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Establish Risk Management Lines of Defense

Risk management lines of defense refer to the different layers or levels within an organization that are responsible for identifying, assessing, and mitigating risks. The concept is often associated with risk governance and ensuring that risks are effectively managed throughout the organization. The three lines of defense model is a widely accepted framework for understanding these layers:

1.First Line of Defense (1LoD) – Operational Management:

  • This is the frontline of business operations where risks are taken to achieve organizational objectives.
  • Responsibilities include identifying, assessing, managing, and controlling risks associated with day-to-day activities.
  • Business units, departments, and operational teams are part of the first line of defense.

2. Second Line of Defense (2LoD) – Risk Management and Compliance:

  • This line oversees and supports the first line of defense, providing expertise, tools, and frameworks to help manage risks effectively.
  • Responsibilities include risk identification, risk measurement, monitoring, and implementing policies and procedures to ensure compliance with laws and regulations.
  • Risk management, compliance, and control functions fall within the second line of defense.

3.Third Line of Defense (3LoD) – Internal Audit:

  • Internal audit provides independent and objective assurance to evaluate the effectiveness of risk management processes and internal controls.
  • It assesses whether the first and second lines of defense are functioning as intended and complying with policies and regulations.
  • Internal audit provides feedback to senior management and the board of directors regarding the overall risk management and control environment.

By establishing these three lines of defense, organizations aim to create a system of checks and balances to ensure that risks are appropriately managed, controls are in place, and compliance is maintained. This model helps in preventing and detecting issues early, promoting a culture of risk awareness, and providing assurance to stakeholders that the organization is managing its risks effectively.

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