conducting a risk assessment, reviewing existing customers, reporting any potential violations, and providing training and guidance to the staff.
The other actions are not appropriate because they either do not address the root cause of the problem, or they could worsen the situation. Starting screening new customers without informing senior management could create a false sense of compliance, and it could also miss the existing customers who may be sanctioned.
Immediately informing the regulators without informing senior management could undermine the trust and communication within the organization, and it could also trigger an investigation or enforcement action before the issue is resolved internally. Doing nothing because the department only handles a very small number of mortgages could be a sign of negligence or indifference, and it could also expose the financial institution to significant risks, as even one transaction with a sanctioned party could have serious consequences.
References:
* CAMS Certification Package - 6th Edition | ACAMS, Chapter 4: Developing and Implementing an AML Training Program, pp. 97-98
* CAMS Certifications: How to Get CAMS Certified | ACAMS, CAMS Study Guide, pp. 76-77
* What is Sanctions Screening and How Does It Work? | Jumio, Introduction and Benefits of Sanctions Screening
* Sanctions Screening: Challenges and Control Considerations, Background and Regulatory Expectations for Sanctions Screening
* Sanction Screening: A Complete Guide | KYC AML Guide, What is Sanction Screening and Why is it Important?

Cryptocurrency is a digital or virtual currency that uses cryptography to secure and verify transactions.
Cryptocurrencies are decentralized and operate outside the control of any central authority, such as a government or a bank. This makes them attractive for money launderers, who can use them to transfer funds anonymously, quickly, and globally, without leaving a trace or being subject to regulation. Cryptocurrencies pose more risk of money laundering than other sources of money, such as wire transfers, credit cards, or money service businesses, which are subject to more oversight, verification, and reporting requirements.
References:
CAMS Study Guide, 6th Edition, Chapter 1, Section 1.9, page 37
CAMS eLearning Course, Module 1, Lesson 9
ACAMS Crypto Hub
Reference: https://complyadvantage.com/knowledgebase/money-laundering-crypto-exchanges/