Understanding Reputational Risk in Banking
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Questions and Answers

What enables money launderers to process checks through an account without being detected?

  • Sanctioned country transactions
  • Anonymous account holders
  • Multiple imaging devices (correct)
  • Lack of human intervention in reviewing cleared items
  • What is a potential risk associated with RDC in relation to sanctions requirements?

  • Facilitating money laundering
  • Decreasing human intervention in reviewing cleared items
  • Processing transactions in a sanctioned country (correct)
  • Violating confidentiality restrictions
  • What is the primary risk associated with RDC according to the text?

  • Non-compliance with regulatory requirements
  • Confidentiality breaches
  • Fraud (correct)
  • Money laundering
  • What is the likely outcome of RDC without proper controls?

    <p>Fraud is not prevented but rather detected after it has occurred</p> Signup and view all the answers

    What is the recommended approach to controlling the risks associated with RDC?

    <p>Integrating RDC processing into other controls</p> Signup and view all the answers

    What is the primary goal of integrating RDC processing into other controls?

    <p>Improving fraud detection and prevention</p> Signup and view all the answers

    What is the potential consequence of RDC minimization of human intervention?

    <p>Decreased ability to identify potential fraud indicators</p> Signup and view all the answers

    What is the recommended approach to implementing new products, such as RDC?

    <p>Integrating new products into existing controls</p> Signup and view all the answers

    What is the potential risk associated with RDC in relation to money laundering?

    <p>Moving checks with ease through an account</p> Signup and view all the answers

    What is the primary goal of implementing an AML/CFT policy and procedure?

    <p>Preventing and detecting fraud and money laundering</p> Signup and view all the answers

    Study Notes

    Reputational Risk

    • A bank's reputation can be damaged by a money laundering scandal, leading to a loss of customers and business
    • High-quality borrowers may withdraw their loans, increasing the risk of the overall loan portfolio
    • Depositors may withdraw their funds, causing potential liquidity problems

    Operational Risk

    • Inadequate internal processes, personnel, or systems can lead to losses
    • External events can also result in losses
    • Losses can occur when organizations incur reduced or terminated inter-bank or correspondent banking services
    • Increased borrowing or funding costs are also a component of operational risk
    • Lawsuits, adverse judgments, unenforceable contracts, fines, and penalties can generate losses and increased expenses
    • Legitimate customers can sue the financial organization for reimbursement in cases of financial crime
    • The SM&CR requires a senior manager to be responsible for ensuring efforts to combat financial crime are effectively designed and implemented

    AML/CFT Regulations

    • The New York State Department of Financial Services (DFS) requires regulated organizations to maintain "transaction monitoring and filtering programs"
    • These programs must monitor transactions after their execution for compliance with the Bank Secrecy Act (BSA) and AML laws and regulations
    • The programs must also prevent unlawful transactions with targets of economic sanctions administered by OFAC

    Transaction Monitoring Systems

    • Models should be risk-based and commensurate with the organization's own risk assessment and profile
    • Ongoing analysis and testing of AML/CFT models are required to assess scenario logic, performance, model technology, assumptions, and model parameter settings

    Remote Deposit Capture (RDC) Risks

    • RDC can be misused by money launderers to move checks with ease through an account
    • RDC can also be used to facilitate violations of sanctions requirements
    • The more prominent risk associated with RDC is fraud, due to the minimization of human intervention in reviewing cleared items
    • Integration of RDC processing into other controls, such as monitoring and fraud-prevention systems, is necessary to mitigate these risks

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    Test your knowledge on the impact of reputational risk on a bank's operations, including the effects on borrowers, depositors, and investors. Learn how a scandal can affect the bank's loan portfolio and funding sources.

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