XYZ & Associates a leading CS firm in Delhi, specialized in providing professional services, ranging from legal services & management consultancy services. Mr. A, a prominent businessman and lawyer by profession,

Answer 1(a)(ii) KYC/Due Diligence work to be performed by CS Firm: The CS firm should have recognized and implemented appropriate KYC procedures to mitigate the risk that corrupt Politically Exposed Persons (PEPs) are firstly concerned about hiding their identity and secondly about hiding their assets. The real risky PEPs are the suits, the middlemen, the associates who stand in the shadows and are almost always the ones involved in the account openings. These people are the PEPs you really need to look out for. In fact, the political figure is arguably the last person you need to watch out for. As such, an effective PEP risk mitigation solution should not merely provide a long list of office holders' names and positions but in order to identify risk critically and methodically, it must also provide the identities of all those 'exposed persons' that surround the PEP. The CS firm should have assessed the economic substance of the transactions and the reasoning of why the identified Beneficial owner (Mr. A) has only invested a total of ₹4,00,000 and the Sole Investor (Mr. P) has invested a total of ₹40,00,00,000 (with only 1% return), as such critically assessing on who the real Beneficial owner is. A full KYC procedure should have been performed, not only on the Beneficial owner but also on the Sole Investor. Source of funds and source of wealth, for the Sole Investor (Mr. P), should have been identified and thoroughly examined in terms of legitimacy of the source. CS firm should have established monitoring procedures on the following: Ensure clients due diligence information is up to date as existing clients sometimes become PEPs after they enter a business relationship; Ensure internal procedures include employee ongoing training programmes, addressing effective ways of determining whether clients are PEPs; Use of the internet and media as sources of information for the determination, monitoring and verification of information in relation to PEPs; Use of available commercial databases, but do not fall into the trap of wrongly assuming that a name is (not) in such a database then the client is (not) a PEP; Use of countries' published list of domestic PEPs; Use in-house developed databases as a tool to assist in the determination of who is a PEP; Use countries' asset disclosure systems applying to those individuals who hold prominent public functions; Use of self-declarations by a client of their PEP status, while noting that such procedure would shift the financial organisation's obligation to their client, which is not an acceptable practice; and Use general information publicised by competent authorities (e.g. the level of corruption in the country, the level of income for certain types of positions).