The Offshore Account and the Unexplained Transfer
A consultant at a Bulgarian investment firm onboards a new client, Mr. Kolev, who presents a Bulgarian passport and a utility bill. He states his occupation as 'business consultant' and his source of funds as 'savings.' Within two months he transfers BGN 180,000 from an account in a jurisdiction the firm classifies as high-risk, then requests purchase of a diversified portfolio. He declines to provide details about the origin of the funds, saying it is 'private.' He also asks that correspondence be sent to a third-party address abroad. The relationship manager notes the client is polite and the amounts are not unusual for the firm's clientele.
1. Identify the red flags and determine whether the firm should proceed.
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Multiple red flags are present:
- High-risk jurisdiction source: Funds arriving from a jurisdiction the firm itself classifies as high-risk warrant enhanced scrutiny.
- Vague source of funds: 'Savings' is not a credible explanation for a BGN 180,000 transfer from offshore when the client refuses detail. Source of funds must be established, not asserted.
- Refusal to explain: Declining to explain origin as 'private' is itself a red flag; legitimate clients can document savings.
- Third-party correspondence address: Routing communications to an unrelated address abroad can obscure beneficial ownership or indicate a nominee arrangement.
- Occupation inconsistency: 'Business consultant' with no verifiable employer or business documentation.
Decision: The firm should not proceed with the investment until enhanced due diligence is complete. The transaction should be paused, and a suspicious activity report considered if the client continues to refuse explanation. The relationship manager's comfort with the amounts is irrelevant - the risk is in the pattern, not the size.
2. Describe the enhanced due diligence steps required and the reporting obligations.
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Enhanced due diligence:
- Obtain and verify independent evidence of source of funds and source of wealth - bank statements, sale contracts, tax returns, or business accounts - not client assertions.
- Identify and verify the beneficial owner if any corporate structure is involved, and establish whether the third-party address belongs to a related party.
- Screen the client and any related parties against sanctions and PEP lists.
- Obtain senior management approval before establishing or continuing the relationship, as required for high-risk cases.
- Conduct more frequent monitoring of the account and document every step.
Reporting: If, after inquiry, the origin of funds remains unexplained or the firm has reasonable grounds to suspect money laundering, it must file a suspicious activity report with the relevant financial intelligence unit. Tipping off the client is prohibited - the firm must not tell him a report was made. The firm should also consider whether to decline or terminate the relationship. The file must show that the decision was risk-based and documented, so that the firm can demonstrate compliance to its supervisor.