Third-party cheques and a delayed suspicious transaction report
Bright Harbour Securities Limited is a licensed Type 1 broker. A new client, Mr. Wong, is introduced by an existing client. He opens a cash account and within three weeks deposits HK$9.8 million by 14 cheques drawn on three BVI companies and one Hong Kong company. The account is opened in his personal name; he says he is a 'consultant' and that the funds are 'family savings'. He declines to provide details of the BVI companies, saying they are 'private'. The client trades only twice, buying and selling a small-cap stock, and then asks to withdraw HK$9.5 million to a bank account in a different name in Malaysia. The account opening officer notes that Mr. Wong is a former district councillor and a 'politically exposed person' check returns no match because the screening system only covers current PEPs, not former ones. The compliance manager suggests filing a suspicious transaction report after quarter-end to avoid disrupting the client's trading. Another officer wants to close the account immediately without reporting.
1. What customer due diligence and enhanced measures should Bright Harbour have applied to Mr. Wong?
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The firm should have identified and verified Mr. Wong, the beneficial owners of the BVI companies behind the cheques, and the purpose and intended nature of the relationship. The third-party cheques, the vague 'family savings' explanation and the reluctance to explain the BVI companies are higher-risk indicators. Source of funds and source of wealth should have been established with evidence, not just a statement. PEP screening should be risk-based and should include former PEPs and domestic PEPs where relevant; a district councillor may not automatically be a PEP under the FATF definition, but the role and the political connection require a documented risk assessment. Enhanced due diligence and senior management approval would be appropriate before accepting the deposits. The firm should also monitor the account for unusual trading and the proposed withdrawal to a different name in Malaysia.
2. Should the firm file a suspicious transaction report, and what are the risks in waiting until quarter-end?
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Yes. The combination of third-party cheques from BVI companies, unclear beneficial ownership, minimal trading, a large withdrawal to a different name and a different jurisdiction, and a vague explanation creates suspicion. The firm should report promptly to the Joint Financial Intelligence Unit. Waiting until quarter-end is not acceptable: the obligation is to report as soon as reasonably practicable after suspicion arises. Delay risks the funds moving and exposes the firm and its compliance manager to regulatory criticism or prosecution. The firm must not tip off Mr. Wong or the introducer that a report has been made. It should continue risk-based monitoring and consider whether to restrict the account, but it should not close the account simply to avoid reporting. The compliance manager's suggestion is a control failure that should be escalated.
3. What are the respective responsibilities of the firm, senior management and the individual officers in this case?
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The firm is responsible for having an effective AML/CFT programme: written policies, a risk-based CDD process, PEP and sanctions screening, transaction monitoring, record-keeping and training. Senior management must ensure the programme is adequately resourced and that staff can escalate concerns without commercial pressure. The compliance manager who suggested delaying the STR has failed to act with integrity and competence; that is a disciplinary and possibly regulatory matter. The account opening officer should have escalated the red flags rather than processing the deposits. The money laundering reporting officer should decide on reporting independently and document the rationale. If the firm failed to report, the SFC can take disciplinary action against the firm and individuals, and the JFIU or police can pursue offences. Closing the account without reporting is not a substitute for an STR.