Skip to content

FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

A trading desk supervisor at a bank also approves the settlement and reconciliation of the same desk's trades. A trader hides losses through fictitious hedging trades that the supervisor never independently verifies. Which control weakness most directly enabled this type of fraud?

The weakness is inadequate segregation of duties between front and back office. When the people who execute trades can also approve, settle or reconcile them, fictitious trades and hidden losses go unchallenged, because no independent party verifies the transactions.

  1. AInadequate segregation of duties between front and back office functionsCorrect
  2. BExcessive diversification of trading strategies
  3. COverly frequent rotation of staff across desks
  4. DToo many independent confirmations of counterparty trades

Explanation

Fraud involving concealed losses through fictitious trades typically succeeds when the same people can both execute and verify or settle trades. Independent confirmation and reconciliation are the key detective controls. Diversification, staff rotation and extra confirmations would reduce, not enable, such fraud.

Did you get it right without looking?

One question tells you little. A timed set on Case Study: Financial Crime and Fraud shows your real accuracy, how long you take and where you lose marks.

Practise Case Study: Financial Crime and FraudFree diagnostic mock

More Case Study: Financial Crime and Fraud questions