Politically Exposed Person
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A “Politically Exposed Person” (PEP) is a concept that too often
is left open to interpretation. By not following the very specific
definitions put forth by the respective authorities and international
bodies like the FATF, a financial institution faces a double-edged sword.
Shoot long and overwhelm your institution with the costs and consequences of screening for the wrong individuals. And yet even these quasi-official definitions lack definition, so what do you have to be on the look-out for when PEP-checking? |
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Defining an effective PEP screening process begins with understanding the historical facts of why and how these authorities came to their definitions of PEPs. The concept of a PEP, in my opinion originates from Switzerland. For more than 25 years, Swiss financial institutions have had a requirement for enhanced due diligence when dealing with senior foreign politicians and their families. Ferdinand and Imelda Marcos and their Swiss bank accounts was one of the original PEP examples that led to what today is known as PEP-checking.
Many institutions in the last 25 years have learned the hard and rather public lesson of not uncovering ‘the man behind the man’ when entering into a banking relationship. Reputational risk is certainly the primary motivation in getting this right. But just what should you be looking for? Certainly the FATF PEP definition is key and parts of this definition need to be carefully understood. Separating the ‘P’ from the ‘EPs’ A key misconception is that PEP-checking involves identifying all political or government office holders. FATF, however, clearly defines the ‘P’ in PEPs as being ‘senior’ and the “definition is not intended to cover middle ranking or more junior individuals.” Of course, the ‘P’ stands for more than politicians and government functionaries. However, databases containing tens of thousands of Russian or Chinese middle and low ranking bureaucrats are of no value and go far beyond what regulations and common sense require. They are a sure way to create a backlog of account openings and investigations. PEP-checking is about risk reduction, keep that firmly in mind. Let’s turn our attention to the far more interesting ‘EPs’ in the PEP concept: family members and close associates. This is where the true risk lies. Uncovering it is far more complex. We know that the likelihood of a corrupt politician with money to hide sending his or her close family down to stand in the account opening queue at a bank is most unlikely. Senior government officials milking their country for millions of dollars will seldom put their spouse or children directly at risk. It make sense, if the goal is to hide one’s identity, to send someone to the bank called Charles Taylor Jr. in the foolish hope that no one pick up on the name or question the millions transferred in haste from Liberia. Since this is unlikely to happen, how do PEPs go about opening accounts? The real risky PEPs are the suits, the middlemen and the advisors – the men and women, who stand in the shadows, broker the deals, know all the secrets, and are almost always the ones involved in account openings. Your shrewd PEP will send a respectable lawyer along to put on a good show and create an air of legitimacy. These people are the EPs you really need to look out for. In fact, I often argue that the senior political figure is the last person you need to watch, its rather the guy in the shadows who must be of greatest concern to you. Over the last four years I have been stunned by the pedigrees that some of these people hold. From diplomatic passports to UNESCO ambassadorships, the middlemen always cloak themselves in respectability. EPs often know what to say and how to say it. They have answered prying questions a hundred times over and are well practiced in the process – after all, these are the kinds of individuals who negotiate billion dollar contracts. Don’t, for a moment believe they don’t know how to handle a basic account opening procedure. Identifying the most risky front men takes years of piecing together the global puzzle in relationship networks. There are no magical sources or Web sites that list them (other than World-Check of course!). I can reassure you, however, that the same names come up again and again. Each region has its handful of untouchables and it is with these “exposed persons” that your real PEP risk hides. Another major misconception is that one should only be concerned about individuals when identifying PEPs. A FATF consultation paper from 2002 outlines that “the proceeds of corruption are typically transferred to a number of foreign jurisdictions and concealed through private companies, trusts or foundations.” We are all well aware of the fact that PEPs with something to hide often do so using legal entities outside of their home country. Whether it’s one of Benazir Bhutto’s two-dozen trust companies or a company linked to Kojo Annan, you are already most likely doing business with PEPs via a legal entity. David Leppan is the founder and CEO of World-Check, which manages a database of PEPs, money launderers, fraudsters, terrorists and other known high-risk individuals and businesses for financial institutions and government agencies from around the world. |
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