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Answer: Internal and external auditors should evaluate the bank's risk controls to ensure that they are effective in managing ML/FT risk as well as compliant with regulations.
## Explanation **C is correct** (based on Basel Committee guidelines paragraphs 26 and 27). Internal and external auditors play a crucial role in the third line of defense by independently evaluating the bank's risk controls to ensure: - Effectiveness in managing ML/FT risk - Compliance with the bank's policies and procedures for ML/FT risk management - Adherence to regulatory requirements and supervisory guidance **A is incorrect** (paragraph 23). The chief AML/CFT officer should not have business line responsibilities to prevent conflicts of interest. The chief AML/CFT officer is part of the second line of defense, while day-to-day management of these risks within business lines should be performed by the business lines themselves as part of the first line of defense. **B is incorrect** (paragraph 22). The chief AML/CFT officer, not the CRO, should serve as the primary point of contact with regulatory supervisors and financial intelligence units on ML/FT risk issues. **D is incorrect** (paragraph 21). Screening of current and prospective employees should be part of the first line of defense and should be performed by staff and management of the business lines, not the corporate operational risk function in the second line of defense. This question tests understanding of the proper allocation of ML/FT risk management responsibilities across the three lines of defense according to Basel Committee best practices.
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A regional bank follows the three lines of defense approach for managing its operational risk. The CRO of the bank is concerned that several competing banks have recently received regulatory fines resulting from poor management of risks related to money laundering and financing of terrorism (ML/FT), and wants to improve the bank's management of these risks. The CRO reviews the Basel Committee guidelines for the management of ML/FT risks and suggests that the bank adopt industry best practices for different business functions in each line of defense. Which of the following would be most appropriate for the CRO to recommend addressing ML/FT risks?
A
The chief officer in charge of ML/FT risk should be responsible for monitoring and managing these risks within each of the business lines on a daily basis.
B
The CRO should serve as the primary point of contact with regulatory supervisors and financial intelligence units on any issues related to ML/FT risk.
C
Internal and external auditors should evaluate the bank's risk controls to ensure that they are effective in managing ML/FT risk as well as compliant with regulations.
D
The corporate operational risk function should screen current and prospective employees as part of the second line of defense in managing ML/FT risk.