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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 chief AML officer is asked to design the annual enterprise-wide ML/FT risk assessment. Which approach best reflects sound practice under the Basel guidance?

Sound practice is to assess inherent ML/FT risk across customers, products, services, delivery channels and geographies, then evaluate how effective controls are to derive residual risk. This supports a risk-based approach; uniform treatment, STR counts alone or narrow geographic focus would leave significant risks unassessed.

  1. AAssess inherent risk across customers, products, services, delivery channels and geographies, then evaluate the effectiveness of controls to determine residual riskCorrect
  2. BApply the same due diligence level to all customers to avoid inconsistent treatment and assess only residual risk
  3. CBase the assessment solely on the number of suspicious transaction reports filed in the prior year
  4. DLimit the assessment to high-risk jurisdictions where the bank has branches

Explanation

A sound risk assessment identifies inherent risk across customer, product, service, channel and geographic factors, then considers mitigating controls to arrive at residual risk, which drives a risk-based approach. Uniform treatment contradicts the risk-based approach. STR counts are an incomplete indicator, and limiting to branches in high-risk locations ignores other risk drivers.

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