CAIIB ABM Module D UNIT 29 MCQ – Framework for Identification of Compliance Issues and Compliance Risks

Correct Answer: C. To oversee compliance with regulations and ensure timely reporting. The objectives of the framework highlight the need for a robust audit and inspection department to oversee compliance with regulations and ensure timely reporting.

Correct Answer: B. The evolution of technology. With the evolution of technology, the banking industry has undergone a massive transformation.

Correct Answer: C. It is expected to be a disruptive force that reshapes the sector, business models, and banking structures.

Correct Answer: B. Compliance.

Correct Answer: C. The act of following laws, rules, regulations, and various codes of conduct. Compliance is defined as the act of following laws, rules, regulations, and various codes of conduct, including voluntary ones.

Correct Answer: B. Adhering to the organisation’s own internal rules, policies, procedures, and ethical practices.

Correct Answer: B. A single event where an Accountable Employee violates one or more required processes or procedures under the Rules. A compliance issue means a single event during which any Accountable Employee is in violation of one or more processes or procedures required under the Rules.

Correct Answer: B. Keeping up with the pace of alterations and complying with evolving regulations. As the financial world gets more regulated, organisations face a greater burden and stress to keep up with the pace of alterations and to comply with the evolving regulations.

Correct Answer: B. Geopolitical Trends towards Nationalism. Geopolitical Trends towards Nationalism is listed as one of the important challenges for the BFSI sector.

Correct Answer: C. To improvise Compliance policies and implementation. With fast moving changes in the BFSI sector, there is a felt need to improvise the Compliance policies and implementation.

Correct Answer: C. Policy and regulation. The re-emergence of protectionism, nationalism and sovereign rights created an uncertainty in the policy and regulation side as well.

Correct Answer: B. Global political shifts. Changes in the geopolitical area affect regulations and financial organisations must remain aware of potential disruptions, directly linking global political shifts to regulatory compliance.

Correct Answer: B. Financial crime. In the countries of uncertainty, financial crime may thrive due to the facilities provided by the innovative technologies.

Correct Answer: C. Merge the diverge. Financial organisations are advised to understand and embrace the divergent nature of regulations, and the term “merge the diverge” must be learned and adapted into their strategies.

Correct Answer: C. Both within their organisation and through third-party organisations. Financial services providers acknowledge data as something to be protected with governance and control within their organisation and through third-party organisations.

Correct Answer: C. Operational resilience. The ability of the financial institutions to adapt to changing environments is one of the key concepts for the process of business transformation for the sake of regulatory compliance, referred to as operational resilience.

Correct Answer: C. Disruptions. Regulators expect Banks & Fls to have a highly broad view of operational resilience by both controlling the operational risks and managing the disruptions.

Correct Answer: C. Continuity planning, operational risk, and concentration risk analysis. Institutions need to operate an integrated approach including continuity planning, operational risk, and concentration risk analysis for operational resilience.

Correct Answer: C. Credit cycles. Financial institutions should learn from previous credit cycles and apply the learnings into their operations to prevent the potential risks which are related to Credit Cycles.

Correct Answer: C. An upgrade in Skills set of employees at all levels. These challenges would require extensive use of latest technological tools and on the other hand upgrade in Skills set of employees at all levels.

Correct Answer: D. Compliance Risk. The definition provided is that of Compliance Risk, which includes the risk of legal or regulatory sanctions, material financial loss, or loss to reputation due to failure to comply with applicable standards.

Correct Answer: B. Workplace Health and Safety. Workplace Health and Safety is listed as one of the common compliance risks.

Correct Answer: C. Regulatory Focus. Regulatory Focus is one of the bases for identifying the level of Compliance Risk in each business line, products and processes.

Correct Answer: C. To identify Compliance Risk and put in place appropriate risk mitigants. The Compliance department through the New product approval process shall ensure that Compliance Risk in all new products and processes introduced get identified and appropriate risk mitigants are put in place.

Correct Answer: B. Staff accountability shall be examined for all compliance failures.

Correct Answer: B. Its activities shall be subject to periodic and independent review by the internal audit function. Its activities shall be subject to periodic and independent review by the internal audit function.

Correct Answer: C. A Core Risk management activity. Compliance function shall be regarded as a Core Risk management activity within the bank and shall not be outsourced.

Correct Answer: C. Risk based and due diligence is essential. The present day approach is a risk based and due diligence is also essential.

Correct Answer: B. That it has been duly diligent through developing, implementing and maintaining a management system. Due diligence is when an organisation is able to demonstrate that it had been duly diligent in meeting its obligations through developing, implementing and maintaining a management system.

Correct Answer: C. Systems that are effective and not merely “paper”. Systems must be “effective” and not “paper”, “legalistic” systems is a critical point to proving due diligence.

Correct Answer: C. Real commitment to compliance. Real commitment to compliance is listed as one of the essential ingredients of due diligence.

Correct Answer: B. The Head of the Internal audit & Compliance department. Under the guidance of the CMD the Head of the Internal audit & Compliance department shall lead and co-ordinate investigations into alleged unsatisfactory conduct or misconduct of Bank employees or consultants.

Correct Answer: B. Identifying, documenting and assessing the compliance risks associated with the Bank’s business activities. On a pro-active basis, to identify, document and assess the compliance risks associated with the Bank’s business activities is part of the complete risk management function.

Correct Answer: B. The risk that it may run short of funds, potentially leading to high interest rates to bridge the gap. Liquidity risk is defined as the risk that a financial institution may run short of funds, owing to a decline in its creditworthiness or an extreme gap between its maturities in inflow and outflow of funds, and may therefore have to pay prohibitively high interest rates to bridge the gap.

Correct Answer: C. By periodically examining the structure of fund sources and uses and implementing measures needed to improve this structure. To manage liquidity risk, the Bank first periodically examines the structure of fund sources and uses and implements measures needed to improve this structure.

Correct Answer: C. Operations risk. Operations risk is inherent in the handling of customer transactions, and errors, unethical conduct, and certain other circumstances that may lead to losses.

Correct Answer: C. Customer complaints concerning transactions. Typical examples are disparities between actual cash and cash balances and customer complaints concerning transactions.

Correct Answer: C. Proper management of these activities. As banking activities become more diverse, proper management of these activities to lessen and minimise operations risk is essential.

Correct Answer: B. Risk inherent in computer systems, potentially causing losses or damages due to malfunctions or unethical conduct. Systems risk is inherent in computer systems, and losses as well as damages may be incurred owing to malfunctions and unethical conduct.

Correct Answer: C. Society at large. For financial institutions, which are highly dependent on these systems, there is a possibility that systems risk may have an impact on society at large.

Correct Answer: B. By supervising and controlling it as part of a unified, bank wide management system. The bank does not regard the management of systems risk as simply a systemic or technological issue but, as one form of management risk, is working to supervise and control it as part of a unified, bank wide management system.

Correct Answer: C. Compliance Risk Assessment. Compliance Risk Assessment is the process of assessing the level of compliance of regulatory directives impacting the banks and the major compliance risks faced by the bank.

Correct Answer: B. Implementation of regulatory guidelines. Implementation of regulatory guidelines is identified as an area related to understanding Compliance Risk Assessment.

Correct Answer: B. AML-CFT compliance. For overseas establishments, AML-CFT compliance may be taken as a parameter for assessment.

Correct Answer: C. Meets requirement. A Compliance Risk Score between 3.1 and 5 indicates the Compliance Risk Level is “Meets requirement”.

Correct Answer: C. A plan to mitigate the risks with actions. Based on the results of the Compliance Risk assessment, a plan may be prepared to mitigate the risks with actions.

Correct Answer: C. At least once a year. The plan includes action to conduct assessment of the compliance risk activity-wise at least once a year.

Correct Answer: B. The bank shall develop and maintain one covering all aspects of the compliance function. The bank shall also develop and maintain a quality assurance and improvement program covering all aspects of the compliance function.

Correct Answer: D. Periodically (at least once in three years). The quality assurance and improvement program shall be subject to independent external review periodically (at least once in three years).

Correct Answer: C. The business units and the compliance function. Compliance is a shared responsibility of the business units and the compliance function.

Correct Answer: B. Each staff member of the bank. Adherence to applicable statutory provisions and regulations needs to be the responsibility of each staff member of the bank.

Correct Answer: B. An effective audit programme. An effective audit programme is the key to a successful compliance policy.

Correct Answer: C. Compliance units. Compliance units in banks may evaluate the compliance risk in each business line at periodical intervals and put up the results to the Board/Management Committee.

Correct Answer: B. Ensuring adequate transaction testing. Ensure adequate transaction testing is listed as one of the key components of an effective audit programme.

Correct Answer: B. New regulations introduced since the prior audit. New regulations introduced since the prior audit is listed as a factor that should be considered.

Correct Answer: C. The existing policies, procedures, and activities. The success of a compliance policy needs a system of independent testing of the existing policies/procedures/activities.

Correct Answer: B. Adequacy of Customer Identification Program (CIP). Adequacy of Customer Identification Program (CIP) is listed as one of the areas/activities to be tested.

Correct Answer: B. To the Compliance department at Central office. Wherever breaches/non-compliances are observed, the same should be sent Compliance department at Central office.

Correct Answer: B. Whether any major Breaches are reported in the past. Whether any major Breaches are reported in the past is a parameter influencing sample size selection.

Correct Answer: B. KYC AML norms/compliance. KYC AML norms/compliance at branch level is relevant for sample selection for testing.

Correct Answer: B. Inspection. An inspection is described as involving a site visit as part of a compliance obligation.

Correct Answer: C. To check that compliance requirements have been fulfilled, including whether necessary inspections were conducted. An audit is defined as the process of checking that compliance obligations have been met, including completed inspections.

Correct Answer: B. Inspections deal with immediate problems or potential accidents, while audits cover the underlying reasons for these problems. Inspections focus on things causing immediate issues, whereas audits cover the root causes.

Correct Answer: B. Risk Based Internal Audit. Risk Based Internal Audit is mentioned as one of the types of audits.

Correct Answer: B. Chief Compliance Officer at Head office. Internal auditors should report breaches and non-compliances to the Chief Compliance Officer at Head office, with a copy to the Risk management department.

Correct Answer: C. The Audit Committee. The role of the audit committee includes providing direction and overseeing the operations of the total audit function.

Correct Answer: B. Reserve Bank of India (RBI). The Audit Committee should follow up on the observations of the inspection by the Reserve Bank of India.

Correct Answer: C. Fixing accountability for failing to detect serious irregularities. Fixing accountability of inspecting/auditing officials for failure to detect serious irregularities is a role of the audit committee.

Correct Answer: C. Accounting policies and internal control systems. Periodical review of the accounting policies and internal control systems is done by the audit committee to ensure greater transparency in accounts.

Correct Answer: B. By developing and using strong sanction and underwriting policies and procedures. Lenders control risk on the front end by developing and using strong Loan sanction/underwriting policies and procedures.

Correct Answer: B. Loan review. One critical element of a strong portfolio management system is the loan review.

Correct Answer: B. To identify the types and levels of credit risk present in the loan portfolio. A loan review mechanism can help banks identify the types and levels of credit risk in their portfolio.

Correct Answer: B. Assessment of individual loans, including repayment risks. A loan review specifically includes the assessment of individual loans, including repayment risks.

Correct Answer: C. The accuracy and appropriateness of the risk grades assigned to loans. The loan review mechanism evaluates risk grades and their accuracy for banks that risk-rate their loans.

Correct Answer: B. Timely and objective data on loan portfolio quality and recommendations for addressing weaknesses. A thorough and correctly completed loan review provides objective and timely data on loan portfolio quality and recommendations for addressing weaknesses.

Correct Answer: B. A portfolio review. A loan review is not a portfolio review, which assesses concentrations like geographic or borrower risks.

Correct Answer: B. The focal date. A loan review assesses loan quality at a specific point in time, which is called the focal date.

Correct Answer: B. Analysis of the financial statements of the initial underwriting. Review of initial underwriting including analysis of financial statements is part of Credit Initiation in a loan review checklist.

Correct Answer: C. Loan Structuring. Evaluation of repayment terms against the borrower’s ability to repay and industry best practices is part of Loan Structuring.

Correct Answer: C. Credit/Collateral File Documentation. Verification of all relevant initial and ongoing documentation is part of Credit/Collateral File Documentation.

Correct Answer: B. Problem Loan Management. Evaluation of problem loan management including reporting to senior management is covered in Problem Loan Management.

Correct Answer: B. A report summarising findings, conclusions, and recommendations. Loan review officials are required to submit a report summarising findings, conclusions and recommendations.

Correct Answer: C. Credit risk. Credit risk is advised as the most important aspect of bank funds management.

Correct Answer: B. Credit audit. Credit audit is the essence of a mid-course correction in the sanction process.

Correct Answer: B. Compliance with established sanction and post-sanction processes and procedures. Credit audit examines compliance with extant sanction and post-sanction processes/procedures.

Correct Answer: B. Improving the quality of the credit portfolio. Improvement in the quality of credit portfolio is listed as an objective of Credit Audit.

Correct Answer: D. Credit Audit. Picking up early warning signals and suggesting remedial measures are objectives of Credit Audit.

Correct Answer: C. A specific department or the Inspection and Audit department. The credit audit/loan review mechanism may be assigned to a specific department or the Inspection and audit department.

Correct Answer: B. The Credit Audit Department. Analysing Credit audit findings and advising concerned departments/functionaries is a function of the Credit Audit Department.

Correct Answer: B. The Credit Audit Department. Maintaining database of advances subjected to Credit audit is a function of the Credit Audit Department.

Correct Answer: C. To look at the overall portfolio and the credit process being followed. The focus of credit audit needs to be broadened from the account level to look at the overall portfolio and the credit process.

Correct Answer: B. Portfolio Review. Portfolio Review is a scope of credit audit that examines the quality of Credit & Investment portfolio.

Correct Answer: C. Loan Review. Review of the sanction process and status of post sanction processes/procedures is covered under Loan Review scope of credit audit.

Correct Answer: C. Accounts of sister concerns/group/associate concerns. Accounts of sister concerns/group/associate concerns of accounts above the cut-off should be reviewed.

Correct Answer: C. Credit audit. Verify compliance of bank’s laid down policies and regulatory compliance with regard to sanction is an action point for review in credit audit.