The BVI shell funded from Vanuatu
Silverline Trading Ltd, incorporated in the BVI five weeks ago, applies to open a securities account. Its sole director and 100% shareholder is Mr A, 29, a Shenzhen resident who says he manages 'my family's money'. The only supporting document is an undated one-page letter from a Samoan company, Golden Bay Holdings Ltd, describing itself as the family office and authorising Mr A to trade. The initial HK$20 million deposit arrives by wire from Golden Bay's account at a bank in Vanuatu - not from an account in Silverline's name. Over six weeks Mr A buys HK$18 million of a HK-listed small-cap with a HK$900 million market capitalisation; three brokers account for about 80% of the stock's turnover, and roughly half of his purchases were matched against sell orders from another client of your firm. He now asks to transfer the shares out to another broker and to withdraw HK$1.5 million in cash.
1. What are the red flags, and what customer due diligence and enhanced due diligence must the firm complete?
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Red flags.
- Shell-like structure: a five-week-old BVI company, a sole director aged 29, no operating history and no audited accounts.
- Opaque ownership and control: 'my family's money', an undated one-page authorisation from a Samoan entity that is itself unexplained, and no ownership chart for Golden Bay.
- Third-party funding: HK$20 million from a Vanuatu bank account of a different company, contrary to the firm's policy requiring payment from an account in the client's name.
- Unusual trading: HK$18 million concentrated in a HK$900 million market-cap stock where three brokers account for 80% of turnover, and about half the purchases matched against another client of the same firm - a possible wash-trade or price-manipulation pattern.
- Rapid movement out: transfer of the shares to another broker plus a HK$1.5 million cash withdrawal, consistent with layering and integration.
Required EDD. Verify the company (certificate of incorporation, register of members, board resolution, ownership chart) and Mr A's identity and address. Identify and verify the ultimate beneficial owner of Golden Bay - which has not been done at all. Establish source of wealth (how the family built the fortune) and source of funds for both the Samoan entity and the HK$20 million. Establish the purpose and expected activity of the account. Screen Mr A, Golden Bay and its UBO against sanctions and PEP lists. Obtain senior management approval for a higher-risk relationship, and set a short review cycle with transaction monitoring.
2. What should the firm do about the third-party deposit and the instructions to transfer shares out and withdraw cash?
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Treat the relationship as suspicious.
- The third-party deposit should not have been accepted without a satisfactory explanation. Now that it has been received it should be held, not simply returned - returning funds to a third party on request can itself be layering.
- Do not process the transfer-out or the cash withdrawal, and do not tell the client why.
- The MLRO should assess the case and, if suspicion is confirmed, file a suspicious transaction report with the Joint Financial Intelligence Unit as soon as practicable.
- Tipping off - telling Mr A or anyone else that a report has been made, or why the account is frozen - is a criminal offence under the Organised and Serious Crimes Ordinance and the Drug Trafficking (Recovery of Proceeds) Ordinance.
- If the firm wishes to continue the relationship or process any transaction after forming the suspicion, it must seek the appropriate consent from the authorities. Otherwise it should decline, exit the relationship and consider whether the shares should remain frozen.
- The matched trades against another client's sell orders raise a separate market misconduct question - false trading or wash trades. That should be escalated to the SFC as its own matter, independently of the STR.
Practical point. The client should be given a neutral, non-explanatory holding response. The RM must not improvise a reason.
3. Who decides, what must be documented, and how long are the records kept?
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Decision-making. The MLRO assesses and decides on the STR. Senior management approves any continuation of the relationship or any transaction after suspicion has arisen. For a case of this size, the board or its delegate should be informed. The RM has no decision-making role once suspicion is raised.
Records. The CDD and EDD material, the risk assessment, the senior management approval, the STR and the reasons for each decision. CDD records must be kept for at least five years after the business relationship ends, and transaction records for at least five years. The STR file itself should be held securely and separately.
Quality of evidence. Even if the firm ultimately concludes the explanation is adequate, it must be able to show it tested the source of wealth rather than accepting a letter. A one-page undated authorisation from an unverified Samoan company is not verification of anything.
Wider review. The firm should examine how a HK$20 million third-party payment cleared onboarding at all, review the relationship with the counterparty client whose sell orders matched, and check whether screening of the Samoan entity and its UBO was ever performed. These are control failures, not just one bad client.