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

Under the Basel Committee guidelines, which sequence best reflects the proper order of steps in a bank's risk-based approach to ML/FT?

The bank first identifies and assesses its inherent ML/FT risks, then designs and applies controls proportionate to those risks, and continually monitors and reviews them. Applying uniform controls or setting controls before assessing risk does not reflect the risk-based approach.

  1. AApply standard due diligence to all customers, then identify risks later if red flags arise
  2. BIdentify and assess inherent ML/FT risks, then design and apply controls and mitigants proportionate to those risks, and monitor and review themCorrect
  3. CSet the mitigation controls first, then define the risks they are intended to cover
  4. DRely on a customer's home regulator to assess risk, then apply uniform controls

Explanation

A risk-based approach requires understanding risks (customers, products, geographies, delivery channels) before calibrating controls, with ongoing monitoring and review. Uniform controls or controls set before risk assessment are not risk-based.

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