Third-party deposits and a PEP at a brokerage
Orient Capital Securities, a Hong Kong licensed broker, opens a margin account for Mr Wong, a 45-year-old businessman. Within three weeks he deposits HK$8 million from four different companies incorporated in Samoa, Cyprus and the UAE, describing them as 'consultancy fees'. The account is operated by Ms Li under a power of attorney; she gives all instructions by phone. Mr Wong's ID shows a Shenzhen residential address. A screening hit shows he is a domestic politically exposed person in a mainland province. The deposits are each just below HK$1 million, and trading is minimal: he buys one small-cap stock and rarely sells. He then requests a HK$3 million wire transfer to a new account in Turkey. The compliance officer also notices that the account opening form records 'source of funds: salary' despite the deposits coming from overseas companies.
1. Identify the key money-laundering red flags and CDD deficiencies.
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Red flags: four offshore corporate deposits in three weeks, each just under HK$1 million (possible structuring); source of funds stated as salary but deposits described as consultancy fees; corporate depositors from Samoa, Cyprus and the UAE; domestic PEP; account operated by an attorney under a power of attorney; instructions by phone; Shenzhen address; minimal trading in one small-cap stock with no economic rationale; sudden HK$3 million transfer to a new Turkey account. CDD deficiencies: no verification of the corporate depositors' beneficial owners and their relationship to Mr Wong; source of wealth not established; PEP enhanced due diligence and senior management approval not completed; the attorney and beneficial owner were not fully verified; purpose and expected activity were not recorded; ongoing monitoring was not triggered.
2. What should the compliance officer do with the HK$3 million transfer request and the existing relationship? Address STR and tipping-off.
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The compliance officer should not process the Turkey transfer until the source of funds and the corporate depositors are explained and verified. The combination of PEP status, offshore corporate deposits, structuring and rapid transfer justifies a suspicious transaction report to the JFIU as soon as reasonably practicable. The broker must not tell Mr Wong or Ms Li that a report has been made, because tipping-off is a criminal offence. It should consider suspending the account or restricting withdrawals while it seeks clarification, and escalate to senior management and the MLRO. It should not simply close the account and return the funds without addressing the money-laundering and terrorist-financing risk and record-keeping.
3. What record-keeping and ongoing monitoring obligations apply, and for how long?
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Under the AMLO and SFC AML/CFT guidelines, the broker must keep CDD records, account and transaction records, and copies of suspicious transaction reports for at least five years after the end of the business relationship or the completion of the transaction. Ongoing monitoring should be risk-based: periodic review of the PEP relationship, scrutiny of source of funds for each large deposit, review of power-of-attorney instructions, and updating CDD when a trigger event occurs. Staff should receive AML training, and the MLRO should report to senior management. If the relationship is exited, the exit should be documented and handled without tipping off.