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

A mid-sized bank is building its framework for managing money laundering and terrorist financing (ML/FT) risk under the Basel Committee guidelines. Which statement best describes the role of the bank's business units, such as relationship managers and branch staff, within the three lines of defence?

Business units are the first line of defence. They own and manage the ML/FT risks arising from their customers, products and activities, applying customer due diligence and controls day to day. Compliance is the second line, and internal audit is the third line providing independent assurance.

  1. AThey form the first line of defence and are responsible for identifying and managing ML/FT risk arising from their customers, products and activitiesCorrect
  2. BThey form the second line of defence and independently challenge the compliance function's monitoring results
  3. CThey form the third line of defence and test the effectiveness of AML controls through periodic audits
  4. DThey sit outside the lines of defence because ML/FT risk is owned solely by the chief AML officer

Explanation

Under the guidelines, business units are the first line: they must know their customers, understand the risks in their activities and apply controls. Compliance and the AML officer form the second line, and internal audit is the third. Ownership is not confined to the AML officer.

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