Do you recall being asked whether you are a Politically Exposed Person (PEP) on an application form to open a new deposit account with your financial institution? Welcome to the club! I erroneously interpreted this question as the bank’s attempt to determine my political alignment. Knowledge has since found me and enlightened me. I have been forgiven of my blissful ignorance and I am not afraid to tell you about the good news of the banks’ rationale in seeking to determine whether a potential customer is a PEP.
What are PEPs?
Politically Exposed Persons (PEPs) are those individuals presently or formerly holding a powerful local or foreign public position, and family members and close associates of that individual.
PEPS are classified according to the potential risks involved.
High Risk – Level 1 PEPs
Heads of state and government;
Members of government (national and regional);
Members of Parliaments (national and regional);
Heads of military, judiciary, law enforcement and board of central banks;
Top ranking officials of political parties.
Medium-High Risk – Level 2 PEPs
Senior officials of the military, judiciary, and law enforcement agencies;
Senior officials of other state agencies and bodies and high ranking civil servants;
Senior members of religious groups;
Ambassadors, consuls, high commissioners.
Medium Risk – Level 3 PEPs
Senior management and board of directors of state-owned businesses and organisations – e.g. Chairman of a Bank
Low Risk – Level 4 PEPs
Mayors and members of local county, city and district assemblies
Senior officials and functionaries of international or supranational organisations
Why are PEPs high risk clients to a Financial Institution?
PEPs are potential targets for bribes due to their prominent position in public life. They have a higher risk of corruption due to their access to state accounts and funds. The FIU has warned that it is not to be assumed that all PEPs are involved in criminal activity. Not all PEPs have acquired wealth through illicit means; many entered public life with a substantial net worth. Not all PEPs are corrupt, but they are vulnerable to bribery and corruption at hands of well dressed criminal elements desirous of furthering their nefarious activities. PEPs are in envious positions to award lucrative contracts and many criminals long for such friends in high places. PEPs pose a substantial risk to the financial institutions and FATF issued guidelines on dealing with same.
PEPs and Money Laundering
Corrupt PEPs may abuse their power and exploit the regulatory difference between jurisdictions to facilitate the laundering of corruption proceeds and/or illegally diverted government, supranational or aid funds.
How do Financial Institutions combat money laundering risks posed by PEPs?
Financial Institutions ought to regularly monitor PEPs.
Guidance on dealing with PEPs
Recommended actions institutions should take:
Identify the PEP from within the customer base;
Identify the country associated with the PEP;
Identify the type of business, industry, personal financial situation of the PEP (this is basic Know Your Customer information);
Identify the PEP’s affiliations, employment, associations, etc. Develop a profile of the PEPs transactions;
Determine if the transactions are as expected by comparing the actual transactions to what is known about the PEP;
Identify and investigate transactions that are outside the norm, or which are high-risk.
General Guidelines on dealing with Foreign PEPs
With respect to foreign PEPs ,the financial institution must perform Enhanced Due Diligence (EDD) on same and monitor the activities of the foreign PEP to understand the following:
Source of Funds;
Source of Wealth;
Differences in sums actual deposited compared to expected sums.
In closing, I hope that you in turn spread the wonderful news about the banks’ reasoning behind asking whether a customer is a PEP . That’s all for PEP Talk people.
The author is an attorney at law based in Trinidad. She has specialized in Anti Money Laundering and Fraud Risk Management. Please call 868 373-1166 for a Consultation. Website http://asydneygroup.com