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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 performs an enterprise-wide ML/FT risk assessment. It first identifies inherent risk across customers, products, geographies and delivery channels. Which next step is most consistent with a sound risk-based approach?

After identifying inherent risk, the bank should assess how effective its controls are to derive residual risk, and then focus resources and enhanced measures on the areas with the highest residual risk. Uniform controls or ignoring control quality would not reflect a risk-based approach.

  1. AApply identical controls to all customers to ensure consistency
  2. BEvaluate the quality of mitigating controls to determine residual risk, and then allocate resources toward higher-residual-risk areasCorrect
  3. CExclude low-volume products from the assessment because they cannot be material
  4. DSet the residual risk equal to inherent risk so that the assessment remains conservative

Explanation

A risk-based approach compares inherent risk with the strength of controls to obtain residual risk, then directs resources and enhanced measures to the highest residual risk. Uniform controls ignore risk differences, and excluding low-volume products or equating residual to inherent risk skips the control assessment.

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