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#Customer Due Diligence #Anti Money Laundering

PEPs: it’s not working, let’s face it. It's time to rethink our approach

International Compliance Association

bribery , corruption , FATF , FSA , grand corruption , Mubarak Regime , PEP

It is time for a fundamental rethink of how regulators, lawmakers and firms manage the risk of Politically Exposed Persons (PEPs). What we are doing now is clearly not working.

With the recent FATF Report on managing the risk of bribery and corruption –“Specific Risk Factors in the Laundering of Proceeds of Corruption - Assistance to reporting institutions”  there is a growing emphasis on being smarter in categorising the risk that entering into relationships with PEPs raise.

At the same time cases of so called “grand corruption” continue to emerge with the on-going turmoil across the Middle-East (the latest example being allegations in respect of the UK’s role in sheltering assets of the Mubarak Regime) See recent Guardian article “Scandal of Mubarak regime millions in UK

The FATF report above makes the following observation:

PEPs

 

“In nearly all recent cases of grand corruption, the detection and investigation of the criminal activity of heads of government occurred only after there was a change of government, specificcorrupt individuals fell out of favour, or there was widespread public outcry after wrongdoing was publicly exposed. While the PEPs were in power, there was no real opportunity for domestic law enforcement agencies to investigate their financial crimes.”

 

 

The UK FSA’s Review of Banks High Risk AML Relationships in 2011 also highlighted a range of poor practice among the leading banks in managing PEP risk.

So it would seem on many levels the PEP “Regime” isn’t working.

The new FATF recommendations make it clear that firms must have “appropriate” risk management systems in place to determine whether the customer or the beneficial owner is a PEP.  Understanding whether systems and controls are proportionate requires a meaningful risk assessment.

The risk of entering into a relationship with a PEP is influenced by a wide range of factors including:

  • What industry or activity are they linked to? (for example the Extraction and Defence Sectors will obviously pose higher risk)
  • Are there credible allegations linking the PEP to corruption or other criminality?
  • What links does the PEP have to high risk jurisdictions?
  • What are the nature, value and form of the transactions undertaken by the PEP?
  • Is an intermediary, nominee or corporate service provider involved in a complex structure?

Increasingly the expectations of regulators are that firms don’t just focus on the initial identification of PEPs but also monitor higher risk transactions, industries and jurisdictional links on an on-going basis.  Many firms are now introducing an event driven, “fluid” categorisation system which will regularly risk rate PEP relationships driven by transaction profiling.

We also know from the excellent “Puppet Masters”  report produced by the World Bank that the “big fish” in terms of corrupt PEPs use corporate service providers, associates and professional trustees to high behind complex structures (e.g. through the use of nominee shareholder and directors.)

What is also clear is that it time for all the stakeholders to re-assess which PEPs should be the focus of our efforts.

Instead of a focus on a one size fits all approach to PEPs, we need to ensure the focus of controls and monitoring is on high risk individuals, transactions and sectors.  Until lawmakers, regulators and firms focus on the key risk areas bulleted above nothing will change. If the stakeholders continue to pay lip service to controls by merely logging PEP relationships to tick a regulatory box we will continue to fail to stem the corrosive tide of corruption flowing from developing economies via the financial sector.


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