response to Burke Files post I thought I would set out a few observations in a
separate post rather than by way of comment. I agree that there are
considerable problems in conducting due diligence with respect to such persons
but the alternative to applying a less thorough approach is unthinkable. There
is of course the problem that staff may not see the wood for the trees if too
wide a net is drawn, but the problem lies with inability of staff to properly
comprehend or assess the risk, rather than being one of identification.
identified some of the main stream definitions, the European Union (EU) Third
Money Laundering Directive on the other hand defines PEPs as:
persons who are or have been entrusted with prominent public functions and
immediate family members, or persons known to be close associates, of such
definition of PEPs, similar to that set out in the 2006 Joint Money Laundering
Steering Group (JMLSG) guidance, and the USA Patriot Act includes “heads of
state or of government, senior politicians, senior government, judicial or
military officials, senior executives of publicly owned enterprises and
important political party officials” (JMLSG, 2006, pp. 89-90).
on the FATF definition the Wolfsberg Group (an association of 12 leading international
banks), broadened this definition to include individuals whose current or past
official position can attract publicity beyond the borders of their home
country, or whose financial actions or circumstances may be the subject of
increased public scrutiny. It proposes a broad definition for PEPs
members of the ruling
influential representatives of the religious organisations (if these functions
are connected with judicial, military or administrative responsibilities);
influential officials, functionaries, and military leaders and people
with similar functions in international or supranational organisations
(Wolfsberg Group, 2008).
definitions of PEP used by regulators or in guidance are usually very general
and leave room for interpretation. The term should be understood to include
persons whose current or former position can
attract publicity beyond the borders of the country concerned and whose
financial circumstances may be the subject of additional public interest. In
specific cases, local factors in the country concerned, such as the political
and social environment, should be considered when deciding whether a person
falls within the definition.
essence associates are more likely to be a source of concern than family
members, as family members are easily identifiable and always likely to raise
suspicion it makes sense that those who seek to conceal illicit wealth will
choose assistors that are less likely to raise red flags. Thus it is
highly important in conducting PEP risk assessment that the category of closely
associated persons be cast widely and should include close business colleagues
and personal advisors/consultants to the politically exposed person as well as
persons who obviously benefit significantly from being close to such a person.
also important to note that PEPs may be ‘clean’ at the commencement of a
business relationship but become compromised within the space of a very short time,
thus such business relationships should be subjected to regular additional
controls and a detailed examination at least once a year.
Again, the real risk PEPs are the PEP associates, the
suits, the middlemen and the advisors – the lawyers and accountants.
These people are not shady characters and will not set off alarm bells when
they arrive at the Banks’ door to open an account, they are generally the type
of clients that Banks cultivate and welcome with open arms. Some of these
people are important dignatories in their own right, they may hold diplomatic
passports or ambassadorships. They may also benefit from diplomatic
immunity. Banks should also not lose sight of the sorry fact that the
proceeds of corruption are typically transferred to a number of foreign
jurisdictions and concealed through private companies, trusts or
foundations. Thus natural persons are not the only ‘persons’
requiring enhanced due diligence. Thus Corporate affiliations and accounts should be
closely and regularly monitored and the beneficial ownership determined. Off the shelf or shell companies have been widely exploited by
corrupted PEPs to launder their corruption proceeds.
As correctly identified
by Burke Files there is a concern
that Financial Institutions – or more particularly the staff tasked with
carrying out the requisite due diligence in PEP cases – are focusing on the designation
of the individual rather than the business dealing of that individual. The provenance of funds placed in banks
or passing through accounts should be a primary focus of attention in any case
in which enhanced due diligence is called for, regardless of the status of the
client or his or her title.