PEP-Talk: A Guide to Managing Risk from Politically Exposed Persons

28 November 2019 11:03

Politically Exposed Persons (PEPs) can be among a bank’s riskiest customers. Their public positions and ability to divert funds make them prime targets for bribery and corruption. But the financial services industry doesn’t face the risk alone. Our new “PEP-Talk” eBook outlines the types of PEPs companies may encounter and tips for navigating the changing regulatory landscape around PEPs.

What are the risks of PEPs?

PEPs are a major risk to a company. Most PEPs act lawfully, and it is very common for companies to have dealings with them, but their public positions expose them to a much higher risk of bribery and corruption than the average customer, investor, or third party. The U.S. Financial Crimes Enforcement Network analyzed 1,300 reports of suspicious activity in the securities and future industries, money services businesses, and casinos and card clubs filings in 2009 and 2010. PEPs were involved in more than 90 percent of the reports.

A recent enforcement action by the U.S. federal authorities offers a timely reminder of these risks. In July, Credit Suisse and its Hong Kong subsidiary agreed to pay nearly $80 million to the Department of Justice and Securities and Exchange Commission to settle charges that it gave jobs to associates of Chinese government officials to gain new business. This practice, which is particularly prevalent in China and has become known as ‘princeling hire’, is a violation of the U.S. Foreign Corrupt Practices Act

Who are PEPs?

PEPs are individuals who have been entrusted with prominent public positions. But the challenge for companies is that although the term has been written into many pieces of legislation, there exists no single, globally-agreed definition of a “PEP.” It differs depending on which law you consult and which country you are in. The Financial Action Task Force (FATF) offers a broad definition of a PEP as “an individual who is or has been entrusted with a prominent public function.” While the banking association The Wolfsberg Group defines a PEP as anyone with the ability to divert public funds.

Strengthening regulatory landscape

The law and guidance relating to PEPs is strengthening in many jurisdictions. In the last two years, the EU’s Fourth and Fifth Anti-Money Laundering Directives expanded the definition of PEPs and required EU member states to create a list of national public offices that qualify as politically exposed. The UK’s Bribery Act in 2010 made it illegal to bribe a foreign public official. Last year, the UK’s Criminal Finances Act allowed regulators to apply for an ‘unexplained wealth order’. This requires PEPs to explain the origin of assets valued greater than £50,000 if these appear to be disproportionate to their lawful income.

Companies must mitigate risk

Companies must take a risk-based approach to engaging with PEPs, seeking as much information as possible on them and the level of risk they pose. Higher-risk PEPs merit enhanced due diligence checks and ongoing risk monitoring. Companies should identify which of their clients are PEPs, establish their source of wealth, assess their level of risk, and carry out ongoing monitoring of the relationship. Is your current process taking a close-enough look at PEPs? If you are in doubt, maybe a screening tool like Nexis Diligence could be relevant to use. Nexis Diligence contains PEP data as well als UBO data.

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