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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's board asks who owns day-to-day ML/FT risk under the three-lines-of-defence model described in the Basel Committee guidelines. Which allocation is consistent with the guidelines?

Business units as the first line own and manage the ML/FT risks in their activities, compliance and the AML officer provide second-line oversight, and internal audit gives independent assurance as the third line. No single function, such as compliance or audit, owns all the risk.

  1. AInternal audit, as the third line, owns ML/FT risk and approves all new customers
  2. BBusiness units, as the first line, own and manage the ML/FT risks arising from their activities; compliance and the chief AML officer form the second line; internal audit independently assesses the programCorrect
  3. CThe compliance function alone owns all ML/FT risk, and business units have no responsibility
  4. DThe board of directors performs customer due diligence directly

Explanation

The first line (business units) is responsible for identifying, assessing and controlling the risks in their business. The second line (compliance/AML officer) oversees and advises, and the third line (internal audit) provides independent assurance. Giving audit ownership or compliance sole ownership breaks the model.

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