Question

John is the Compliance Officer of ABC bank Limited. He is responsible for meeting with new prospective clients and gathering all required information before the commencement of business relationship.

A new client, Peter, was introduced by an existing client Derek. Peter claimed himself as a trader in garment. John went through the ‘Know Your Customer’ (KYC) documents required for the onboarding, explained the bank’s policies and procedures to be followed. He requested Peter to provide all documents by the end of the week.

Peter dropped off at the bank with some documents, but upon review, John found that he had only provided a few documents. John emailed Peter a list of missing documents and a new deadline for submission. Peter replied that he was in a hurry to Country X where is notorious for drug dealing, to sign a contract with a big garment buyer there and requested John to proceed with the account opening first, and he would come back next week for the necessary documents.

John prepared all the required forms for signing. Peter came back from Country X and left John a USD cheque with substantial amount issued by a casino in Country X for account opening, but he still omitted to bring the pending documents required to complete the KYC and Due Diligence procedures. John checked with Derek who referred Peter to the bank and found out he did not know him that well.

1. a. What are the red flags which might indicate money laundering activity and or terrorist financing in this case?

1. b. What are the potential risks and threats that the Bank may be faced with in this situation?

1. c. What actions should the Compliance Officer have taken?

Answer 1

(A) Money laundering is a process by which money is earned by means of criminal activity and there are no or very legitimate sources to show. It involves money accumulation in the initial stage, which is later mixed with other legitimate sources and finally put back to its original sources.

Terrorist financing is the method by which funds are provided to terrorists or non-state actors.

INDICATIONS OF MONEY LAUNDERING ACTIVITIES & TERRORIST FINANCING IN THIS CASE ARE :

• The correct sources of funds were not revealed.
• The required documents were not presented before the bank despite providing ample time.
• He had been to a country notorious of drug dealing and presented a cheque that is suspected to be earned via terrorist financing/money laundering/drug dealing that is not acceptable to the norms of the bank.

(B)     RISKS & THREATS OF THE BANK IN THIS SITUATION

• The bank's KYC policy will not allow the opening of a new account in the absence of the required documents. Hence the bank is at a risk of losing a customer.
• Accepting money, whose sources are not confirmed and which is suspected to have arisen from some terrorist activity or money laundering is a great threat to the bank's liquidity position as well as the ability to carry on their banking business in the future. They will have to face legal consequences in the future, if the money is later found to be from such a source.

(C) Compliance Officer is a person employed inorder to check if all the required regulations that are applicable to its functions/working are duly met and there is no deviations from the statutes.

ACTIONS OUGHT TO BE TAKEN

• As far as the bank is concerned, periodical checks should be conducted to find out money laundering or terrorist financing activities and reported submitted.
• Proper customer acceptance policy should be developed taking into account customers' background, occupation, wealth, country of origin, residence, purpose of accounts and other things that relevant to determine the overall risk and measures to apply in managing those risks.
• Customers with higher risk profile should go through senior levels (It is to be noted that this should not affect the general public - who are the most disadvantaged) and clearly state the situations where a bank cannot accept a ceratin custom and define the reasons with facts adjoining the case.