The Discreet Beneficial Owner
You are the compliance officer at a small private bank. A new client, Mr. A, is a 45-year-old entrepreneur from a jurisdiction with weak AML controls. He wants to open a personal investment account with an initial deposit of $2.5 million. He provides a passport and a utility bill, both verified. He states that the funds come from the sale of his software company. However, when asked about the ownership structure of the selling entity, he becomes evasive and says the buyer was a private equity firm and that he has signed a non-disclosure agreement. He refuses to provide the sale contract or any documentation showing the source of funds. He also mentions that he plans to transfer the funds from an account in a different offshore jurisdiction. The bank's risk appetite is low, and the jurisdiction where the bank operates requires enhanced due diligence for politically exposed persons (PEPs) and for clients from high-risk countries. Mr. A is not a PEP, but his country is on the FATF grey list. The relationship manager is keen to onboard him because of the size of the account.
1. What are the key red flags in this scenario, and what does the bank's AML policy require in terms of due diligence?
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Key red flags include: (1) The client's evasiveness about the source of funds and refusal to provide documentation, despite a plausible story. (2) The involvement of an offshore jurisdiction for the transfer, which adds layering risk. (3) The client's country is on the FATF grey list, which triggers enhanced due diligence (EDD) under the bank's policy. (4) The large initial deposit ($2.5 million) relative to the client's profile and the bank's low risk appetite. (5) The use of an NDA as a reason not to disclose the sale contract is unusual; while NDAs are common, the bank can still request redacted documents or a letter from the buyer's lawyers confirming the sale. The bank's AML policy should require: standard CDD (identification and verification) plus EDD because of the high-risk country. EDD includes establishing the source of wealth and source of funds, which in this case means obtaining independent evidence of the sale (e.g., sale contract, bank statements showing receipt of funds, or a letter from the buyer). The bank should also consider whether the client is a PEP (he is not, but associated persons might be). If the client cannot or will not provide satisfactory evidence, the bank must not onboard and should consider filing a suspicious activity report (SAR). The relationship manager's enthusiasm should not override compliance requirements.
2. How should the compliance officer handle the relationship manager's pressure to onboard the client?
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The compliance officer should remind the relationship manager that the bank's policies and regulatory obligations require strict adherence to AML/CFT rules, regardless of the size of the account. The officer should document the RM's request and the compliance decision. The officer should explain that onboarding without satisfactory source of funds evidence would expose the bank to regulatory sanctions, reputational damage, and potential criminal liability. The officer should escalate the matter to senior management if the RM continues to pressure. The officer should also ensure that the client is given a clear explanation of what documentation is needed and an opportunity to provide it. If the client fails to provide adequate documentation within a reasonable timeframe, the bank should decline the relationship. The officer should consider whether the RM's behavior warrants further review or training. Finally, if there are suspicions of money laundering, the officer should file a SAR with the financial intelligence unit, ensuring not to tip off the client.