Offshore Buyer, Third-Party Funds and a Below-Market Property Purchase
A Hong Kong law firm is instructed by a BVI company to purchase a residential property at HK$28 million. The bank valuation is HK$35 million. The sole director of the BVI company is a nominee resident in Seychelles. The shareholder is another BVI company. The ultimate beneficial owner has not been disclosed. The purchase funds are to be wired from a third-party Hong Kong company unrelated to the buyer. The client wants completion in 10 days and says the UBO is “a private investor who values privacy”. A deposit of HK$2.8 million has already been received from a separate individual. The client refuses to provide the trust deed, the ownership chart or source-of-funds evidence, and asks the firm to hold the funds in its client account before completion.
1. What customer due diligence and beneficial ownership issues arise for the law firm as a DNFBP?
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The law firm must identify the client and the beneficial owner. The client is the BVI company, but the firm cannot rely on the nominee director or the corporate chain without understanding who ultimately owns or controls the buyer. The second BVI company and the undisclosed UBO are core CDD gaps. The firm should obtain the ownership chart, constitutional documents, register of members, trust deed if any, and identify each individual with 25% or more ownership or control, or the beneficial owner by other means.
The third-party payer and the separate individual who paid the deposit are also relevant. The firm should establish the relationship between the buyer, the payer and the deposit payer, and verify their identities. The below-market price and the request to hold funds in the client account add risk. The firm should not proceed on the basis of a vague “private investor” explanation. If the client refuses, the firm cannot satisfy CDD and should decline.
2. What enhanced due diligence and source-of-funds steps are needed, and should the firm proceed to completion?
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EDD should cover the offshore structure, the nominee director, the UBO, the third-party payer and the deposit payer. The firm should obtain evidence of the UBO’s wealth and the source of the HK$28 million, such as bank statements, sale contracts, corporate records or audited accounts. It should independently verify the payer’s identity and its relationship to the buyer. The below-market purchase price should be explained; it may indicate value transfer or a non-arm’s-length arrangement.
The firm should not complete while the UBO and source of funds remain undisclosed. Holding third-party funds in the client account without a clear basis increases risk. If the client cooperates fully, the firm can reassess and seek senior approval within the firm. If not, it should decline to act. The decision should be documented, including why the risks could not be mitigated.
3. When should the firm file an STR, and how should it communicate with the client without tipping off?
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The firm should escalate to its MLRO or compliance partner as soon as the red flags are identified. If there are reasonable grounds to suspect that the funds or property are connected to crime, an STR should be filed promptly with JFIU. The firm should not wait for completion or for the client to provide every document. The refusal to disclose the UBO, the third-party funds and the below-market price are sufficient to justify suspicion in combination.
The firm must not tell the client that an STR has been filed or that suspicion exists. It can ask for the missing CDD documents in a routine way, but it should avoid signalling a report. If it decides not to act, it should give a neutral explanation, such as inability to meet client due diligence requirements, and take legal advice where needed. The firm should retain all correspondence and CDD records.