Four Branches, Four Policies, One Refund Account
Over four working days, a customer at an Islamic bank makes four single-contribution payments into a family takaful savings plan - PKR 1,750,000 each, each at a different branch, each in cash, each on a fresh proposal form in the name of a different family member (wife, two sons, brother-in-law). Stated source of funds is 'savings'. On day 12 the customer asks to cancel all four policies and requests that the refunds be paid into one account in the name of a cousin, held at another bank. The operations officer notices the March file already carries a similar-pattern flag. The customer is a well-known local trader, a client for ten years; his brother is a member of the provincial assembly.
1. Identify the red flags and classify the customer for CDD purposes, explaining the consequences.
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Red flags - structuring and layering
- Multiple payments in quick succession, deliberately spread across branches, each sized just under the branch's escalation threshold. The pattern, not any single payment, is the signal.
- Cash, repeatedly, from a customer whose stated source is 'savings' - no trail to verify.
- Third-party and nominee policyholders: the wife, sons and brother-in-law are not present; the real payer and controller of the funds is one person.
- Inconsistent with the product: a long-term savings takaful plan cancelled at day 12 is not a savings decision; it is money being moved through a product and back out.
- Refund to an unrelated third party at another bank - furthest possible step from the payer, breaking the audit trail.
- Repeat pattern: a similar flag on the March file means this is not a one-off, and the earlier flag was apparently not resolved.
- Cash intensity inconsistent with a long-standing account relationship that should have an auditable source of funds.
Classification: the customer's brother is a member of a provincial assembly - a prominent public office. Family members of PEPs are themselves treated as PEPs for CDD purposes. Consequence: enhanced due diligence is mandatory, including establishing source of wealth and source of funds, identifying the beneficial owner of each policy, sanctions screening of all parties against the applicable lists, and senior management approval for establishing or continuing the relationship. Standard CDD is not sufficient.
2. What must the officer and the compliance function do now, and what must not happen while the suspicion is unresolved?
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Immediate steps
- Do not process the refunds. Refer the request to compliance/MLRO the same day with the file, the four proposals, branch timestamps and the earlier March flag.
- Complete EDD: verified identity of all four policyholders and the proposed refund account holder; beneficial ownership of the funds; source of wealth and source of funds; relationship between the customer and the cousin; purpose of the arrangement.
- Screen all parties against the applicable sanctions and proscribed-persons lists and against internal negative lists, and re-screen the March case.
- Assess for STR: the pattern indicates suspected structuring and layering through a savings product. An STR should be filed with the Financial Monitoring Unit on the compliance officer's determination, covering all four policies and the March case.
- Senior management approval required to continue or exit the relationship, given PEP status.
- Records: retain all CDD, transaction and decision records for the statutory retention period, and document the reasoning even if no STR is filed.
What must not happen
- No tipping off. Do not tell the customer, his relatives or the branch relationship manager that a report is being considered or has been filed.
- Do not let the branch 'help' by splitting or rerouting the refund, or by accepting a written authority to pay a third party as a way of closing the file.
- Do not close the case quietly because the customer is long-standing and well connected. Influence is precisely what the PEP regime exists to address.
3. The branch manager says the refunds are the customer's own money and the bank has no right to hold them. How do you respond, and what conditions would have to be met to release any money?
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Response. Two things are being conflated: ownership of the funds and the bank's obligation to complete CDD and report suspicion.
- Ownership: the policyholders' money is not in dispute in principle. But the refund is not the customer's to redirect. It belongs to each policyholder, and paying it to an unrelated third party at another bank requires written, verified authority from each of them - not just from the payer.
- Obligation: the bank and the takaful operator are reporting entities. Suspicion of structuring must be reported, and the transaction may be deferred while the suspicion is unresolved. Processing the refund to a cousin's account would complete exactly the layering step the pattern suggests, and would be the bank's own contribution to it.
Conditions before releasing anything
- EDD completed and signed off, including source of wealth and the beneficial owner of each policy.
- Sanctions and PEP screening cleared for the customer, the relatives and the account holder.
- Senior management approval documented.
- STR filed where the compliance officer concludes suspicion exists - filing does not require waiting for proof.
- Identity of each policyholder verified, with their own signed cancellation and payment instructions.
- Refunds paid, where permissible, to accounts in the policyholders' own names, verified against their CNICs - not to a third party.
Escalation: if the customer presses or threatens, the matter goes to the MLRO and legal, not to the branch manager. Any regulatory enquiry is answered by compliance through the proper channel.