Layered Offshore Ownership, a PEP Director and a Request to Split a Transfer
A Type 1 and Type 4 licensed corporation onboards Bright Peak Holdings, a BVI company. Its two shareholders are companies incorporated in Panama and the Seychelles; the sole director, Mr A, is a former deputy minister of a Southeast Asian country. Within three weeks the account receives HK$6.4 million in seven payments from four unrelated third parties in two jurisdictions, and instructions to buy liquid Hong Kong ETFs and then to remit HK$5.9 million to a Cypriot company. The client file contains only the certificate of incorporation and Mr A's passport: there is no ownership chart and no source-of-wealth evidence. Mr A declines to identify the ultimate beneficial owners, calling it 'commercially sensitive', and asks whether the HK$5.9 million transfer can be split into smaller amounts 'to speed up approval'. The relationship manager has not raised any internal report.
1. What customer due diligence and enhanced due diligence is required before this relationship can continue?
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Ownership and control. The firm must identify the beneficial owners - generally anyone holding 25% or more, directly or indirectly - and understand the ownership and control structure. Two offshore holding companies are not an answer; a layered chart, constitutional documents and evidence of the shareholders' identity are required. If Mr A exercises control without ownership, he must be identified and verified as the controller.
PEP status. A former deputy minister is a politically exposed person. That requires enhanced due diligence: senior management approval before establishing or continuing the relationship, enhanced source-of-funds and source-of-wealth checks, and enhanced ongoing monitoring.
Source of funds and wealth. HK$6.4 million arriving from four unrelated third parties in two jurisdictions, with no apparent link to the company's business, must be explained. The firm needs evidence of the origin of each payment, the relationship between the company and each payer, and the basis of the company's wealth - not a verbal assurance.
Refusal to identify UBOs. 'Commercially sensitive' is not an acceptable response where the law requires identification. If the client will not provide the information, the firm cannot satisfy its obligations: do not establish the relationship, or terminate it, and consider whether the funds should be returned in accordance with the firm's policy and legal advice. The Cypriot remittance is itself a further red flag and should not be processed while the CDD gap exists.
2. Should a suspicious transaction report be made? Explain the timing, the tipping-off prohibition and how the relationship should be handled in the meantime.
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Yes - the indicators are cumulative and strong. Layered offshore ownership, a PEP controller, unexplained third-party funding from multiple jurisdictions, immediate pass-through into ETFs and out to a Cypriot entity, missing CDD and a request to split transfers together meet the threshold of suspicion. There is no monetary threshold: the obligation is to report suspicion, not a large transaction.
Timing. The report goes to the Joint Financial Intelligence Unit as soon as it is practicable after suspicion arises. It should be made through the firm's nominated officer (money laundering reporting officer), with the underlying facts and documents attached. Waiting for the client to answer, or for the compliance committee to meet, is not acceptable if it delays the report.
Tipping-off. Mr A must not be told that a report has been or may be made, and no colleague outside the reporting chain should be informed. The tipping-off prohibition is criminal.
Handling the relationship. Where a report has been made, the firm should follow the JFIU's and its own policy on whether to continue or exit. Doing nothing is not an option: the firm must not process the HK$5.9 million remittance while it cannot explain the funds, and it must consider whether to freeze activity, return the funds, or exit the relationship. Exit should be done without alerting the client to the reason. The RM's failure to escalate internally is itself a control failure that should be investigated and remediated through training.
3. How should the request to split the HK$5.9 million transfer be handled, and what record-keeping and governance failures does this file reveal?
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The splitting request is a red flag, not an administrative convenience. Breaking a transfer into smaller amounts to avoid scrutiny or approval thresholds is structuring, a recognised indicator of money laundering. The firm must not accommodate it, must not process the transfer while the CDD gap exists, and must record the request and the response.
Records. The firm must keep CDD records - identification, ownership chart, PEP determination, source-of-funds evidence, approvals, risk assessment, monitoring alerts and the internal escalation - for the retention period required by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The current file contains none of the substantive records, so even good decisions cannot be evidenced; reconstructing them after an inspection is not a substitute.
Governance failures revealed.
- Onboarding proceeded without beneficial ownership information or source-of-wealth evidence.
- No PEP screening or senior management approval.
- No ongoing monitoring triggered by seven rapid third-party inflows and an immediate outbound remittance.
- No internal escalation by the RM, indicating weak training and a culture where revenue outweighs compliance.
Remedy. Escalate immediately, report to the JFIU, suspend the account, conduct a look-back over other clients introduced by the same RM, review onboarding checklists, tighten PEP and third-party payment controls, and deliver targeted AML training. The SFC treats failures of this kind as serious supervisory breaches, with disciplinary and, in egregious cases, criminal consequences for the firm and its responsible officers.