The risk in Option C is that the client may be attempting to mislead the mortgage lender by inflating his income to secure a larger mortgage. This misrepresentation is a red flag for potential fraud or money laundering. Therefore, Peter should make further enquiries to verify the client’s true financial situation and consider reporting to the mortgage lender if necessary. In Option A, having legal expenses covered by an insurance policy is a common and acceptable practice, but written confirmation of the insurance coverage is typically required. In Option B, making a payment to a legitimate party using client funds held in the firm's account is routine and acceptable. In Option D, small cash payments like £130 are not typically suspicious and would not usually prompt further enquiries. In Option E, verifying the identity of a company's director is essential, and the director's passport helps establish personal identity, while company verification can be done through Companies House records. 

Key Point: This question evaluates understanding of client due diligence and recognising red flags in financial transactions under the Money Laundering Regulations 2007. It is important to identify situations requiring further enquiries to prevent potential fraud or money laundering activities.