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FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism

A bank is considering onboarding a foreign politically exposed person (PEP). Which approach best aligns with the Basel guidance?

The bank should apply enhanced due diligence to a foreign PEP, including establishing source of wealth and funds, obtaining senior management approval, and conducting enhanced ongoing monitoring from the outset. Treating the PEP as standard risk or waiting for suspicious activity is inadequate, and blanket refusal is not required.

  1. ATreat the PEP as standard risk since public office does not imply criminality
  2. BRefuse all PEPs as a matter of policy
  3. CApply enhanced due diligence including establishing source of wealth and funds, senior management approval, and enhanced ongoing monitoringCorrect
  4. DOnboard the PEP but apply enhanced monitoring only after the first suspicious transaction

Explanation

PEPs present higher risk of corruption-related proceeds, so the bank should apply enhanced due diligence, determine source of wealth and funds, obtain senior management approval, and monitor more closely from the start. Blanket refusal is not required, and waiting for suspicious activity is reactive rather than preventive.

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