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FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

A bank applies a risk-based approach to AML. A client is a politically exposed person (PEP) who is a senior official in a high-corruption-risk country and wishes to open an account with large expected cash deposits. Which response is most consistent with a risk-based framework?

The bank should apply enhanced due diligence: establish source of wealth and source of funds, obtain senior management approval, and monitor the account more intensively. PEPs are not automatically barred, but their higher corruption and laundering risk makes standard or simplified measures inadequate under a risk-based approach.

  1. AApply standard due diligence because PEP status is not itself evidence of wrongdoing
  2. BDecline the relationship automatically because PEPs are prohibited
  3. CApply enhanced due diligence, including source of wealth and funds, senior management approval and ongoing enhanced monitoringCorrect
  4. DApply simplified due diligence until the first suspicious transaction occurs

Explanation

PEPs are higher-risk and call for enhanced due diligence: establishing source of wealth and funds, senior management approval and enhanced ongoing monitoring. Automatic refusal is not required, since the approach is risk-based, and standard or simplified measures understate the risk.

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