CBP Compliance, Risk and Regulations 3 — Questions and Answers
Question 1: Which U.S. law requires financial institutions to verify the identity of beneficial owners of legal entity customers?
- Patriot Act Section 326
- FinCEN Customer Due Diligence Rule (Correct answer)
- Community Reinvestment Act
- Fair Credit Reporting Act
Correct answer: FinCEN Customer Due Diligence Rule
FinCEN's CDD Rule, effective 2018, requires banks to identify and verify beneficial owners holding 25% or more of a legal entity.
Question 2: What is 'operational risk' as defined under Basel II?
- Risk of credit default by counterparties
- Risk of loss from inadequate internal processes, people, systems, or external events (Correct answer)
- Risk of interest rate movements
- Risk of currency fluctuations
Correct answer: Risk of loss from inadequate internal processes, people, systems, or external events
Basel II defines operational risk as the risk of loss from failed internal processes, human error, system failures, or external events.
Question 3: The Community Reinvestment Act (CRA) was enacted primarily to address which issue?
- Excessive executive compensation
- Discriminatory lending practices that denied credit to low-income communities (Correct answer)
- Insider trading by bank employees
- Excessive risk-taking in derivatives markets
Correct answer: Discriminatory lending practices that denied credit to low-income communities
The CRA was enacted in 1977 to prevent redlining and ensure banks meet credit needs of all communities, including low- and moderate-income areas.
Question 4: Under the Volcker Rule, which activity is generally prohibited for banking entities?
- Offering mortgage loans
- Proprietary trading of securities for the bank's own profit (Correct answer)
- Accepting insured deposits
- Issuing letters of credit
Correct answer: Proprietary trading of securities for the bank's own profit
The Volcker Rule prohibits banks from engaging in short-term proprietary trading of securities, derivatives, and certain other financial instruments for their own account.
Question 5: What is the primary purpose of a bank's Internal Capital Adequacy Assessment Process (ICAAP)?
- To set customer credit limits
- To ensure the bank holds capital commensurate with its full risk profile (Correct answer)
- To automate loan approvals
- To report earnings to shareholders
Correct answer: To ensure the bank holds capital commensurate with its full risk profile
ICAAP requires banks to assess all material risks and maintain adequate capital beyond minimum regulatory requirements.
Question 6: Which risk is primarily associated with a bank holding long-term fixed-rate loans funded by short-term deposits?
- Credit risk
- Interest rate risk (Correct answer)
- Liquidity risk
- Reputational risk
Correct answer: Interest rate risk
Holding long-term fixed-rate assets funded by short-term liabilities creates interest rate risk, as rising rates increase funding costs while asset yields remain fixed.
Question 7: A compliance officer receives a subpoena for customer records from a foreign government. What is the bank's most appropriate first step?
- Immediately provide all requested records
- Consult legal counsel and review applicable law and treaties (Correct answer)
- Notify the customer immediately
- Destroy the records to protect customer privacy
Correct answer: Consult legal counsel and review applicable law and treaties
Banks must consult legal counsel to determine obligations under U.S. law, privacy regulations, and relevant international treaties before responding to foreign subpoenas.
CBP Compliance, Risk and Regulations 3
Which U.S. law requires financial institutions to verify the identity of beneficial owners of legal entity customers?