I once had a customer who wanted to close his bank account just because he got to know that the bank had classified his account as a Politically Exposed Person (PEP). This was because he thought the bank perceived him as a corrupt politician. After explaining the meaning of who a PEP is and why the bank classified him as such for its internal processes, he appreciated it and continued to do business with the bank.
I believe many people (especially the politician) can associate with the behavior of the customer illustrated above? This article is aimed at highlighting the meaning and dynamics of a PEP and the risk of money laundering and terrorist financing associated with the PEP. Also the article will touch on how companies can identify PEPs and how to treat them to avoid regulatory sanctions.
There is a regulatory sanction for not putting in place appropriate risk management systems to determine whether a potential customer or existing customer or the beneficial owner is a PEP when performing Customer Due Diligence (CDD) procedures. Therefore, essential to the identification process is having a definition of PEPs.
Unfortunately, there is not an internationally agreed definition for a PEP. But in Ghana, according to the BoG/FIC AML/CFT (P) guidelines, July 2018, a PEP is individual who is or has been entrusted with prominent public function both in Ghana or in foreign countries and people or entities associated with them. PEPs also include person who are or have been trusted with a prominent functions by international organization. Example, if you find yourself in any of the following category of people, then you will be classified as a PEP:
- Heads of State or government
- Ministers of State
- High ranking political party officials
- Senior public officials
- Senior Judicial officials
- Senior military officials
- Chief executives of state owned companies/ corporations
- Traditional Rulers
The following other categories are also considered as PEPs because of the degree of influence the PEP has over or on them:
- Family members and/ or close associates of PEPs (including domestic staff)
- An artificial politically exposed person (an unnatural legal entity belonging to a PEP)
As the definition of PEPs might differ from one country to another, companies should institute measures to able to identify PEPs from other countries as they also pose money laundering risk as the domestic ones. Companies should also identify Financial Exposed Persons (FEPs), as they pose the same AML/CFT risk as PEPs. FEPs are those individuals who hold executive management and/ or board positions in large organizations and control financial resources of these organizations. We should note that all PEPs are FEPs but not all FEPs are PEPs.
Although public ofﬁcials and bureaucrats are not by deﬁnition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny large-scale projects for illicit enrichment Although public ofﬁcials and bureaucrats are not by deﬁnition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny large-scale projects for illicit enrichment
Although public ofﬁcials and bureaucrats are not by deﬁnition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny large-scale projects for illicit enrichment.
Although PEPs/ FEPs are not by definition corrupted or corrupt, they are placed in a vulnerable position as they have the capacity of control and/ or divert funds and to award or deny large scale projects for illicit enrichment and also embezzlement of public funds.
There is this argument which suggests that once the PEP leaves office for a number of years, he or she should not be considered as a PEP again because he or she does not have control over public funds. This argument is correct in some countries but majority of the countries, especially African countries, hold a different view, which is “once a PEP, always a PEP”, because of the influence and control the PEP will still have. The handling of a client who is no longer entrusted with a prominent public function should be based on an assessment of risk and not on prescribed time limits. Companies should assess the risk based on the following factors:
- The level of “informal” influence that the individual could still exercise; the seniority of the position that the individual held as a PEP; or
- Whether the individual’s previous and current function are linked in any way (e.g., formally by appointment of the PEPs successor, or informally by the fact that the PEP continues to deal with the same substantive matters).
Once the PEP has been identified, the company need to put measures in place to manage the relationship established so as to minimize the risk exposure the PEP possesses.
One way companies, especially financial institutions, can manage the money laundering and terrorist financing risk associated with PEPs is by first identifying them during the KYC/ CDD procedures. Companies should have or subscribe to a database of PEPs, both foreign and domestic. Any customer’s name should be run through the database. Also asking the necessary questions can help identify the PEP. After identifying them, the PEP should be risk rated as high risk with the needed Enhanced Due Diligence (EDD) procedures conducted on the customer. The EDD procedure on the PEP is to help the company get enough information about the customer to reduce the risk exposure. When conducting ongoing due diligence of the business relationship with the PEP, it is important for companies to ensure that the level and type of transactions are consistent with the institution’s knowledge of the PEP’s information.
Getting senior management approval as to whether to establish or continue a business relationship with a PEP helps to manage the relationship to ensure that senior management are aware of relationships with PEPs and that the company do not in any circumstance undertake business relationships with them in the absence of adequate controls. The senior management person(s) giving the approval should have a deep knowledge of the institution’s AML/CFT programs (i.e., the internal control programs), and a strong understanding of the potential or existing customer’s ML/TF risk profile. Additionally, the senior management person(s) should have active involvement in the approval process of the institution’s AML/CFT policies and procedures. The approval or refusal of the PEP relationship should be in writing.
Another way to manage the risk of money laundering and terrorist financing associated with a PEP is for the company to take reasonable measures in determining the source of wealth and source of funds of the PEP. Source of wealth and source of funds are two different concepts but are used interchangeable. The source of wealth refers to the origin of the PEP’s entire body of wealth (i.e total assets or properties). This information will give an indication as to the volume of wealth the customer would be expected to have, and a picture of how the PEP acquired such wealth. Although companies may not have specific information about assets and/or properties not deposited or processed by them, it may be possible to gather general information from commercial databases and/ or other open sources. The source of funds, on the other hand, refers to the origin of the particular funds or other assets which are the subject of the business relationship between the PEP and the company (e.g., the amounts being invested, deposited, or wired as part of the business relationship). The information (normally, easy to know or obtain) should be substantive and establish the origin and/ or reason for having been acquired.
The above requirements are preventive in nature and should not be interpreted as meaning all PEPs are involved in criminal activities. When though PEPs possess high Money laundering and Terrorist Financing risk to almost every company in the world, they provide good source cheap deposit for financial institutions in Ghana. PEP accounts and transactions should be managed well to mitigate the risks they possess and at the same time benefit from the cheap deposits.
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