FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism
A mid-sized bank's compliance department identifies that its onboarding staff in the business unit decide whether a prospective customer is high risk, and also take primary day-to-day ownership of applying customer due diligence measures. Under the three lines of defence model described in the Basel Committee guidance on sound management of ML/FT risks, which function does this describe?
This describes the first line of defence. Business units that take on customers own the ML/FT risks they create and must identify, assess and control them, including applying customer due diligence. Compliance oversees and audit independently assures, while the board sets strategy rather than approving customers.
- AFirst line of defence, because business units own and manage the ML/FT risks they generateCorrect
- BSecond line of defence, because customer risk classification is a compliance responsibility
- CThird line of defence, because internal audit verifies onboarding decisions
- DBoard of directors, because it must approve each high-risk customer
Explanation
Under the guidance, the business units (front office, customer-facing activities) are the first line and are responsible for identifying, assessing and controlling the ML/FT risks of their business, including applying CDD. Compliance (second line) oversees and advises, and internal audit (third line) provides independent assurance. The board sets overall strategy and oversight but does not approve individual customers.
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