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 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.BC
The correct answers are A. The client is from a country known for corruption and C. The client is a family member of a PEP from a country known for corruption.
Explanation:
A. The client is from a country known for corruption:
This is a red flag as countries with a reputation for corruption are often associated with high levels of money laundering and other financial crimes. The Financial Action Task Force (FATF), an intergovernmental body that sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system, has identified corruption as a major risk factor for money laundering. This is because corrupt officials may use their positions of power to facilitate illicit financial flows, such as by taking bribes or engaging in embezzlement.
C. The client is a family member of a PEP from a country known for corruption:
This is also a red flag because PEPs (politically exposed persons) are individuals who hold prominent public positions or are closely associated with those in power, and are therefore at higher risk of involvement in corruption and other financial crimes. The fact that the client's father became president of Country B shortly after on-boarding suggests a potential conflict of interest or undue influence, and may raise concerns about the source of the client's wealth.
B. The substantial growth in wealth during a short period of time:
While this could also be a red flag, it is not as strong an indicator of money laundering or financial terrorism as the other two factors. Significant increases in wealth over a short period of time may be the result of legitimate business activities or investment strategies, and may not necessarily be indicative of illegal activity. Nonetheless, such increases may still warrant further scrutiny and investigation to ensure that the source of the funds is legitimate.
D. The holding company is in Country A with a bank account in one of the international banks:
This is not necessarily a red flag in and of itself, as it is not uncommon for companies to establish holding companies in foreign jurisdictions for legitimate reasons such as tax planning or to take advantage of favorable legal or regulatory frameworks. However, the fact that the holding company is in a jurisdiction known for its international financial center and one of the international banks located there, does raise the possibility that the company may be trying to take advantage of lax regulatory standards or banking secrecy laws.