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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 onboarding policy. Under a risk-based approach to customer due diligence, which treatment is most appropriate for a newly onboarded customer who is a foreign politically exposed person (PEP)?

Foreign PEPs are higher-risk customers, so the bank should apply enhanced due diligence. This includes senior management approval, establishing source of wealth and source of funds, and enhanced ongoing monitoring. PEP relationships are not banned, and simplified or standard due diligence would be inadequate for this risk level.

  1. AApply standard due diligence because PEP status is relevant only for domestic customers
  2. BApply enhanced due diligence, including senior management approval and establishing source of wealth and fundsCorrect
  3. CDecline all PEP relationships because regulations prohibit them
  4. DApply simplified due diligence until the first suspicious transaction is detected

Explanation

A risk-based approach requires enhanced due diligence for higher-risk customers such as foreign PEPs, including senior management approval, source of wealth and funds checks, and ongoing enhanced monitoring. PEP relationships are not prohibited. Simplified due diligence is reserved for demonstrably lower-risk situations.

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