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

A bank's correspondent banking unit has a respondent bank in a high-risk jurisdiction. The respondent allows its own customers to use the account directly to transact (payable-through-type access) and its customer base includes unregulated money service businesses. Which control set is most appropriate?

The bank should apply enhanced due diligence: understand the respondent's business and customer base, verify its AML controls and its ability to supply customer due diligence data, obtain senior management approval, and monitor closely. Mere attestations, currency restrictions or blanket exit from the jurisdiction are not proportionate risk-based responses.

  1. ARely on the respondent's attestation of its AML program and review it every five years
  2. BApply enhanced due diligence, understand the respondent's customer base and controls, confirm it can provide customer CDD data on request, obtain senior approval, and monitor activity closelyCorrect
  3. CApply standard due diligence but restrict the relationship to euro-denominated payments
  4. DTerminate all correspondent relationships in the jurisdiction regardless of respondent quality

Explanation

Nested and payable-through access to a high-risk respondent calls for enhanced due diligence, assurance that the respondent performs CDD on customers with direct access and can supply data, senior approval, and heightened monitoring. Reliance on attestation alone is weak, currency restriction does not mitigate the risk, and wholesale de-risking is not required and harms financial inclusion.

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