Private Banking PEP and a Late Source-of-Wealth Story
A private bank has an existing customer, aged 62, retired and resident in Hong Kong. He has held a relationship for four years with low activity and a current balance of about HKD 2 million. He now asks the bank to receive US$6 million from an account in Country X held by a family trust. He says the money comes from the sale of government construction contracts awarded while he was deputy minister of transport in Country X until three years ago. He wants to add his daughter as an authorised signatory. The daughter lives in a jurisdiction known for secrecy and holds a second passport. Local media in Country X have alleged procurement irregularities involving the customer, but there is no conviction or charge. The customer refuses to provide the trust deed or the sale contract, saying: “You already have my passport and my file.”
1. Assess the customer’s PEP status and identify the enhanced due diligence measures required before the US$6 million can be received.
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He is a foreign PEP because he held a prominent public function as deputy minister of transport in Country X. The three-year period since leaving office does not automatically remove the risk; risk should be assessed on the country, the role, the source of wealth and any adverse media. His daughter is a family member of a PEP and should also be screened. The trust may be a connected vehicle.
EDD should include: establishing the trust’s settlor, trustee, protector and beneficiaries; obtaining the trust deed and the sale contract; independently verifying the government contracts and the sale proceeds; screening the customer, daughter and trust parties against sanctions and adverse media; and assessing the Country X risk. Senior management approval is required before establishing or continuing the relationship. The bank should also assess source of funds for the US$6 million transfer, not just source of wealth. Refusal to provide the trust deed is a material obstacle.
2. Should the bank accept the US$6 million and add the daughter as signatory? Explain your decision and any conditions.
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The bank should not accept the funds or add the daughter until EDD is satisfactorily completed and senior management has approved. The combination of a foreign PEP, alleged procurement irregularities, an offshore trust, a secrecy jurisdiction, a second passport and refusal to provide core documents is high risk. The customer’s explanation is also vague: government contracts sold after leaving office can be legitimate, but the bank needs evidence of the sale, the buyer, the valuation and the movement of funds.
Conditions could include: receipt of the trust deed and sale contract; independent verification of the contracts and proceeds; identification of all trust parties and the daughter’s source of funds; and a clear explanation of why a third-party trust is paying. If the customer continues to refuse, the bank should decline the transfer and consider whether the relationship can continue. A decision to exit should be documented and, where suspicion arises, an STR should be filed.
3. What ongoing monitoring and trigger-event reviews should apply if the relationship continues? How should the adverse media be handled?
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If the relationship continues, it should be rated high risk and subject to enhanced ongoing monitoring, including more frequent reviews of transactions, counterparties and source of funds. Trigger events should include: the daughter becoming a signatory; any further trust or offshore structure; changes in the customer’s political exposure; new adverse media; and large transfers from Country X. The bank should set thresholds and review the first movements of the US$6 million closely.
Adverse media should not be treated as proof of wrongdoing, but it must be assessed. The bank should identify the source, date, seriousness and whether the allegations relate to the same government contracts. It should document why the media does or does not affect the risk assessment. If the allegations are credible and unresolved, the bank may be unable to establish source of wealth. In that case, declining or exiting is safer than relying on the customer’s denial alone.