Ethics, Code of Conduct and AML/CFT
Domain 2: Ethics, Code of Conduct and AML/CFT
This domain tests the standards expected of a financial advisor and the controls that prevent the financial system being used for crime. Questions often present a conflict and ask what a professional must do, or test CDD and reporting duties.
Ethical principles
- Integrity, objectivity, competence, confidentiality, and fair dealing. Put the client's lawful interests first; disclose and manage conflicts; do not accept undisclosed inducements.
- Suitability: understand the client, the product, and the match. Do not misrepresent returns, risks, fees, or Shariah status.
- Confidentiality yields to legal duties: AML reporting, court orders, and regulatory requests.
AML/CFT duties
Pakistan's AML Act, 2010, as amended, criminalizes money laundering and terrorist financing. SECP AML/CFT Regulations require regulated firms to conduct customer due diligence, identify beneficial owners, screen sanctions and PEPs, monitor transactions, keep records, and report suspicious transactions to the Financial Monitoring Unit (FMU). Suspicion, not proof, triggers an STR. Tipping off is prohibited.
Worked example
A client deposits PKR 5 million in cash, then asks to buy mutual funds and immediately redeem to a third-party bank account. Reasoning: cash intensity, rapid movement, and an unrelated third party are red flags. The advisor must complete EDD, establish source of funds and beneficial ownership, and escalate. If the explanation is inconsistent, file an STR; do not tell the client an STR was filed. Proceeding because the amount is below a threshold is wrong: there is no safe 'below-threshold' exemption from suspicion reporting.
Traps
An STR is not an accusation of guilt; it is a suspicion report. PEP status does not automatically bar a client, but requires EDD and senior approval. Do not confuse 'know your customer' with a one-time form: ongoing monitoring is required.