A company service provider in Country A sets up a corporate structure for a client from Country B, which is known for corruption. The corporate structure includes a holding company in Country A with a bank account in one of the international banks located there.
During on-boarding, the client's wealth was estimated at $7.52 million. Shortly thereafter, the client's father became president of Country B. During a routine client review two years later, it was identified that client's wealth had grown to $510 million.
What are two red flags that indicate money laundering or financial terrorism? (Choose two.)
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A. B. C. D. E.BC
Explanation -
High-risk: The risks here are significant, but are not necessarily prohibited. To mitigate the heightened risk presented, the financial institution should apply more stringent controls to reduce the ML/FT risk, such as conducting enhanced due diligence and more rigorous transaction monitoring. Countries that maintain a reputation for corruption or drug trafficking are generally considered high-risk. High-risk customers may include politically exposed persons
(PEPs) or certain types of money services businesses or cash-intensive businesses; high-risk products and services may include correspondent banking and private banking.
Based on the scenario provided, two red flags that indicate money laundering or financial terrorism are as follows:
The client is a family member of a PEP from a country known for corruption. Option C is a red flag because the client is a family member of a Politically Exposed Person (PEP), who has become the President of a country known for corruption. PEPs are individuals who are entrusted with prominent public functions or positions, and their family members and close associates can also be exposed to the same risks of corruption, money laundering, or terrorist financing. The fact that the client is related to a PEP from a high-risk country may indicate that the funds being held in the corporate structure could be proceeds of corruption or other illicit activities.
The substantial growth in wealth during a short period of time. Option D is a red flag because the client's wealth has increased from $7.52 million to $510 million in just two years. Such a significant increase in wealth within a short period may indicate that the funds are derived from illegal activities. Therefore, it is important to conduct a thorough investigation to determine the source of funds and ensure that the funds are not being used for money laundering or terrorist financing purposes.
Other options can also be considered as potential red flags. For instance, option B highlights that the client is from a country known for corruption, which raises a risk of the client being involved in illicit activities. Option E emphasizes that the holding company is in Country A with a bank account in one of the international banks, which could be an indication of an attempt to conceal the true identity of the beneficial owner and the source of funds.
However, given the context of the scenario, options C and D provide stronger indicators of money laundering or financial terrorism. Therefore, these are the two red flags that require immediate attention and investigation.