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

A bank is considering a new real-time payment screening control. Expected annual fraud losses are USD 4.0 million without the control. The control reduces fraud losses by 60% and costs USD 1.5 million annually to run, and it also creates USD 0.3 million of annual losses from lost business due to false declines. What is the expected net annual benefit of the control?

The net annual benefit is USD 0.6 million. The control avoids USD 2.4 million of fraud losses, which is 60% of USD 4.0 million, but costs USD 1.5 million to run and causes USD 0.3 million of false-decline losses, totalling USD 1.8 million.

  1. AUSD 0.6 millionCorrect
  2. BUSD 0.9 million
  3. CUSD 2.4 million
  4. DUSD 1.8 million

Explanation

Loss reduction = 60% x 4.0 = USD 2.4 million. Costs = 1.5 running + 0.3 false-decline losses = USD 1.8 million. Net benefit = 2.4 - 1.8 = USD 0.6 million. The 0.9 option omits the false-decline cost, and 2.4 ignores all costs.

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