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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A trader at a bank deliberately books fictitious hedging trades to hide losses on his own positions, and no outside party is involved. Under the Basel operational risk event-type taxonomy, how should this loss be categorised?

This is internal fraud. Basel classes intentional acts to defraud or circumvent policy involving at least one employee, including unauthorised trading and concealment, as internal fraud. External fraud would require an outside party acting without staff involvement.

  1. AInternal fraudCorrect
  2. BExternal fraud
  3. CClients, products and business practices
  4. DExecution, delivery and process management

Explanation

Basel defines internal fraud as losses from intentional acts to defraud, misappropriate property or circumvent regulations or policy that involve at least one internal party. Unauthorised activity and concealment by an employee fits this. External fraud requires a third party as the perpetrator.

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