The Shell Company with Inconsistent Trade Flows
A bank onboards a new corporate customer, a company incorporated in a jurisdiction with strict secrecy laws. The company's stated business is importing agricultural products from Country G and exporting to Country H. During CDD, the bank collects the certificate of incorporation, list of directors (two nominees), and a copy of the passport of the sole shareholder, who is a resident of a different country. The company's projected annual turnover is USD 20 million. Within three months, the company executes several trades: imports from Country G worth USD 2 million, but exports to Country H only USD 1.5 million. The shipping documents show goods described as 'grains', but the invoices lack detailed descriptions and quantities. The bank's monitoring system flags unusual patterns: multiple small payments from unrelated third parties in Country I, and payments to suppliers in Country G that are routed through banks in Country J.
1. What are the CDD and ongoing monitoring concerns with this customer?
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CDD concerns: (1) the company is incorporated in a secrecy jurisdiction, which obscures beneficial ownership; (2) directors are nominees, and the sole shareholder resides elsewhere, making it difficult to identify the true controller; (3) the business rationale for importing from Country G and exporting to Country H is unclear, especially with a trade deficit (imports > exports), which could indicate over-invoicing of imports or under-invoicing of exports; (4) lack of detailed trade documentation (invoices without descriptions/quantities) is a red flag; (5) payments from unrelated third parties in Country I and routed through Country J suggest possible layering. Ongoing monitoring concerns: the trade patterns are inconsistent with the stated business, and the bank lacks sufficient information to verify the legitimacy of transactions.
2. What additional CDD measures should the bank take, and what actions are recommended?
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The bank should: (1) conduct enhanced due diligence to identify the beneficial owner and verify the source of funds and wealth; (2) request detailed trade documents, including contracts, bills of lading, and customs declarations, to verify the trade flows; (3) investigate the third-party payments and the routing through Country J, which may indicate shell banks or layering; (4) consider obtaining a legal opinion on the secrecy jurisdiction's AML laws; (5) file an STR if suspicions are not alleviated; (6) consider exiting the relationship if the customer fails to provide satisfactory information. The bank must also ensure it complies with local regulations regarding shell companies and beneficial ownership.