1. The Evolution of 3 Lines of Defence
Ruth Hutchinson
Head of Financial Crime Compliance

2. Learning Objectives
Review the history of the 3 lines of defence model; what have we learned since it was introduced?
Evaluate its current use in managing financial crime risk.
Consider ways in which the model might be changing in response to the rapidly evolving risk environment.

3. History of 3LoD Where did it all begin? Military strategy!
Financial scandals
Economic crisis
Financial crime
The need for a flexible, adaptable model of risk management
Application to financial crime prevention
Discuss some of the drivers of needing a 3LOD model.
Apply this to how 3LOD model helps to manage risk
Discuss then how this relates to financial crime risk management

4. The Traditional Model 1st Line Business Units 2nd Line
Customer facing
First to detect any risk issues
Apply risk management controls and mitigators
Best informed about the firm’s exposure to risks
1st Line
Business Units
Subject matter experts
Oversee and challenge risk management approach
Horizon scanning
Design risk management framework
2nd Line
Risk and Compliance
Independent oversight
Objective review and testing
Provide challenge
3rd Line
Audit

5. Does it work? Benefits Challenges
Clarifies risk management accountabilities
Difficult to understand and apply
Strengthens governance approach
Lack of clarity of roles
Supports embedding a strong culture
Not consistently applied
Encourages dialogue
Siloed 2LOD
Doesn’t take account of technologies
Other points of discussion for negatives:
Misaligned incentives for risk takers in 1LOD
Lack of organisational independence for those in 2LOD
Lack of skills and expertise in 2LOD, lack of business awareness
Use examples appropriate to FC risk management to illustrate

6. What’s next? Evolution. Board/Audit Committee Regulatory supervisors
Senior Management
1st line of defence.
Functions that own and manage risk
Risk Management Controls
Risk ownership
2nd line of defence.
Oversee controls
Compliance
SMEs
Risk
Financial Crime
Policy & Advisory
3rd line of defence
Independent assurance
Audit
External Audit
Reference discussions currently being held in Europe post the Danske Bank Estonian branch scandal.
Last week, the European commission put forward proposals to create the EU’s first genuine cross-border anti-money laundering force. The European Banking Authority will see its relevant investigations team increased from two people to 10, and the agency is to be handed the power to intervene where it believes national regulators are failing. But its mandate is limited to taking action against banks – it cannot prosecute their criminal customers.
3 Lines of Defence
4th Line of Defence

7. Thank you