Narration of PEPs Definitions in multiple jurisdictions

Monday 14 November 2016

By Bachir El Nakib, CAMS, ACFE, CFAP

When you mention PEPs in legal and financial circles there can be a range of assumptions as to what you are referring to: percentage per equity partner, personal equity plans, or politically exposed persons.

While it is politically exposed persons that are the focus of enhanced anti-money laundering controls, even when the acronym is correctly identified they seem to be considered as creatures of myth by many in the legal sector.

Yet recent publications by the FSA (PDF) and the World Bank (PDF); not to mention repeated press reports on how the assets of deposed dictators have been located in the UK, all point to the fact that politically exposed persons are alive and well and possibly instructing your firm.

On this basis it is important to ensure that your fee earners are able to spot a PEP and know what they are legally required to do, in a proportionate and effective manner.

A PEP is a natural person appointed by a foreign government or an international organisation to a high profile position, who has held that position within the last 12 months. It is also a family member or a close business associate of such a person.

Under the new FATF recommendations this definition will be extended to include such individuals whether they are your client or a beneficial owner of your client and to such persons who are appointed by your national government.

The specific list of the roles considered to be high profile positions is contained in the 2007 Money Laundering Regulations (the Regulations), but includes Government Ministers, Supreme Court Judges and directors of state owned enterprises.

Firms are required to have in place a risk based process for establishing whether they have a PEP as a client. Once they find that they have a PEP they are required to:

• seek senior management approval for the business relationship
• take adequate measures to establish source of funds and source of wealth
• conduct closer ongoing monitoring of the business relationship.

The main aim of the PEP provisions is to prevent corrupt PEPs from hiding the proceeds of bribery and corruption or otherwise stripping assets from their country.

But as can be seen from the examples below, not every PEP client will pose the same level of risk of such corrupt conduct:

• a family member of political leader in a country which is currently the subject of sanctions seeking legal assistance to obtain asylum and purchase a property in the UK
• a politician from a country with a poor transparency perception rating using defence force accounts to pay for shopping trips, children's school fees and multiple property purchases in the UK and abroad
• a housewife whose brother is a foreign government minister purchasing a property in the UK when her only income is paid directly from the foreign government
• an ambassador to a reputable international organisation who wants to set up a trust to fund their child's education in the UK
• the sister of a senior judge from a country with a good transparency perception rating, who has lived in the UK for a number of years and is seeking assistance in setting up a small company to run a local business
• the family member of a director of a recently nationalised bank who is selling their house and purchasing a new one with a mortgage and the proceeds of the sale.

Once you establish that you have a PEP, you can look at the basis on which they are categorised and the nature of the retainer they are asking you to undertake to ensure that your enhanced due diligence is proportionate and effective.

Where the transaction is effectively a normal transaction which would be undertaken by non-PEPs on a regular basis and there is so question of unusual funding, simply asking basic questions and documenting the responses may constitute adequate measures to mitigate the increased risk of money laundering.

E-verification providers and internet sources can often provide further information about the individual, their source of wealth outside of the political position and their remuneration for their current role. They can also highlight whether there are any credible allegations of or investigations into criminal activity which you should take into account when assessing risk.

Where the jurisdiction which has appointed the PEP is higher risk, the funding for the transaction is substantial or from an unusual source or the type of transaction is higher risk, then further questions will need to be asked and more documentary evidence is likely to be required to verify the answers provided.

Higher risk PEPs are also more likely to continue to pose some risk after they leave office. As such firms may choose to undertake enhanced due diligence for a longer period in relation to a former PEP under the generic enhanced due diligence requirements in the Regulations.

It is important to remember that a risk-based approach to dealing with PEPs only relates to how many questions you ask to be comfortable that the retainer is consistent with the legitimate funds available to the PEP and that you do not have a suspicion of money laundering.

Where you have information that gives rise to a suspicion that the individual is not using legitimate funds, you are not able to take a decision on the business and reputational risks of getting caught dealing with these funds and with this person. You need to consider whether you will be money laundering, whether you need to make a suspicious activity report and whether you can continue acting for the client.

As both the World Bank report and the FSA thematic review demonstrate, those firms who choose to turn a blind eye to the activities of corrupt PEPs and try to simply 'manage' the relationship face a risk of serious sanction. 

According to the US Bank Secrecy Act, Anti-Money Laundering Examination Manual, Banks should take all reasonable steps to ensure that they do not knowingly or unwittingly assist in hiding or moving the proceeds of corruption by senior foreign political figures, their families, and their associates. Because the risks presented by PEPs will vary by customer, product/service, country, and industry, identifying, monitoring, and designing controls for these accounts and transactions should be risk-based.

The US Definition of a PEP or “politically exposed person” generally includes a current or former senior foreign political figure, their immediate family, and their close associates. Interagency guidance issued in January 2001 offers banks resources that can help them to determine whether an individual is a PEP.

More specifically:

• A “senior foreign political figure” is a senior official in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned corporation. In addition, a senior foreign political figure includes any corporation, business, or other entity that has been formed by, or for the benefit of, a senior foreign political figure.
• The “immediate family” of a senior foreign political figure typically includes the figure’s parents, siblings, spouse, children, and in-laws.
• A “close associate” of a senior foreign political figure is a person who is widely and publicly known to maintain an unusually close relationship with the senior foreign political figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the senior foreign political figure.

The definition of senior official or executive must remain sufficiently flexible to capture the range of individuals who, by virtue of their office or position, potentially pose a risk that their funds may be the proceeds of foreign corruption. Titles alone may not provide sufficient information to determine if an individual is a PEP, because governments are organized differently from jurisdiction to jurisdiction. In those cases when a bank files a SAR concerning a transaction that may involve the proceeds of foreign corruption, FinCEN has instructed banks to include the term “foreign corruption” in the narrative portion of the SAR.

Banks should establish risk-based controls and procedures that include reasonable steps to ascertain the status of an individual as a PEP and to conduct risk-based scrutiny of accounts held by these individuals. Risk will vary depending on other factors such as products and services used and size or complexity of the account relationship.

Banks also should consider various factors when determining if an individual is a PEP including:

• Official responsibilities of the individual’s office
• Nature of the title (e.g., honorary or salaried)
• Level and nature of authority or influence over government activities or other officials
• Access to significant government assets or funds

In determining the acceptability of higher-risk accounts, a bank should be able to obtain sufficient information to determine whether an individual is or is not a PEP. For example, when conducting due diligence on a higher-risk account, it would be usual for a bank to review a customer’s income sources, financial information, and professional background. These factors would likely require some review of past and present employment as well as general references that may identify a customer’s status as a PEP. Moreover, a bank should always keep in mind that identification of a customer’s status as a PEP should not automatically result in a higher-risk determination; it is only one factor the bank should consider in assessing the risk of a relationship.

Ascertaining whether a customer has a close association with a senior foreign political figure can be difficult, although focusing on those relationships that are “widely and publicly known” provides a reasonable limitation on expectations to identify close associates as PEPs. However, banks that have actual knowledge of a close association should consider their customer a PEP, even if such association is not otherwise widely or publicly known. Banks are expected to follow reasonable steps to ascertain the status of an individual, and the federal banking agencies and FinCEN recognize that these steps may not uncover all close associations.