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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 ML/FT risk assessment shows that its private banking unit has high inherent risk because of politically exposed persons and cross-border flows. After enhanced due diligence, senior management approval and intensive monitoring were applied, the control environment was judged strong. What is the most appropriate conclusion for the bank's risk assessment?

Strong controls reduce the unit's residual risk below its inherent risk, but residual risk remains and must be documented, compared with risk appetite and monitored. Controls do not change inherent risk, and the unit stays within the assessment.

  1. AResidual risk is lower than inherent risk, but it should be recorded and still monitored, and it may remain above the risk appetite for some clientsCorrect
  2. BResidual risk equals inherent risk because controls never alter ML/FT risk
  3. CInherent risk is reduced to the level of the lowest-risk unit in the bank
  4. DThe unit should be removed from the assessment because controls are strong

Explanation

Effective controls reduce inherent risk to a lower residual level, but do not eliminate it. The residual risk must still be documented, compared with risk appetite and monitored. Inherent risk is a feature of the business and does not change with controls, and strong controls do not justify excluding a unit from the assessment.

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