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Politically exposed person

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In financial regulation, "politically exposed person" (PEP) is a term describing someone who has been entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. The terms politically exposed person and senior foreign political figure are often used interchangeably, particularly in international forums. Foreign official is a term for individuals deemed as government persons under the Foreign Corrupt Practices Act or FCPA, and although definitions are similar to PEP, there are quite a few differences and should not be used interchangeably. The term PEP is typically used referring to customers in the financial services industry, while 'foreign official' refers to the risks of third party relationships in all industries.

Definition by the Financial Action Task Force on Money Laundering

While there is no global definition of a PEP, most countries have based their definition on the 2003 Financial Action Task Force on Money Laundering (FATF) standard, as for example the Swiss financial market regulator in 2011, which quoted it as "the international standard"[1] or the Australian government in 2015.[2] FATF is an international inter-governmental body, founded in 1989 on the initiative of the G7 and hosted by the OECD, to set standards and promote implementing measures against money laundering, financing of terrorism and financing of proliferation of weapons of mass destruction to preserve the integrity of the global financial system.[3]: 2 

In February 2012, the FATF's latest definition of politically exposed persons (PEP), revised from 2003, is as follows:[3]: 120–121 

  • Foreign PEPs: individuals who are or have been entrusted with prominent public functions by a foreign country, for example Heads of state or Heads of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
  • Domestic PEPs: individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials. (Not all countries subscribe to the concept of domestic PEPs with respect to regulatory requirements/application of due diligence. For example, US law, specifically Section 312 of the USA Patriot Act and its implementing regulations provide for enhanced due diligence for SFPFs (Senior Foreign Political Figure) only, defined as: "a current or former senior official in the executive, legislative, administrative, military, or judicial branches of a 'foreign' government...a senior official of a major 'foreign' political party; and a senior executive of a 'foreign' government-owned commercial enterprise.)
  • Persons who are or have been entrusted with a prominent function by a state owned enterprise or an international organisation refers to members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions.

Requirements for a PEP apply to family members or close associates, any individual publicly known, or known by the financial institution to be a close personal or professional associate.[3]: 18  "The FATF definition is not intended to include middle-ranking or more junior individuals."[3]: 121 

A forerunner definition was by the 1997 OECD Anti-Bribery Convention aimed at reducing corruption in developing countries, which came into force February 1999; it used the term 'foreign official'.

Implementation

Most of the 37 FATF member countries treat domestic and foreign PEPs with heightened scrutiny. The FATF guidance implies that if a person is a foreign PEP, it de facto makes them a domestic PEP in their own country. This makes sense for crime prevention, because to export proceeds of crime, the PEP must first use their own domestic financial system and thus, importance is placed on domestic, and non-foreign PEPs.[4]

Australia

Under Australia's AML/CTF Rules,[5] Politically exposed persons (PEPs) are individuals who occupy a prominent public position or functions in a government body or international organisation, both within and outside Australia. This definition also extends to their immediate family members and close associates.

The AML/CTF Rules define three categories of PEPs:

  • Domestic PEPs are individuals who hold a prominent public position or function in an Australian government body
  • Foreign PEPs are individuals who hold a prominent public position or function in a government body of a foreign country.
  • International organisation PEPs are individuals who hold a prominent public position or function in an international organisation.

A reporting entity must have procedures to identify whether any individual customer or beneficial owner is a PEP, or an associate of a PEP. The reporting entity must undertake this identification process before it provides the customer with a designated service, or as soon as practicable afterwards. A reporting entity must implement additional due diligence measures and risk management systems where the PEP is high ML/TF risk or is a foreign PEP.

Canada

Canada only considers foreign PEPs to pose a money laundering and terrorist financing risk.[6] Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, a politically exposed person is only a foreign PEP.[citation needed]

Chile

See also: Banco de Chile

In Chile, financial institutions are mandated to report any transaction suspicious for potential involvement in bribery by virtue of a PEP's position and the influence that they may hold. As of 2015, 2,200 to 3,000 individuals are considered PEP's, 150 of them foreign, and also their second grade relatives are under financial observation by the institutions.[7]

UK

As of January 2015 likewise the UK's PEP definition is identical to the 2003 FATF definition, i.e. without the 2012 update to include domestic PEP's; It is found in the Money Laundering Regulations 2007 Section 14(5)[8] A politically exposed person is considered any individual who fits any of the criteria listed below:

  • A foreign person who has held any time in the preceding year a prominent public function outside the United Kingdom, in a state or international institution
  • Members of courts of auditors or of the boards of central banks
  • Ambassadors, chargés d’affaires and high-ranking officers in the armed forces
  • Members of the administrative, management or supervisory bodies of state-owned enterprises
  • Heads of state, heads of government, ministers and deputy or assistant ministers
  • Members of parliaments
  • Members of supreme courts, constitutional courts or of other high-level judicial bodies

The definition explicitly excludes middle-ranking or more junior officials.

PEP status also extends to relatives and close associates. Relatives and close associates include a spouse, a partner, children and their spouses or partners and parents. Close associates include any individual who is known to have joint beneficial ownership of a legal entity or legal arrangement, or any other close business relations. It also includes any individual who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit of a person referred to in regulation.

The Financial Conduct Authority and Joint Money Laundering Steering Group both publish comprehensive guidance on both PEPs and other KYC related matters to assist firms in complying with their legal obligations.[9]

The 4th EU AML Directive is expected update the definition to include domestic PEPs, and limit relatives-status to spouse and partner only, and no longer the children and parents of PEPs.[10][11]

USA

The term foreign official has been used by US enforcement agencies relating to persons who have similar characteristics as PEPs, as referenced in the US Foreign Corrupt Practices Act.15 U.S.C. § 78dd-1 It is used in all industries, not only by financial institutions. The Treasury's Financial Crimes Enforcement Network (FinCEN) did not use the term PEP in its regulations as of 2010.[12] Suspicious activity requires a financial institution to fill out a suspicious activity report to FinCEN. The term 'Senior Foreign Political Figure', as defined by section 312 of the USA PATRIOT Act is to a great extent similar to the definition of PEP, and also excludes middle-ranking or more junior individuals.[citation needed] The term PEP is recognized (and was defined) by the 'Wolfsberg Group' of eleven global banks.[13]

History

The designation "politically exposed person" dates back to the late 1990s, in what was known as the "Abacha Affair." Sani Abacha was a Nigerian dictator who organized a large scale, systematic theft of assets from the Nigerian central bank for some years with his family members and associates. It is believed that several billion dollars were stolen, and that the funds were transferred to bank accounts in the United Kingdom and Switzerland.[14] In 2001, the Nigerian Government that succeeded the Abacha Regime made an effort to recover the money.[15] It lodged complaints with several European agencies, including the Federal Office of Police of Switzerland which investigated close to sixty Swiss banks.[16] In this investigation, the concept of "politically exposed person" emerged, around which the UN organised a committee in December 2000, that eventually led to the October 2003 resolution of United Nations Convention against Corruption, entered into force in December 2005, with ongoing annual reviews of implementation and asset recovery.[17] It had become European Union law in 2004.[14]

PEP-specific compliance legislation addresses the link between government corruption, money laundering and terrorism financing. [citation needed] Since September 11, 2001, more than 100 countries have changed their laws related to financial services regulation, combating political corruption.[citation needed]

Heavy fines have been imposed on financial institutions for conducting business with PEPs without following adequate procedures, as in the case of Riggs Bank.[18]

In spite of regulation, political leaders like Muammar Gaddafi and Hosni Mubarak have made news in 2013 for having frozen assets in US banks that did not follow due diligence.[19]

Risk screening

Most financial institutions view a PEP as a potential compliance risk, and perform enhanced monitoring of accounts that fall within this category. Screening for PEPs is usually performed at the beginning of account opening, called initial due diligence or know your customer (KYC). Screening of accounts periodically is performed as part of ongoing due diligence.

Due diligence to uncover PEPs can be time consuming and requires the checking of names, dates of birth, national identification numbers and photos of clients against a reputable database of known PEPs, which usually contains over one million profiles.[citation needed] No 'official' PEP lists exist. The CIA and UN have lists of heads of states, which fall below the PEP definitions of FATF. As of 2014 there were at least five companies advertising for regulatory, financial and reputational risk screening. Other vendors maintain their own particular database of PEPs and other high-risk customers: NameScan offers a free sanction check tool as well as a pay-as-you-go PEP checking service. IdentityMind offers a useful PEP screening service, World Compliance[20] has a global PEP list, World Check by Thomson Reuters,[21] Dow Jones offers a global PEP database,[22] Regulatory DataCorp offers PEP list screening,[23] and Reed Elsevier's 'Accuity' advertises "global payment routing data and anti-money laundering solutions to banks and businesses worldwide" and utilizes the WorldCompliance PEP List .[24]

Open Source PEP Datasets

As with any other data source type, the lists of Politically Exposed Persons are being collected with the help of public contributions. A notable open source move is Every Politician which seems to be the world’s richest open dataset on politicians by listing over 71,734 politicians from 233 countries. This list however only includes the politicians involved in legislation, also known as Parliament members. PEP Checks have always been a premium service but due to the growth of public PEP datasets, some free tools have become available. NameScan Free PEP Check is one of these.

See also

References

  1. ^ "Due diligence obligations of Swiss banks when handling assets of "politically exposed persons"" (PDF). Eidgenoessische Finanzmarktaufsicht (FINMA). 10 November 2011.
  2. ^ Australian Transaction reports and Analysis Center(Austrac) (January 2015). "Draft guidance note 15/01. Key terms used in 'politically exposed person' definition". Australian government. p. 12.
  3. ^ a b c d FATF (15 February 2012). "INTERNATIONAL STANDARDS ON COMBATING MONEY LAUNDERING AND THE FINANCING OF TERRORISM & PROLIFERATION" (PDF). ATF/OECD. p. 130.
  4. ^ Duhaime, Christine (28 February 2014). "The $70 Billion Missing From the Ukraine: Does it Demonstrate a Whopping Failure of Global Anti-Money Laundering and Corruption Laws? Duhaime's Financial Guide and Anti-Money Laundering Law". Duhaime Law.
  5. ^ (AUSTRAC), Australian Transaction Reports and Analysis Centre (30 October 2014). "AML/CTF Act".
  6. ^ Duhaime, Christine (n.d.). "Politically Exposed Persons, Duhaime's Financial Guide and Anti-Money Laundering Law". Duhaime Law.
  7. ^ Chilean newspaper La Tercera 22 February 2015, PEP: así opera la vigilancia financiera a la clase política Fernando Vega, retrieved on 22 February 2015
  8. ^ "The Money Laundering Regulations 2007". No. 2157 PART 2 Enhanced customer due diligence and ongoing monitoring, Regulation 14. legislation.gov.uk. 2007. Retrieved 14 May 2014.
  9. ^ FCA Information on Money Laundering & Terrorist Financing
  10. ^ "AMLD4 and Domestic PEPS". Comply Advantage. December 2014.
  11. ^ "The Fourth Anti Money Laundering Directive". LK Shields.
  12. ^ http://www.fincen.gov/news_room/testimony/pdf/20100204.pdf
  13. ^ http://www.wolfsberg-principles.com/pdf/faq/Wolfsberg_PEP_FAQs_(2008).pdf
  14. ^ a b French Senate,Justice et affaires intérieures (30 June 2004). "Proposition de directive du Parlement européen et du Conseil relative à la prévention de l'utilisation du système financier aux fins du blanchiment de capitaux, y compris le financement du terrorisme" (in French). French Government.
  15. ^ http://allafrica.com/stories/200108080222.html
  16. ^ "Switzerland provides mutual legal assistance in the Abacha case - To date, USD 645 million have been frozen in Switzerland". Federal Office of Justice Switzerland. 21 January 2000.
  17. ^ "United Nations Convention against Corruption". UN office of drugs and crime (UNODC). n.d. Retrieved 12 February 2015.
  18. ^ "At Riggs Bank, A Tangled Path Led to Scandal". New York Times. 19 July 2004.
  19. ^ "Frozen Mubarak assets worth around $1bn". Daily News Egypt. 17 April 2013.
  20. ^ http://www.lexisnexis.com/risk/intl/en/resources/brochures/WorldCompliance-Data.pdf
  21. ^ "Thomson Reuters Risk Management Solutions".
  22. ^ http://www.dowjones.com/info/pep-list-screening.asp
  23. ^ Regulatory DataCorp, Inc. (RDC) (Mar 18, 2013). "RDC Revolutionizes PEP Risk Management" (Press release). Reuters. Retrieved 11 February 2015.
  24. ^ "Monday 29 September 2014 Reed Elsevier acquires FircoSoft, the Paris-based global sanctions screening software group". Reed business info. 29 September 2014. Retrieved 11 February 2015.
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