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

A bank's compliance officer is reviewing its customer due diligence program. A new corporate client is a holding company whose shares are owned through several layers of offshore entities. Which step is most essential to meet the core KYC requirement in this situation?

The bank must identify and verify the natural persons who ultimately own or control the client. Customer due diligence is aimed at beneficial ownership, and layered offshore structures raise risk, so verifying only the entity's address or accepting self-declarations would not satisfy the requirement.

  1. AIdentify and verify the natural persons who ultimately own or control the clientCorrect
  2. BVerify the registered address of the holding company only
  3. CRely on the client's own declaration of its ownership without further checks
  4. DApply simplified due diligence because the client is a corporate entity

Explanation

KYC and customer due diligence standards require identifying the beneficial owners, meaning the natural persons who ultimately own or control the customer, and taking reasonable steps to verify their identity. Verifying only the entity's address leaves the real controllers unknown. Complex offshore layering is a risk factor that calls for enhanced, not simplified, diligence.

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