In 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. 

Burke identified some of the main stream definitions, the European Union (EU) Third Money Laundering Directive on the other hand defines PEPs as: 

 ‘natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, of such persons.’ 

This 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).  

Developing 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 including: 

 ·            members of the ruling royal family;  

 ·            senior and/or influential representatives of the religious organisations (if these functions are connected with judicial, military or administrative responsibilities);  

 ·            senior judges;  

 ·            senior party functionaries; and  

 ·            senior and/or influential officials, functionaries, and military leaders and people  with similar functions in international or supranational organisations (Wolfsberg Group, 2008).  

The 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. 

In 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. 

It is 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.