Former Pacific Minister, a Family Trust and Source of Wealth
Mr R, a former finance minister of a Pacific island nation, applies to open a derivatives account with a New Zealand dealer. He provides a passport and a utility bill showing a local address. The initial deposit is NZ$250,000 from a Singapore bank account held by the R Family Trust. The trust's settlor is Mr R's spouse; the protector is Mr R's brother; the beneficiary class includes Mr R and his adult children. Mr R says the funds came from the sale of a property in Singapore and provides a one-page sale agreement with no settlement statement. The firm's AML/CFT programme requires enhanced due diligence for politically exposed persons, trusts and high-risk jurisdictions, and senior management approval before onboarding. A junior analyst notes Mr R is 'well known' and recommends standard customer due diligence because the passport and address match. The firm has no correspondent relationship with the Singapore bank.
1. Assess the customer risk and classification. Is Mr R a PEP, and what does the trust structure add?
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Mr R should be treated as a politically exposed person. The definition is not limited to someone currently in office; a former finance minister of a foreign country has held a prominent public function, and the risk does not disappear on leaving office. The fact that he is 'well known' increases the need for scrutiny rather than reducing it. The trust also brings in the PEP rules for family members and close associates: his spouse is the settlor, his brother is the protector, and his children are within the beneficiary class. The firm cannot look only at Mr R's passport and utility bill. It must identify the trust's beneficial owners and understand the trust's control structure, including who can direct distributions and who can replace the trustee.
The source-of-funds evidence is weak. A one-page sale agreement without a settlement statement does not show that the NZ$250,000 actually came from the property sale, nor does it explain why the funds are held through a Singapore trust account. The Singapore bank connection is not itself suspicious, but the firm has no correspondent relationship and has not verified the account. The combination of a foreign PEP, a complex trust, an offshore account and incomplete source-of-wealth evidence places the customer in a high-risk category. Standard CDD is not appropriate. The analyst's recommendation should be overridden and the file escalated.
2. What enhanced due diligence and approval steps are required before the firm may onboard Mr R?
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Before onboarding, the firm needs EDD that is proportionate to the risk. It should verify Mr R's identity and address to the required standard, then separately establish the trust's beneficial ownership and control. That means obtaining the trust deed or an extract, identifying the trustee, settlor, protector and beneficiaries, and understanding the purpose of the structure. Because the funds are said to come from a Singapore property sale, the firm should obtain independent evidence of the sale: the completed sale and purchase agreement, settlement statement, bank statements showing the proceeds moving from the sale into the trust account, and evidence connecting the trust account to the funds being deposited. A one-page agreement is not enough. The firm should also obtain a clear source-of-wealth explanation covering Mr R's career and post-ministerial income, and test it against the bank statements.
Senior management approval must be obtained before the relationship is established, not after. The approval should be documented, with the risk assessment, the EDD obtained, any unresolved gaps, and the conditions of approval. If the firm cannot satisfactorily verify source of funds or beneficial ownership, it should not onboard and should consider whether a suspicious activity report to the Financial Intelligence Unit is required. The firm should also decide whether it can conduct ongoing monitoring at the required level; if it cannot, it should decline the relationship. The key point is that EDD is not a paperwork exercise completed after the account is open.
3. What ongoing monitoring and record-keeping should apply if the account is approved?
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If senior management approves the relationship, the firm should set a higher monitoring tier. That means more frequent review of transactions, scrutiny of deposits from or to the trust account and any new counterparties, and checks that activity is consistent with the stated source of wealth. A NZ$250,000 initial deposit followed by rapid movement, third-party transfers or requests to change bank details should trigger review. The firm should also monitor for changes in Mr R's political exposure or the trust's control persons, because a PEP relationship is dynamic. Periodic reviews should be more frequent than for low-risk clients, and the rationale for the monitoring level should be recorded.
Records should show the risk assessment, the PEP determination, the trust ownership analysis, the EDD documents, the senior management approval, the source-of-funds and source-of-wealth evidence, and the monitoring decisions. The firm should record why any gap was accepted and what compensating measures were applied. If the firm later cannot maintain the EDD, it should consider terminating the relationship and report suspicious activity where appropriate. Record keeping is not just retention; it is evidence that the firm exercised judgement at each stage. A file that contains only the passport and utility bill would not demonstrate compliance.