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

A bank classifies customers as low, medium or high risk, with periodic KYC refresh cycles. Which design is most consistent with a risk-based approach?

The most consistent design refreshes high-risk customers more often and lower-risk customers less often, while also triggering reviews when events such as adverse media, ownership changes or unusual activity occur. A uniform cycle or reactive reviews fail to allocate effort in proportion to risk.

  1. ARefresh all customers every three years, regardless of risk rating
  2. BRefresh high-risk customers more frequently (for example annually), lower-risk customers less often, plus event-driven reviews upon trigger eventsCorrect
  3. CRefresh only customers who have filed complaints
  4. DRefresh only when regulators request it

Explanation

A risk-based approach scales refresh frequency with risk and adds event-driven triggers such as adverse media or changed ownership. A uniform cycle ignores risk differentiation, and complaint- or regulator-driven refresh is reactive and insufficient.

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