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

A bank's sanctions screening uses fuzzy name matching with a 90% similarity threshold. In testing, a sample of 200 known sanctioned-name variants was run: 170 were flagged. Separately, 10,000 legitimate customer names were screened and 500 were flagged. The bank lowers the threshold to 80%, and flags rise to 188 of the 200 variants and 1,500 of the legitimate names. Which conclusion is correct?

Detection improves from 85% to 94% of known sanctioned variants, but false alerts triple from 5% to 15% of legitimate names. The change is a genuine trade-off, to be judged against sanctions risk appetite and the capacity to review alerts, rather than clearly good or bad.

  1. ASensitivity rose from 85% to 94%, but false alerts tripled from 5% to 15% of legitimate names, so the trade-off must be judged against sanctions risk appetite and review capacityCorrect
  2. BSensitivity rose from 85% to 94% and false alerts rose from 5% to 10%, so the change is clearly beneficial
  3. CSensitivity rose from 85% to 94% with false alerts unchanged, so the change is clearly beneficial
  4. DSensitivity fell because more names are flagged, so the threshold should be raised

Explanation

Sensitivity: 170/200 = 85% and 188/200 = 94%. False alert rate: 500/10,000 = 5% and 1,500/10,000 = 15%, a tripling. Lower thresholds catch more true matches but burden reviewers, so the decision depends on risk appetite, since sanctions breaches carry strict liability risk and capacity is finite.

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