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FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism

A home supervisor finds that a bank's foreign branch in a jurisdiction with weak AML/CFT rules applies lower customer due diligence standards than the head office, citing local law as permitting this. Which supervisory response best reflects the BCBS guidelines?

The supervisor should require the branch to apply the higher home standards as far as host law allows, and if it cannot, require additional risk-mitigating measures and consider restricting or closing the operation. Accepting the weaker local standard or lowering group standards would leave the group exposed.

  1. AAccept the lower standard because the host jurisdiction's law is lawful
  2. BRequire the branch to apply the higher home-country standards to the extent host law permits, and if it cannot, require additional safeguards and consider restricting or closing the operationCorrect
  3. CRequire the head office to adopt the lower standard for consistency
  4. DLeave the issue to the branch's local auditors

Explanation

Where home standards are higher, the guidelines expect them applied to the extent host laws allow. If host law prevents it, the bank must apply appropriate additional measures, and the supervisor may take further action including closing the operation. Lowering group standards or deferring to auditors does not address the risk.

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