Category: tax evasion

What is a Politically Exposed Person?

This post will give a definition for a PEP and answer what is a politically exposed person. It also provides details of red flags that indicate a PEP is acting criminally. There is also a detailed guide from FATF.

PEPs are governed by the recommendations of FATF, recommendations 12 and 22 specifically.

FATF recommend enhancing due diligence when dealing with a PEP in financial transactions or account dealing.

An individual is a PEP if he is or has been entrusted with a prominent function. Many PEPs hold political positions that can be abused for the purpose of laundering stolen funds or other predicate offences such as corruption or bribery. A PEP includes politicians/councillors, senior police, business and military people. Checks with the relatives and associates of PEPs is also recommended to prevent second person related offences.

Because of the risks associated with Politically exposed people, FATF recommends additional Anti-Money Laundering or Counter Financing of Terrorism measures with PEPs. The measures are to prevent offences not criminalise PEPs specifically.

It is a fundamental principle of managing PEPs that institutes know who their customers are. Institutes need data to identify PEPs, be they domestic or foreign. Intelligence systems exist globally to help identify who is and who is not a PEP. However, these databases are not sufficient to comply with the PEPs requirements.

Institutes should find ways to share data throughout the industry to help identify customers as they conduct business with the institute.

The below list identifies many of the ‘red flags‘ that indicate a PEP is abusing their position of trust.

Politically Exposed Persons – Red Flags

1. The determination that a customer is a PEP is not an aim in itself but forms part of the process that enables financial institutions and DNFBPs to assess the different types of higher risks related to PEPs. Determining that a customer is a PEP does not absolve financial institutions and DNFBPs of further ongoing due diligence specifically tailored to the fact that the client is a PEP.
   Being a PEP does not prejudge a link to criminal activities, or equate to being a criminal and / or subsequent abuse of the financial system. Similarly, the fact that a person is a domestic/international organisation PEP does not automatically imply that he/she poses a higher risk. Financial institutions and DNFBPs need nevertheless to be aware of the risks that a PEP may abuse the financial system to launder illicit proceeds, and financial institutions and DNFBPs need to be aware of the red flags / indicators that can be used to detect such abuse.
2. The list of red flags below is relevant to detect those PEPs that abuse the financial system, and does not intend to stigmatize all PEPs.
3. PEP red flags are not an exhaustive list and are complementary to the usual ML red flags that a reporting entity may be using. The methods of those PEPs that engage in illicit activity change and therefore indicators of their activity will do so as well. Also, there may be other red flags that should be considered as equally important in a particular country or region.

Detecting Misuse of the financial system by PEPS – Red Flags and Indicators for suspicion.

A. PEPS ATTEMPTING TO SHIELD THEIR IDENTITY:

PEPs are aware that their status as a PEP may facilitate the detection of their illicit behaviour. This means that PEPs may attempt to shield their identity, to prevent detection. Examples of ways in which this is done are:

• Use of corporate vehicles (legal entities and legal arrangements) to obscure the beneficial owner.
• Use of corporate vehicles without valid business reason.
• Use of intermediaries when this does not match with normal business practices or when this seems to be used to shield identity of PEP.
• Use of family members or close associates as legal owner.

B. RED FLAGS AND INDICATORS RELATING TO THE PEP AND HIS BEHAVIOUR:

• Use of corporate vehicles (legal entities and legal arrangements) to obscure i) ownership, ii) involved industries or iii) countries.
• The PEP makes inquiries about the institution’s AML policy or PEP policy.
• The PEP seems generally uncomfortable to provide information about source of wealth or source of funds.
• The information that is provided by the PEP is inconsistent with other (publicly available) information, such as asset declarations and published official salaries.
• The PEP is unable or reluctant to explain the reason for doing business in the country of the financial institution or DNFBP.
• The PEP provides inaccurate or incomplete information.
• The PEPs seeks to make use of the services of a financial institution or DNFBP that would normally not cater to foreign or high value clients.
• Funds are repeatedly moved to and from countries to which the PEPs does not seem to have ties with.
• The PEP is or has been denied entry to the country (visa denial).
• The PEP is from a country that prohibits or restricts its citizens to hold accounts or own certain property in a foreign country.

C. THE PEP’S POSITION OR INVOLVEMENT IN BUSINESSES:

The position that a PEP holds and the manner in which the PEP presents his/her position are important factors to be taken into account. Possible red flags are:

• The PEP has a substantial authority over or access to state assets and funds, policies and operations.
• The PEP has control over regulatory approvals, including awarding licences and concessions.
• The PEP has the formal or informal ability to control mechanisms established to prevent and detected ML/TF.
• The PEP (actively) downplays importance of his/her public function, or the public function s/he is relates to associated with.
• The PEP does not reveal all positions (including those that are ex officio).
• The PEP has access to, control or influence over, government or corporate accounts.
• The PEP (partially) owns or controls financial institutions or DNFBPs, either privately, or ex officio.
• The PEP (partially) owns or controls the financial institution or DNFBP (either privately or ex officio) that is a counter part or a correspondent in a transaction.
• The PEP is a director or beneficial owner of a legal entity that is a client of a financial institution or a DNFBP.

D. RED FLAGS AND INDICATORS RELATING TO THE INDUSTRY/SECTOR WITH WHICH THE PEP IS INVOLVED:

A connection with a high risk industry may raise the risk of doing business with a PEP. Under FATF Recommendation 1, competent authorities, financial institutions and DNFBPs are required for determining which types of clients may be higher risk. For this, financial institutions and DNFBPs will also be guided by national guidance or risk assessments. Which industries may be at risk depends on the risk assessments and varies from country to country, and on other industry safeguards that may be in place. Examples of higher risk industries are:

• Arms trade and defence industry.
• Banking and finance.
• Businesses active in government procurement, i.e., those whose business is selling to government or state agencies.
• Construction and (large) infrastructure.
• Development and other types of assistance.
• Human health activities.
• Mining and extraction.
• Privatisation.
• Provision of public goods, utilities.

E. BUSINESS RELATIONSHIP / TRANSACTION, PURPOSE OF BUSINESS RELATIONSHIP:

Red flag and indicators can also relate to the specific business relationship or transaction:

• Multiple STRs (sometimes called a SAR) have been submitted on a PEP.
• (Consistent) use of rounded amounts, where this cannot be explained by the expected business.
• Deposit or withdrawal of large amounts of cash from an account, use of bank cheques or other bearer instruments to make large payments. Use of large amounts of cash in the business relationship.
• Other financial institutions and DNFBPs have terminated the business relationship with the PEP.
• Other financial institutions and DNFBPs have been subject to regulatory actions over doing business with the PEP.
• Personal and business related money flows are difficult to distinguish from each other.
• Financial activity is inconsistent with legitimate or expected activity, funds are moved to or from an account or between financial institutions without a business rationale.
• The account shows substantial activity after a dormant period; or over a relatively short time; or shortly after commencing the business relationship.
• The account shows substantial flow of cash or wire transfers into or out of the account.
• Transactions between non-client corporate vehicles and the PEP’s accounts.
• A PEP is unable or reluctant to provide details or credible explanations for establishing a business relationship, opening an account or conducting transactions.
• A PEP receives large international funds transfers to a gaming account. The PEP withdraws a small amount for gaming purposes and withdraws the balance by way of cheque.
• A PEP uses third parties to exchange gaming chips for cash and vice versa with little or minimal gaming activity.
• A PEP uses multiple bank accounts for no apparent commercial or other reason.

F. PRODUCTS, SERVICE, TRANSACTION OR DELIVERY CHANNELS:

The FATF Recommendations contain examples of products, industries, service, transaction or delivery channels, which are of a higher risk, irrespective of the type of customer. These examples are:

• Private banking.
• Anonymous transactions (including cash).
• Non-face-to-face business relationships or transactions.
• Payments received from unknown or un-associated third parties.

If these industries, products, service, transaction or delivery channels are used by PEPs, then this adds an additional risk factor (depending on the nature of the PEP). In addition to the examples already listed in the FATF Recommendations, there are other products, industries, service, transaction or delivery channels that can become additionally vulnerable when used by PEPs.
Examples of these are:

• Businesses that cater mainly to (high value) foreign clients.
• Trust and company service providers.
• Wire transfers, to and from a PEP account that cannot be economically explained, or that lack relevant originator or beneficiary information.
• Correspondent and concentration accounts.
• Dealers in precious metals and precious stones, or other luxurious goods.
• Dealers in luxurious transport vehicles (such as cars, sports cars, ships, helicopters and planes).
• High end real estate dealers.

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G. COUNTRY SPECIFIC RED FLAGS AND INDICATORS

The FATF Recommendations contain examples of higher risk country or geographic risk factors, irrespective of the type of customer. Additionally, the following red flags and indicators relating to countries can be taken into account when doing business with a PEP:

• The foreign or domestic PEP is from a higher risk country.
• Additional risks occur if a foreign or domestic PEP from a higher risk country would in his/her position have control or influence over decisions that would effectively address identified shortcomings in the AML/CFT system.
• Foreign or domestic PEPs from countries identified by credible sources as having a high risk of corruption.
• Foreign or domestic PEPs from countries that have not signed or ratified or have not or insufficiently implemented relevant anti-corruption conventions, such as the UNCAC, and the OECD Anti-Bribery Convention.
• Foreign or domestic PEPs from countries with a mono economies (economic dependency on one or a few export products), especially if export control or licensing measures have been put in place.
• Foreign or domestic PEPs from countries that are dependent on the export of illicit goods, such as drugs.
• Foreign or domestic PEPs from countries (including political subdivisions) with political systems that are based on personal rule, autocratic regimes, or countries where a major objective is to enrich those in power, and countries with high level of patronage appointments.
• Foreign or domestic PEPs from countries with poor and/or opaque governance and accountability.
• Foreign or domestic PEPs from countries identified by credible sources as having high levels of (organised) crime.

If you need to train your staff on recognising a PEP or putting measures in place to mitigate risk, contact us to provide you with a bespoke training package.