FRM Part I · FRM Exam Part I · Operational Risk
A trader at a bank deliberately books fictitious trades to conceal losses and inflate his bonus. Under the Basel event-type categories, how should this loss be classified?
The loss is internal fraud. Basel's internal fraud category covers intentional acts by employees, such as deliberately misreporting positions or booking fictitious trades, intended to defraud or circumvent rules. It is not external fraud because an insider, not an outsider, is responsible, and it is not a mere process error.
- AInternal fraudCorrect
- BExternal fraud
- CClients, products and business practices
- DExecution, delivery and process management
Explanation
Internal fraud covers intentional misreporting of positions, unauthorized activity and misappropriation involving at least one internal party. Here an employee acts deliberately. External fraud requires a third party acting alone. The other categories involve process or sales practice failures, not intentional employee deception.
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