Two Deposits Just Under the Threshold
Northbridge Agri Ventures Inc. applies for a cash securities account at your broker-dealer. The secretary's certificate lists two nominee directors who are also the incorporators; the registered address is a virtual office; the beneficial-owner section says 'to follow.' The initial P480,000 deposit arrives from a remittance company in the name of an individual unrelated to the corporation. Three business days later, a further P470,000 arrives from a different individual remitter. The authorised trader, aged 24, says the money comes from 'a family office in Hong Kong' and declines to identify the owners, saying it is 'private.' He asks that orders be given through his personal Viber account and that confirmations go to a Gmail address. During the interview he mentions that his uncle is the municipal mayor and that the account is partly for the uncle's 'projects.' The relationship manager is keen to open the account before month-end because it would meet his target.
1. List the AML/KYC red flags and explain which ones independently require enhanced due diligence.
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Red flags. (1) Opaque ownership: nominee directors and a beneficial owner marked 'to follow.' (2) Shell-like profile: virtual office and no operating history. (3) Third-party funding from individuals unrelated to the corporation. (4) Two deposits of P480,000 and P470,000, each just below the P500,000 covered-transaction threshold and close together, suggesting structuring. (5) Vague source of funds ('family office in Hong Kong') combined with refusal to identify owners. (6) PEP nexus: the mayor-uncle and the reference to 'projects.' (7) Channel requests-personal Viber and free email-that defeat firm recordkeeping. (8) A very young authorised trader with no documented authority. (9) Relationship-manager pressure to meet a target.
Independent EDD triggers. Any one of the following requires escalation on its own: unidentified beneficial ownership; a PEP connection; third-party funding; requests for unrecorded communication channels; and possible structuring. Together they are prohibitive. Note that the threshold itself is not a safe harbour-deliberately keeping transactions below it is itself suspicious and may be an offence.
2. Decide whether the account can be opened. Set out the CDD steps, approval level and documentation you would require before any trade.
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Decision. Do not open or activate the account on the current file. Customer due diligence is incomplete, so no trade may be accepted.
Steps. (i) Obtain certified articles and secretary's certificate, a beneficial ownership declaration, IDs of all significant owners and of the trader, and a board resolution authorising him. (ii) Obtain independent evidence of source of funds and source of wealth-bank statements, audited financials, remitter KYC-and a written explanation of the 'family office' and the remitters' relationship to the company. (iii) Verify the virtual office and the business's substance. (iv) Screen all names against sanctions, PEP and adverse-media lists. (v) Require senior-management approval for any high-risk or PEP relationship. (vi) Require orders through recorded firm channels and confirmations only to the registered address or an authorised corporate email.
If refused. If the client will not identify the beneficial owners, the firm cannot proceed. Decline the relationship in writing, document the decision, and consider a suspicious transaction report. Do not accept further deposits in the meantime.
3. What reporting and follow-up obligations arise, including on the two deposits and the client's refusal to identify beneficial owners? Address tipping off and any freeze or hold decision.
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Reporting. Both deposits must be assessed for structuring. If the firm suspects structuring, laundering, or a link to a PEP or illicit activity, it must file a suspicious transaction report with the AMLC within the prescribed period. Filing is confidential: no tipping off to the client, the remitters or the relationship manager.
Hold or freeze. The firm should not execute trades on funds whose source is unverified. It may place an internal hold and seek legal and MLRO guidance. A formal freeze order comes from the AMLC or the courts, not from the salesman. Do not return funds to a different remitter without guidance, since that may assist layering.
Records. Preserve the account-opening file, remittance records, chat logs and interview notes, and record the declination reason. Retain them for the required period.
Governance. Escalate to the compliance officer and MLRO and address the target-pressure issue: sales incentives are never a factor in CDD decisions. If the account is declined, consider whether the RM's conduct itself requires review.