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

In the three lines of defence model applied to ML/FT risk under the Basel guidelines, which is the correct allocation?

Business units are the first line and own and manage ML/FT risk; compliance, led by the chief AML officer, is the second line providing oversight; internal audit is the independent third line that assesses effectiveness. The other allocations confuse design, testing and ownership responsibilities.

  1. ABusiness units own and manage ML/FT risk as the first line; the chief AML officer and compliance monitor as the second; internal audit independently assesses as the thirdCorrect
  2. BCompliance is the first line and owns all customer onboarding decisions; business units are the second line
  3. CInternal audit designs the controls and the business units test them
  4. DThe board forms the first line and internal audit the second line

Explanation

Business units, being customer-facing, are the first line and own the risk. Compliance with a designated chief AML officer is the second line, providing oversight and monitoring. Internal audit is the independent third line. The other options reverse or confuse these roles.

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