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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank's fraud team discovers that a branch employee created fictitious customer accounts and diverted funds into them over two years. Under the Basel operational risk event-type taxonomy, how should this loss be classified?

The loss is internal fraud, because the Basel taxonomy assigns intentional misappropriation or defrauding that involves at least one employee or insider to that category. External fraud applies only when outside parties act without any internal participation.

  1. AInternal fraudCorrect
  2. BExternal fraud
  3. CEmployment practices and workplace safety
  4. DClients, products and business practices

Explanation

Basel defines internal fraud as losses from acts intended to defraud or misappropriate property involving at least one internal party. The employee is internal, so the event is internal fraud. External fraud requires a third party acting without internal involvement.

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