In the age of globalized banking it is very important to understand the risk that “Politically Exposed Persons” pose to any business, no matter how small, that deals with international clients involving transactions or asset management of even modest sums.
Politically Exposed Persons or PEPs are those people that due to their own position or that of a close associate exercise functions that are conducive to corruption and related criminal activity.
Being a PEP does not necessarily mean that a person is corrupt, although some may argue this point. A PEP is simply someone who has the access and the authority to be corrupt. According to FATF guidance on evaluating PEP risk, a PEP may be anyone who is elected or appointed to a political office, anyone who heads a state-owned or state controlled enterprise, any family member of the former two, or a known a close associate of the former types of people. This includes judges, high ranking military officers, and government officials, especially those in a position where corruption is common, such as procurement or contracting.
A glaring example of such abuse by PEPs is the “Cash for Kids” scandal in which two U.S. judges were found to have been sentencing children to serve time in private juvenile prisons in which the very judges held a commercial interest. While this scandal may have been difficult for the bank of the judges to detect there are often warning signs that should not be ignored.
The first step is to know that your client is a PEP. Identifying PEP status and risk should be part of your KYC (Know Your Customer) client on-boarding and risk evaluation process. You should ask your customer to disclose any political office or other politically exposed position they may hold and you should expect an honest answer.
Following advice that Ronald Regan made famous: a “Trust, but verify” approach is necessary. Good research tools can be used to screen individuals against a database of known PEPs, as well as provide access to media coverage that will allow you to qualify the extent of the individual’s political exposure.
Take the very recent press example of former Minister Ninu Zammit of Malta. HSBC Geneva managed accounts of more than 3 million Euros for him. They took active steps to move the funds from Europe to BVI companies in order to avoid the EU Savings Tax Directive and clearly knew Zammit for several years. However, a glaring red flag is that Mr. Zammit declared earning only 37,000 Euros per year from his ministerial position. How is it then that he amassed a fortune of more than 70 years worth of his salary? This is a typical Red Flag for a PEP: having assets far beyond their logical means. Zammit claims that these deposits were built up since the 1970s through his savings and property business. Unless he could document these deposits over that time, the source of the funds through tax returns and business records, and he could explain why he needed to put the funds in a secret offshore account, it would appear that HSBC may have been aiding and abetting corruption and been an active participant in money laundering in this case. HSBC’s reputation is now suffering from their failure to manage this risk.
According to current statements, HSBC has changed their procedures and cleaned up their bank since this time; however, the example of Zammit is a very good case study of a high-risk PEP that would require a thorough KYC/AML evaluation and monitoring in order to manage the risk of the account.