“Basel Core Principles for Effective Banking Supervision (bcbs230) state that “Where banks use models to measure components of risk, the supervisor determines that: banks comply with supervisory standards on their use, banks’ boards and senior management understand the limitations and uncertainties relating to the output of the models and the risk inherent in their use, they shall perform regular and independent validation and testing of the models and that the supervisor assesses whether the model outputs appear reasonable as a reflection of the risks assumed.”

The status of model risk management is provided to the risk management committee, the board of directors, senior management and the audit committee.

A Model Risk Committee is responsible for assisting the board of directors in fulfilling its obligations in respect to all the models used by the financial institution, ensuring the integrity of the information about all the models stored in the model inventory, ensuring the composition of the committee membership is appropriate, providing reports to the risk management committee, the board of directors and senior management on the status of model risk management. 

The CAMS 6th Edition clearly identifies a risk-based approach as the cornerstone of effective AML/CFT programs. Risk assessments should consider various risk factors that directly influence exposure to ML/TF.

Product risk (A): Certain products or services may present higher ML/TF risks, such as private banking, correspondent banking, or cash-intensive products.''Products and services offered, and their inherent risk levels, must be assessed as part of the risk-based approach.''(CAMS 6th Edition, AML Compliance Program, Risk Assessment)
Geographic risk (C): Jurisdictions where the customer operates or where transactions are conducted may present higher or lower risks due to factors such as weak AML regulations or high corruption.''Geographic risk considers where a customer is located and/or where transactions occur, referencing countries with increased risk, such as those identified by the FATF.''(CAMS 6th Edition, Risk Assessment Factors)
Customer risk (D): The type of customer, such as PEPs, non-residents, or companies with complex structures, may present higher ML/TF risks.''Customer risk assessment is based on the customer's profile, activity, and ownership structure, and is a critical component in risk-based monitoring.''(CAMS 6th Edition, CDD/EDD)
Incorrect Options:
B (Credit risk): Related to creditworthiness, not ML/TF.
E (Liquidity risk): Refers to a firm's ability to meet financial obligations; not an AML risk factor.
CAMS Study Guide 6th Edition, AML Compliance Program, ''Risk-Based Approach''
FATF Guidance: National Money Laundering and Terrorist Financing Risk Assessment (2013)

The first step in designing an effective controls framework using a risk-based approach is conducting a risk assessment. This identifies and evaluates inherent risks, providing the basis for determining which controls are necessary and how they should be prioritized.