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

A bank's transaction monitoring system generated 2,000 alerts in a month. Investigators closed 1,960 as false positives and filed suspicious activity reports on 40. Management proposes raising the alert thresholds, which would cut alerts to 800 but is estimated to miss 15 of the 40 cases that currently result in reports. Which assessment is most appropriate?

Management should not approve the change without further analysis. The higher threshold would miss 15 of 40 genuine cases, or 37.5%, a major loss in detection. Workload savings do not offset that, so the change needs below-the-line testing, validation and a documented risk-based justification.

  1. AApprove, because the false positive rate falls from 98% to 95%, showing improved effectiveness
  2. BApprove, because workload falls by 60% and missed cases are only a small share of alerts
  3. CReject outright, because any false negative is unacceptable under AML rules
  4. DDo not approve without further analysis, since 37.5% of true suspicious cases would go undetected, requiring below-the-line testing and a risk-based justificationCorrect

Explanation

Current false positive share is 1,960/2,000 = 98%. Missing 15 of 40 is 37.5% of true cases lost, a large detection loss. Threshold changes need validation and below-the-line testing and a documented risk rationale. The 95% figure is wrong: new alerts 800 less 25 true leaves 775/800 = 96.9%, and efficiency gains do not justify losing detection.

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