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

A bank screens customer names against sanctions lists using fuzzy matching. After lowering the match threshold to catch more spelling variants, the compliance team observes a large rise in alerts with little change in confirmed matches. Which is the most appropriate interpretation?

The false positive rate rose. Lowering the fuzzy matching threshold flagged many more names, but confirmed matches barely changed, so the extra alerts add operational burden without better detection. Precision fell, and the threshold should be recalibrated using tested known matches.

  1. AThe false positive rate rose, increasing operational burden without improving true detectionCorrect
  2. BThe false negative rate rose, increasing sanctions breach exposure
  3. CThe model's precision improved because more names are flagged
  4. DSanctions risk has been eliminated since the threshold is more inclusive

Explanation

A lower threshold flags more names as potential matches. Because confirmed matches barely changed, the extra alerts are false positives, which lowers precision and raises workload. Flagging more cannot raise false negatives, and risk is not eliminated; the team should recalibrate by testing against known true matches.

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