Structured Premiums from a Third Party
Mr Lau, aged 42, is a self-employed trader. He applies for a five-year regular-premium life policy with an annual premium of HK$600,000. The first two premiums are paid by bank transfer from a BVI company account whose name is similar to his trading company; the third is paid by a cashier order purchased by a friend. Mr Lau says the friend is a business partner but cannot explain the partner's full name or address. He provides a utility bill in his own name and a copy of his Hong Kong identity card, but declines to provide financial statements or explain the source of the HK$1.8 million already paid. The agent notices that the BVI company was incorporated six months ago and that Mr Lau's stated annual income is HK$800,000. The insurer has not yet been asked to approve the third-party payment. The agent wants to submit the application because the policy is good value and the client has paid promptly.
1. What customer due diligence and enhanced due diligence should be completed before the application is submitted?
Read the worked answer
The agent should not treat prompt payment as reassurance. The structure has several higher-risk features: a large premium relative to stated income, payments from a recently incorporated offshore company, a third-party cashier order, an unidentified business partner, and a refusal to explain source of wealth. Customer due diligence must identify the customer and any beneficial owner, understand the purpose and intended nature of the relationship, and verify identity using reliable sources. The agent should also establish the source of funds for each payment and the source of wealth for the overall premium stream.
Enhanced due diligence is needed because of the higher risk. That means obtaining senior management approval, verifying the BVI company and its ownership, identifying the friend and the relationship, obtaining evidence of the business connection, and resolving inconsistencies between the stated income and the amounts paid. If the customer will not provide the information, the agent should not submit the application as if the case were ordinary. The insurer's third-party payment approval process should be triggered before any further premium is accepted.
2. What should the agent do about the premiums already received and the ongoing relationship?
Read the worked answer
The agent should escalate the case promptly to the agency's compliance or money laundering reporting officer and to the insurer. The existing payments should not be quietly retained while the file is incomplete. The agent should consider whether the circumstances give rise to suspicion, including the offshore company, third-party payer, inconsistent income and refusal to explain wealth. If suspicion remains after reasonable enquiries, a suspicious transaction report should be made to the Joint Financial Intelligence Unit.
The agent must not tell Mr Lau that a report has been made or that he is being investigated, because tipping off is prohibited. The agency should follow the insurer's instructions on holding, returning or freezing premiums, keep a full record of the enquiries and decisions, and continue enhanced monitoring if the relationship proceeds. Declining the business does not remove the reporting obligation if suspicion arose.
3. Could the agent simply reject the application and return all premiums without further action?
Read the worked answer
Rejecting the business may be an appropriate commercial decision, but it is not a complete response. The agent must still consider the suspicious transaction reporting obligation and document why the case was declined. Returning premiums without analysis could destroy or obscure the audit trail and may leave the insurer exposed if the funds are later linked to unlawful activity.
The agency should record the CDD steps taken, the information requested, Mr Lau's responses, the concerns identified, and the internal escalation. It should follow the insurer's procedures on refunds and any legal or regulatory holds. If a report is made, the agency must avoid disclosure to the customer. A clean rejection is therefore possible only after the compliance and reporting issues have been addressed, not instead of addressing them.