Benjamin Musau
Politically Exposed Persons (PEPs)
I find this topic to be quite interesting especially because I covered it in depth in my LL.M class at the Thomas Jefferson School of Law, and I am, therefore, very curious to learn as much about it as possible.
The Politically Exposed Person (PEP) designation dates back to the late 1990s in what was known as the “Abacha Affair”. Sani Abacha was a Nigerian dictator who organized (with his family members and associates) a network of massive theft of assets from the government and people of Nigeria. He is believed to have stolen in excess of several billion US$ and the funds were transferred to bank accounts in the United Kingdom and Switzerland.
The Nigerian Government that succeeded the Abacha Regime lodged complaints in 2001 with several European agencies, including the Federal Office of Police (FOP) of Switzerland which, in turn, investigated close to 60 Swiss banks. It is in the context of this investigation that the concept of PEP emerged, which was later included in the 2003 United Nations Convention against Corruption.
PEP is a term that describes a person who has been entrusted with a prominent public function, or an individual who is closely related to such a person. The terms “Politically Exposed Person” and “Senior Foreign Political Figure” are often used interchangeably, particularly in international fora. The term PEP is not used in FinCEN’s regulations. It is to a greater extent similar to the definition of Senior Foreign Political Figure, as defined by section 312 of the USA Patriot Act. The definition contained in the report of the Financial Action Task Force on Money Laundering (FATF) and that contained in the USA Patriot Act are intended to include middle ranking or more junior individuals in the categories.
The term Foreign Official is used by enforcement agencies relating to persons who have similar characteristics as PEPs. This term is used in all industries and is not limited in use to financial institutions. In fact, it is referenced in the Foreign Corrupt Practices Act in the United States.
A PEP generally presents a higher risk for potential involvement in bribery and corruption because of their position and the influence that they may hold. PEPs are, therefore, viewed as potential compliance risks and most financial institutions dealing with them performed enhanced monitoring of accounts that fall within this category.
The process of screening for PEPs is actually part of the Know Your Customer procedures i.e. initial due diligence that a financial institution performs as part of the account opening and in addition there is periodic screening of accounts as part of ongoing due diligence. The process of due diligence and screening for PEPs is time consuming and requires screening against a reputable database of known PEPs, usually close to 1 million profiles. The screening is done against the names, dates of birth, national identification numbers and photographs of clients.
In the case of Riggs Bank heavy fines were imposed on the financial information for conducting business with PEPs without following adequate Know Your Customer procedures and enhanced due diligence processes. PEP specific compliance legislation underlines the link between corrupt politicians, money laundering and the financing of terrorism. There is contemporary interest in new legislation to cover this situation since September 11, 2001 because more than 100 countries have changed their laws related to financial services regulation, with the fight against political corruption playing a fundamental role. This new legislation is expected to play a key role in dealing with suspicion of corruption involving the immediate Presidents of Libya (Muamar Khadafi) and Egypt (Hosni Mubarak).
There is no global definition of a PEP. Most countries have based their definition on the FATF definition:
- current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not)
- a senior official of a major foreign political party
- a senior executive of a foreign government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual
- an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse’s parents or siblings
- any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate.
In Canada, the anti-money laundering legislation requires financial institutions to determine if clients are Politically Exposed Foreign Persons (PEFPs). This Canadian term shows a large degree of overlap with the politically exposed person (PEP) definition used in most other countries in the world, and is also comparable to the “senior foreign political figure” as outlined in the USA Patriot Act.
The Canadian PEFP definition is:
“Politically exposed foreign person – means a person who holds or has ever held one of the following offices or positions in or on behalf of a foreign state:
(a) head of state or head of government;
(b) member of the executive council of government or member of a legislature;
(c) deputy minister or equivalent rank;
(d) ambassador or attaché or counsellor of an ambassador;
(e) military officer with a rank of general or above;
(f) president of a state-owned company or a state-owned bank;
(g) head of a government agency;
(h) judge;
(i) leader or president of a political party represented in a legislature; or
(j) holder of any prescribed office or position.”
The definition includes any prescribed family member of such a person.
The Financial Action Task Force (FATF) proposals in recommendation 6 will largely do away with the often-viewed artificial distinction between domestic and non-domestic PEPs n line with the UN Convention Against Corruption. However, the FATF recommendation is nuanced as follows:
- foreign PEPs will always be considered to be higher risk;
- reasonable measures will be required to be taken to determining whether a customer is a domestic PEP; and
- enhanced Customer Due Diligence if the domestic PEP is considered to be a higher risk.
A case of “there are PEPs, and then there are PEPs”. In reality, there has always been some grading of PEPs within institutions to allocate resources to genuinely high risk PEPs. These proposals seem to go some way in confirming this. The family and close associates requirement will also be tightened up.
References:
- http://www.fincen.gov/news_room/testimony/pdf/20100204.pdf
- http://www.senat.fr/ue/pac/E2734.html
- http://allafrica.com/stories/200108080222.html
- http://www.worldcompliance.com/global-pep-list.html
- http://www.fatf-gafi.org/glossary/0,3414,en_32250379_32236930_35433764_1_1_1_1,00.html
- http://www.kyc360.com/hot_topic/show/159?set=1
28th February, 2011
I am a Kenyan Advocate and the Managing Partner of B M Musau & Co., Advocates, a position I have held since 1999. My work encompasses regulatory reforms, reduction of administrative burdens, the structure of business entities, joint ventures, acquisitions, banking, foreign investment and other general corporate areas
Write a comment: