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INTRODUCTION

            The purpose of this paper is not to suggest that all Politically Exposed Persons (PEPs) are motivated by criminal activities in discharging their entrusted duties but rather to engage in a discourse of the complicity of the financial institutions in aiding the PEPs to hide proceeds of their criminal activities despite the efforts of international community to curb PEPs’ heists.  This discourse would look at the recommendations and compliance, the burdens faced by the financial institutions with these recommendations and compliance, the impacts of lack of compliance on the financial institutions, global economy, developing countries, the global frustrations on money laundering and the PEPs, and the sophisticated typologies of PEPs in laundering money.  This paper would also discuss the jurisdictional complacency, compliance obstacles, and overall failure of effective implementation of international PEPs’ standards.  While this paper would not characterize all financial institutions of complicity or suggests that all PEPs have criminal proclivity, this paper would however discuss the little leaven that lumps the whole.  It is imperative to understand that PEPs’ ability to hide the proceeds of their loots underscores the global efforts to curb money laundering.  The unscrupulous PEPs left many in abject poverty and the global economy dysfunctional.

In this paper, I would also discuss the dilemma faced by financial institutions and global regulatory body in categorizing PEPs.  Who are PEPs?  Where is the cutoff point when characterizing the PEPs?  How long is PEP considered PEP?  These questions and more are confronted when dealing with PEPS which make it more daunting in solving the money laundering activities of the PEPs.  This paper would attempt to make sense of the logistical and human factors in trying to develop a module that can effectively address the PEPs and the money laundering debacle.  Against these backdrops, I would endeavor in this paper to suggest the way forward in the fight against banks complicity, PEPs and money laundering.

Definitions:

            Politically Exposed Persons (PEPs) are considered high risk in today’s regulatory environment. Thus, regulation requires enhanced due diligence when conducting business with Politically Exposed Persons, particularly when they become part of private banking transactions. Although there is no global definition of PEP, the Financial Action Task Force (FATF) has issued guidelines. U.S. Patriot Act, as well as the European Union Directive, uses similar definitions of a Politically Exposed Person, typically consisting of the following five layers:

• 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, and/or 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; and
• Any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate.¹

It is indeed prudent to look at how various Anti-Money Laundering regulatory bodies define PEPs in an attempt to curb the risks posed by PEPs in money laundering.  The trail blazer among these global organizations is Financial Action Task Force (FATF) which defines PEPs as “individuals who are or have been entrusted with prominent public functions in a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or  military officials, senior executives of state owned corporations, important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior individuals in the foregoing categories.”²

            In the third Anti-money laundering directive of the European Union, Article 3(8) defines PEPs as “Politically Exposed Persons” (PEPs) means natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, holding or having held, important public positions, particularly those from countries where corruption is widespread…apply the complete NCDD in respect of domestic PEPs or ECDD in respect of PEPs residing in another Member State or in a third country”³   Under Section § 312 of the Patriot Act, PEP’s are defined as: Present or former high ranking officials in the executive, legislative or judicial branches of a foreign government (the office holder does not have to have been democratically elected); a person who holds an administrative or military position in a foreign government; a person holding a high ranking position at an important political party; or, most importantly and of concern to our readers, a PEP can be a family member, close friend or business associate of a foreign public official including, a PEP’s attorney, accountant, financial advisor, broker or banker. The latter, moreover, is by no means an exhaustive list of who may be considered PEP. It encompasses basically anyone who is a close consultant or confidant of the foreign public official. PEPs also include individuals with a position at government owned institutions, such as a bank or petroleum company and their respective close associates, family members and consultants.⁴  The United Nation on the other hands, defines PEPs in reference of public officials: (a) “Public official” shall mean: (i) any person holding a legislative, executive, administrative or judicial office of a State Party, whether appointed or elected, whether permanent or temporary, whether paid or unpaid, irrespective of that person’s seniority; (ii) any other person who performs a public function, including for a public agency or public enterprise, or provides a public service, as defined in the domestic law of the State Party and as applied in the pertinent area of law of that State Party; (iii) any other person defined as a “public official” in the domestic law of a State Party.⁵  The UK definition of a PEP, as found in the Money Laundering Regulations 2007 are as follows: Section 14(5) of the ML Regulations define a PEP as:

“a politically exposed person” means a person who is –

 (a) an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function by –

      i. a state other than the United Kingdom;

      ii. a Community institution; or

      iii. an international body, including a person who falls in any of the categories listed in paragraph 4(1)(a) of Schedule 2;

 (b) an immediate family member of a person referred to in sub-paragraph (a), including a person who falls in any of the categories listed in paragraph 4(1)(c) of Schedule 2; or

 (c) a known close associate of a person referred to in sub-paragraph (a), including a person who falls in either of the categories listed in paragraph 4(1)(d) of Schedule 2.

Where Schedule 2 provides the following clarification: Politically exposed persons

(1) For the purposes of regulation 14(5) are:

   (a) Individuals who are or have been entrusted with prominent public functions include the following-

      i. heads of state, heads of government, ministers and deputy or assistant ministers;

      ii. members of parliaments;

      iii. members of supreme courts, of constitutional courts or of other high-level judicial bodies whose decisions are not generally subject to further appeal, other than in exceptional      circumstances;

      iv. members of courts of auditors or of the boards of central banks;

      v. ambassadors, chargés d’affaires and high-ranking officers in the armed forces; and

      vi. members of the administrative, management or supervisory bodies of state-owned enterprises;

   (b) the categories set out in paragraphs (i) to (vi) of sub-paragraph (a) do not include middle-ranking or more junior officials;

   (c) immediate family members include the following-

     i. a spouse;

     ii. a partner;

     iii. children and their spouses or partners; and

     iv. parents;

   (d) persons known to be close associates include the following-

     i. any individual who is known to have joint beneficial ownership of a legal entity or legal arrangement, or any other close business relations, with a person referred to in regulation

     14(5)(a); and

     ii. any individual who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit of a person referred to in regulation

     14(5)(a).

(2) In paragraph (1)(c), “partner” means a person who is considered by his national law as equivalent to a spouse.⁶  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.⁷

As shown above, the definitions of PEPs vary within the global anti-money laundering organizations.  Some give detail definitions while others provide brief definitions.  Nonetheless, all the definitions cover practically the same fundamental.  These definitions show the concern and the risk posed by PEPs to global economy.  The detailed definitions by these various global organizations resulted from the realization that PEPs have the proclivity for corruption and the potential of disguising their ill-gotten money.  The World Bank has identified corruption as the ‘single greatest obstacle to economic and social development.  Top down corruption has a devastating effect on national treasuries, undermines the rule of law, and weakens the public institutions which are the foundation for good governance.  Although, the problem of ‘grand corruption’ and ‘indigenous spoliation’ is not new, the difference today is that the illicit activities of political and military elites are facilitated by an infrastructure of money laundering located in the world’s offshore and international financial centers.⁸ In this vein, global organization, in an attempt to stem corruption by the PEPs, make is more daring for the PEPs to disguise their ill-gotten money.  Notable among the global organizations are discussed below:

FinCEN

            31 U.S.C. 310 establishes FinCEN as a bureau within the Treasury Department and describes FinCEN’s duties and powers to include:

• Maintaining a government-wide data access service with a range of financial transactions information;
• Analysis and dissemination of information in support of law enforcement investigatory professionals at the Federal, State, Local, and International levels;
• Determine emerging trends and methods in money laundering and other financial crimes;
• Serve as the Financial Intelligence Unit of the United States; and
• Carry out other delegated regulatory responsibilities.⁹

FinCEN’s mission is to enhance the integrity of financial systems by facilitating the detection and deterrence of financial crime.  Although the statute that established Financial Crimes Enforcement Network, (FinCEN) did not define Politically exposed persons (PEPs) but refers collectively to:  1) the specific enhanced due diligence obligations for private banking accounts that are established, maintained, administered, or managed in the United States for senior foreign political figures, and 2) the general due diligence procedures required for all politically exposed persons, incorporated into the institution’s anti-money laundering program as appropriate.¹⁰

StAR

                The Stolen Asset Recovery (StAR) initiative was launched jointly by the UN Office on Drugs and Crime (UNODC) and the World Bank Group (WBG) to respond to various methods of siphoning funds from government coffer by the PEPs.  The UNODC-WBG StAR initiative is an integral part of the World Bank Group which recognizes the need to help developing countries recover stolen assets. The international legal framework underpinning StAR is provided by the UN Convention Against Corruption, the first global anti-corruption agreement, which entered into force in December 2005.  These are some of the initiatives of StAR:

• Implementation of UNCAC, including developing and strengthening partnerships with multilateral and bilateral agencies in pursuit of this effort.
• Developing a pilot program aimed at helping countries recover the stock of stolen assets by providing the needed legal and technical assistance. This could include help on filing a request for mutual legal assistance and advice on experts needed. Neither the WBG nor UNODC would get directly involved in the investigation, tracing, law enforcement, prosecution, confiscation, and repatriation of stolen assets—activities that may be best suited for government-to-government assistance or private sector assistance, working with the relevant government authorities.
• Offering countries alternatives for monitoring recovered assets, within an overall framework of public financial management reform, to ensure transparency and effective use of those assets. Such monitoring would be on a voluntary basis, with the agreement of all the countries concerned, in keeping with the fundamental principle of the return of stolen assets as embodied in UNCAC.
• Building global partnerships on StAR.

            Working in close partnership with the international development community, the United Nations’ Office on Drugs and Crime, and the World Bank Group, hope to make a positive difference to developing countries through the StAR initiative.  The objective of the StAR Initiative is to reduce barriers to asset recovery and thereby encourage and facilitate more systematic and timely return of stolen assets.  There is clearly positive momentum and support for StAR, but differences in legal systems across jurisdictions where the theft occurs and money is laundered and parked present a formidable impediment to asset recovery.¹¹

UNCAC

            As part of the initiatives to stem the evil of PEPs, article 52 of UNCAC provides that:

1) […] each State Party shall take such measures as may be necessary, in accordance with its domestic law, to require banks within its jurisdiction to verify the identity of customers, to take reasonable steps to determine the identity of beneficial owners of funds deposited into high-value accounts and to conduct enhanced scrutiny of accounts sought or maintained by or on behalf of individuals who are, or have been, entrusted with prominent public functions and their family members and associates. Such enhanced scrutiny shall be reasonably designed to detect suspicious transactions for the purpose of reporting of competent authorities and should not be so construed as to discourage or prohibit banks from doing business with any legitimate customer.

2) […] In order to facilitate implementation of the measures provided for in paragraph 1 of this article, each State Party, in accordance with its domestic law and inspired by relevant initiatives of regional, inter-regional and multilateral organizations against money laundering, shall:

            (a) Issue advisories regarding the types of natural or legal person to whose accounts banks within its jurisdiction will be expected to apply enhanced scrutiny, the types of accounts and transactions to which to pay particular attention and appropriate account-opening, maintenance and record keeping measures to take concerning such accounts; and

            (b) Where appropriate, notify banks within its jurisdiction, at the request of another State Party or on its own initiative, of the identity of particular natural or legal persons to whose accounts such institutions will be expected to apply enhanced scrutiny, in addition to those whom the banks may otherwise identify.¹²

UNITED NATIONS

            In the fight against corruption and money laundering, UN is one of the global organizations that are engaged actively to curb these problems, particularly, as it pertains to the PEPs.  The 1999 International Convention for the Suppression of the Financing of Terrorism abhors any  direct involvement or complicity in the international and unlawful provision or collection of funds, attempted or actual, with the intent or knowledge that any part of the funds may be used to carry out any of the offenses described in the Convention, and encourages signatories to establish jurisdiction these acts and make them punishable by appropriate penalties, and make sure the alleged offenders into custody, prosecute or extradite them.  It also advises signatories to cooperate in preventive measures and countermeasures, and exchange information and evidence needed in related criminal proceedings.  The Convention also requires each signatory to take appropriate measures, in accordance with its domestic legal principles, for the detection, freezing, seizure, and forfeiture of any funds used or allocated for the purposes of committing the listed offenses.  Article 18(1) requires signatories to subject financial institutions and other professionals to “Know Your Customer” requirements and the filing of suspicious transaction reports. Additionally, article 18(2) requires signatories to cooperate in preventing the financing of terrorism insofar as the licensing of money service businesses and other measures to detect or monitor cross-border transactions are concerned.¹³

EU

            European Union (EU) commitment to curb Money laundering, particularly, by the PEPs has been steady and ongoing.  The European Parliament issued a report in April to assess the effectiveness of the 3rd EU Money Laundering Directive – and consider the need for a 4th Directive.  The report builds on the updated FATF recommendations issued in February 2012.  The key points raised in this report which could affect firms are:

• Clarity is required on Simplified Due Diligence (SDD) with more examples. There is a worry that SDD could be seen by some as an exemption from Anti-Money Laundering (AML) requirements which it clearly is not.
• Politically Exposed Persons (PEPs) – the FATF recommendation was that domestic PEPs are considered which is not what the 3rd Directive had said.  A suggestion was made that there should be risk assessments for PEPs with domestic PEPs being lower risk. The 3rd Directive required that where a firm accepts a PEP it should be done by firms senior management. Clarification is required as to who this should be and what level in the firm. There is the feeling at the present time that PEPs are being accepted by too junior staff.
• The 3rd Directive required the EU to present a report to the European Parliament on the consequences of reducing the limits on beneficial ownership from 25% to 20%. The study concluded that lowering the threshold would not bring significant advantages and would increase costs but the Commission will need to consider this.
• The 3rd Directive calls for suspicions to be reported promptly.  However, Financial Intelligence Units have been criticized for their lack of feedback in relation to reports. Consideration is to be given on how this can be improved across the EU.
• Third Country Equivalence – the 3rd Directive allows lighter Customer Due Diligence measures to be applied in the case of Financial Institutions situated in EU/EEA countries. However it is time consuming to prepare the equivalent lists and given the FAFT lists, the EU is considering whether such lists are still needed. The 3rd Directive allowed for a Black List of countries, but this has never been used, therefore the provision may be removed.
• A criticism of the 3rd Directive was that there needs to be better interaction between AML and personal data protection obligations. It is felt that a lot of information which could be shared is currently not for fear of breaching personal data requirements. Consideration is to be given on how personal data should be handled in order to enable effective Anti-Money Laundering/ Counter Terrorism Financing compliance whilst respecting fundamental rights.
• Legal Privilege – It was noted that Privilege can create anxiety within the legal profession as it can violate the lawyer’s obligation of professional secrecy and the right to a fair trial.  It was noted that the European Court of Justice has ruled on this issue in 2007 that the AML obligations imposed on the legal profession do not infringe the right to a fair trial.  It was noted that the exemption applies mainly on a transactional basis rather than on a link to judicial proceedings. However it was noted that the guidance can be unclear and would benefit from further clarification.¹⁴

FATF

            To mitigate the potential risks posed by PEPs.  In 2003, the Financial Action Task Force on Money Laundering (FATF) introduced a number of preventive measures to identify these higher risk individuals and to better monitor their transactions.  These measures are set forth in Recommendation 6 of the FATF 40+9 Recommendations, with the related requirements of customer due diligence in Recommendation 5. Also in 2003, the United Nations Convention against Corruption called for enhanced scrutiny of accounts held by PEPs in Article 52(1) and (2) as a means to prevent and detect the transfer of the proceeds of crime.  In 2006, FATF stated that the lack of rule of law and measures to prevent and combat corruption may significantly impair the implementation of an effective anti-money laundering/combating the financing of terrorism (AML/CFT) framework.¹⁵ The constant reviews and revisions of FATF AML recommendations are just a reminder of the enormous risks posed by PEPs, and daunting efforts to stem the evil.

BANKS COMPLIANCE, BURDEN AND COMPLICITY

            There is no doubt that PEPs are potential high risks to global economy, the risks to the financial institutions- – Banks, are even more alarming.  In lieu of this fact, banks compliance to global regulations on money laundering is highly required. The International standard for financial institutions, when it comes to PEPs, require the banks to identify the PEPs amongst its clientele, and make sure that funds managed by its organization on behalf of the Politically Exposed Person were not derive from a corrupt source.  This two-step process is to protect banks against transactional and reputational risks, and to guide against money laundering by PEPs.   The level of compliance among banks is very minuscule, if all.  In the Third EU directive with respect to transactions or business relationships with politically exposed persons residing in another Member State or in a third country, banks are required to: a) have appropriate risk-based procedures to determine whether the customer is a PEP; b) have senior management approval for establishing business relationships with such customers; c) take adequate measures to establish the source of wealth and the source of funds that are involved in the business relationships or transaction; and d) conduct enhanced ongoing monitoring of the business relationship.¹⁶  These directives, among many other directives and recommendations inundate the banks to a paralytic state because of the enormous amount of data involved to comply.  Because the typology for money laundering changes constantly, even with the PEPs, the directives, considering number of data the Banks have to keep, become overwhelming and unattainable.  And when faced with the choice between compliance and customer attrition, some banks turn the blind eye.  Bank complicity, either as a result of inability to meet the compliance standard or greed, enhance the duplicity of the PEPs, and make the effort to stem money laundering more difficult, if not altogether, impossible.   Correspondent banking (CB), the provision of banking services by one bank to another bank, is another non-compliance method used by banks to abet the PEPs.  This is a highly profitable and significant sector of big banking that enables overseas banks to conduct business and provide services for their customers – including drug dealers and others engaged in criminal activity – in jurisdictions like the U.S. where the banks have no physical presence.

Another area that hampered compliance by the banks is lack of unified definition of PEPs which also creates legal quagmire; what constitutes a PEP in one jurisdiction is not so in another jurisdiction.  This is true even with the AML organizations, as indicated in the above definitions.  An instance, the UNCAC expressly includes family and associates in the definition of PEPs, whereas, the FATF definition states “PEPs are individuals who are or have been entrusted with prominent public functions in a foreign country. . . . Family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves.”¹⁷ Even some banks include additional categories in their definition of PEPs, going beyond the requirements under the law or regulations, including the AML recommendations. One bank included senior decision makers from international and supranational organizations, public associations, media, religious organizations, and public enterprises and undertakings.¹⁸ This typifies the extent of global problem of PEPs’ classification, thus, making it more difficult for banks to comply with recommendations and regulations.

The FSA’s findings include:  Three quarters of banks reviewed are not doing enough to establish the legitimacy of their customers’ source of wealth – some in situations where they had adverse information about their customer’s integrity; At least two banks have been referred to enforcement with `serious weaknesses’ in their systems and controls for managing high-risk customers, including PEPs; A third of banks are failing to do enough to identify PEPs; Half of banks are not reviewing their high risk and PEP relationships regularly; A third of banks dismissed serious allegations about their customers without adequate review; A third of banks do not keep adequate records of their high-risk and PEP customers, impeding their ability to assess money laundering risk; Some banks had inadequate safeguards to mitigate conflicts of interest on the part of their relationship managers; Many relationship managers are rewarded primarily on the basis of profit and new business, regardless of their performance on anti-money laundering issues; There is inadequate handling of the risks presented by correspondent banking relationships.¹⁹  These findings also compound enforcement abilities by member states and non-member states, even when the compliance is marginal or non-existence.

Over the last 20 years, big bank laundering of criminal funds and looted funds has increased geometrically, dwarfing in size and rates of profit the activities in the formal economy. Estimates by experts place the rate of return in the PB market between 20-25% annually. Congressional investigations revealed that Citibank provided “services” for 4 political swindlers moving $380 million: Raul Salinas – $80-$100 million, Asif Ali Zardari (husband of former Prime Minister of Pakistan) in excess of $40 million, El Hadj Omar Bongo (dictator of Gabon since 1967) in excess of $130 million, the Abacha sons of General Abacha ex-dictator of Nigeria – in excess of $110 million. In all cases Citibank violated all of its own procedures and government guidelines: there was no client profile (review of client background), determination of the source of the funds, nor of any violations of country laws from which the money accrued. On the contrary, the bank facilitated the outflow in its prepackaged format: shell corporations were established, code names were provided, funds were moved through concentration accounts, the funds were invested in legitimate businesses or in U.S. bonds, etc. In none of these cases – or thousands of others – was due diligence practiced by the banks (under due diligence a private bank is obligated by law to take steps to ensure that it does not facilitate money laundering). In none of these cases was the top banking officials brought to court and tried. Even after arrest of their clients, Citibank continued to provide services, including the movement of funds to secret accounts and the provision of loans.²⁰  Although, heavy fines have been imposed on financial institutions that have conducted business with PEPs without following adequate Know Your Customer procedures and enhanced due diligence processes, banks still lag behind in compliance with AML regulations. Since September 11, 2001, more than 100 countries have tightened their Anti Money Laundering laws, making the fight against corruption a central element of their new legislation. In addition, there has been greater emphasis on cooperation between nations to enforce the Foreign Corrupt Practices Act.²¹

Impacts of Banks Complicity

            Banks complicity not only underscores the fight against money laundering and corruptions of some PEPs, it also undermines the global effort to curb the risks posed by PEPs to financial institutions and global economy.  While corrupt PEPs may be a small portion of the entire number of PEPs, a single corrupt PEP’s behavior can have a disproportionate impact on a country and sometimes an entire region.  Quantifying the amount of money that has stolen and laundered by corrupt PEPs has proven difficult. The estimates available, therefore, provide rough approximations of the order of magnitude.  The World Bank estimates that more than $1 trillion dollars is paid in bribes each year.  Furthermore, the Stolen Asset Recovery (StAR) Initiative has estimated that corrupt money received by public officials in developing and transition countries reaches $20 billion to $40 billion per year—a figure equivalent to 20 to 40 percent of flows of official development assistance.²² On the same token, banks complicity only enhance PEPs their corruptions and the attempt to disguise those ill-gotten money.  The impact of complicity goes beyond transactional but reputational risks as well.  Banks that deal with PEPs’ laundered money run the risks of losing the money once the money is cleaned.  Since the modus operandi of launderers is disguise and secrecy, there is always that chance that PEP would not leave the fund in the bank for fear of detection.  Thus, the bank only becomes a mere conduit for funneling.  Reputational risks for banks outweigh the benefits of complicity, and whether the PEP is domestic or foreign, controls should be designed to draw attention to, and mitigate, the increased money laundering risk posed by this category of customer.  While corruption is more prevalent in some countries than in others, domestic politicians are subject to the same pressures and perverse incentives as their foreign counterparts and should be treated accordingly.

Jurisdictional Complacency and compliance obstacles

            The only agreement in this discourse is that PEPs posed high risks to global economy but the lack of legal bites by various political institutions, and AML organizations impede the fight against money laundering schemes by PEPs.  Some jurisdictions are better than the others in this fight, but by and large, lack of political will for sweeping regulations, and the zeal to enforce the AML regulations constitute the greatest impediment to money laundering and/or terrorist financing.  Most jurisdictions either failed to enforce the ALM regimes or just outrightly, ignored the violations.  The complicity of some States in sanctioning big bank money laundering activities is evident. Big banks money laundering activities have been investigated, audited, criticized and subject to legislation; the banks have written procedures to comply. Yet banks like Citibank and the other big ten banks ignored the procedures and laws; the government likewise, ignored the non-compliance.²³  In early 1999, in part because of his connections with high-ranking members of the government (including President Boris Yeltsin), Berezovsky became the focus of an investigation into Kremlin corruption led by Russian prosecutor ,Yuri Skuratov.  In April, Skuratov issued an arrest warrant for Berezovsky.  The warrant accused Berezovsky of using a Swiss-based company to divert hundreds of millions of dollars from the Russian Aeroflot Corporation.  The Kremlin responded to Skuratov’s investigation by releasing a video allegedly showing the prosecutor engaged in illicit conduct with two prostitutes.  Yeltsin used this video to declare Skuratov unfit to perform his official duties.  Commentators in Russia have suggested that Yeltsin’s actions were intended to prevent the exposure of high-level crime and corruption.²⁴

Recommendations and Initiatives

            Recommendation 6 of the FATF 40 Recommendations: Banks should, in relation to politically exposed persons, in addition to performing normal due diligence measures:

a) Have appropriate risk management systems to determine whether the customer is a politically exposed person.

b) Obtain senior management approval for establishing business relationships with such customers.

c) Take reasonable measures to establish the source of wealth and source of funds.

d) Conduct enhanced ongoing monitoring of the business relationship.

e) FATF should clarify the definition of PEPs to ensure that it includes family members and close associates along with holders of “prominent public functions.

f) Jurisdictions should clarify the definition of PEPs to ensure that it includes family members and close associates along with holders of “prominent public functions.”

g) FATF and UNCAC should align the definition of PEPs. This definition should be adopted by national standard setters and other key stakeholders.

h) Laws and regulations should make no distinction between domestic and foreign PEPs.  The standards adopted by FATF and regional and national standard setters should require similar enhanced due diligence for both foreign and domestic PEPs.²⁵

World Bank Recommendations for PEPs Risk Assessment.

• Do your own risk assessment on who is PEP and when they cease to be PE
• Define PEPS within your institution based upon your market.  Look at your own national regulations first, and then look at the regional and international variations. Omit definitions that do not apply to you. For example, if there are no state owned enterprises in your jurisdiction, then do not include a senior official in a state owned enterprise in your risk scoring.
• Ask the customer for detailed information – this is your primary source of KYC.
• Identify the beneficial owner and source of funds – not an easy feat and one worth more discussion.
• Develop your red flags.
• Clarify your decision tree and escalation process – make sure senior management and the board endorse this.
• Pool your corporate information – you may already have the information you need.
• Review your systems regularly – ensure they are providing you with the data required.
• Document your decisions – have a record of how you built your approach to show the regulator why you chose your risk based approach.
• Develop good faith tailoring – tailor your approach to your risk model and close the gaps in the risk. ²⁶

UNCAC

71 Articles:  Its legal architecture includes:

1. Prevention: This embraces wide-ranging measures directed at both the public and private sectors, including the establishment of anti-corruption bodies and enhanced transparency in the financing of elections, citizens’ rights, and the involvement of civil society in raising public awareness of corruption and what can be done about it. It includes mandatory consideration of establishing Financial Intelligence Units (FIUs) responsible for analyzing suspicious financial transaction reports filed by financial institutions.
2. Criminalization: The Convention requires countries to criminalize a wide range of acts, including bribery, embezzlement of public funds, money laundering, and obstruction of justice.  It also recommends that other acts be criminalized, such as trading in influence.
3. International cooperation: UNCAC promotes cooperation between law enforcement agencies, the protection of witnesses, and the removal of bank secrecy as a barrier for prosecution.  It also provides for mutual legal assistance in gathering and transferring evidence for use in court and to extradite offenders. Countries are also required to help trace, freeze, and confiscate the proceeds of corruption.
4. Asset recovery: “The return of assets…is a fundamental principle of this Convention, and States Parties shall afford one another the widest measure of cooperation and assistance in this regard.” ²⁷

Conclusion

            The reason for the focus on PEPs by global policy makers is that corruption has a devastating effect on development outcomes in some of the world’s poorest countries.  An individual corrupt PEP can have a disproportionate impact on a country or region.  This risk is not phantoms but real ones.  It’s the risk of a court case filed by major shareholders against the bank’s management for incompetence and failure to comply with legislation.  It’s the risk of losing clients, losing millions of dollars, paying crippling fines and having all your correspondent banking relationships terminated.  Thus, financial institutions should ensure to carry out KYC and Enhanced Due Diligence on companies, foundations, charities and trusts in the way done with individuals; treat onshore and offshore vehicles in the same manner; having identified a PEP, assess the risk in dealing with this person; consider the country and its government, the person’s position and their potential exposure to corruption and bribery.

            Understand the PEP’s business requirements of an institution; carry out regular reviews of all customers and even more regular reviews of all PEPs; understand that it might be an ‘Exposed Person’ been looked for, and not an actual ‘office holder’, and that KYC on all signatories on all accounts, and especially PEP accounts are carried out.  All PEPs are not corrupt, and all banks are not complicit, but one corrupts PEP and one complicit bank can have a disproportionate impact on a country, and the world for that matter.

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            ¹http://www.worldcompliance.com/en/content/global-pep-list.aspx; http://www.wolfsberg-principles.com/pdf/PEP-FAQ-052008.pdf

            ²http://www.worldcheck.com/media/d/content_whitepaper_reference/Refining_the_PEP_Definition_-_EditionII.pdf

            ³www.oecd.org/dataoecd/49/29/44442206.pdf

            ⁴http://www.diazreus.com/news-3.html

            ⁵See, www.oecd.org/dataoecd/49/29/44442206.pdf

            ⁶http://en.wikipedia.org/wiki/Politically_exposed_person; this is one text, which is ultimately used by the Joint Money Laundering Steering Group when issuing their Guidance Notes.

            ⁷http://en.wikipedia.org/wiki/Politically_exposed_person;  The designation “Politically Exposed Person” 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 of Nigeria. It is believed that several billion dollars were stolen, and that the funds were transferred to bank accounts in the United Kingdom and Switzerland.  In 2001, in an effort to recover the money, the Nigerian Government that succeeded the Abacha Regime lodged complaints with several European agencies, including the Federal Office of Police (FOP) of Switzerland which, in turn, investigated close to sixty Swiss banks.  From this investigation, the concept of “Politically Exposed Person” emerged, and was later included in the 2003 United Nations Convention against Corruption.

            ⁸Bond Law Review, Vol. 17 [2005], Iss. 2, Art. 2;

http://epublications.bond.edu.au/blr/vol17/iss2/2

            ⁹http://www.fincen.gov/statutes_regs/bsa/

            ¹⁰ See, http://www.fincen.gov/

            ¹¹http://siteresources.worldbank.org/NEWS/Resources/Star-rep-full.pdf;See, Stolen Asset Recovery (StAR) Initiative; For more information on the StAR Initiative see www.worldbank.org/star.

            ¹²http://www1.worldbank.org/finance/star_site/documents/PEPs/part_04.pdf

            ¹³http://www.un.org/law/cod/finterr.htm; 22 Berkeley J. Int’l L. 123, *137

            ¹⁴http://www.moorestephens.com/eu_money_laundering_directive.aspx

            ¹⁵http://www1.worldbank.org/finance/star_site/documents/PEPs/part_04.pdf

            ¹⁶See EU 3rd Directive/ Rec.6 (FATF)

            ¹⁷Politically Exposed Persons: Preventive Measures for the Banking Sector.

            ¹⁸Ibid.

            ¹⁹http://www.fsa.gov.uk/library/other_publications/miscellaneous/2011/rbs.shtml http://www.fsa.gov.uk/library/other_publications/miscellaneous/2011/rbs.shtml

            ²⁰http://www.globalresearch.ca/articles/PET108A

            ²¹http://www.worldcompliance.com/en/content/global-pep-list.aspx

            ²²Available at www.worldbank.org/finance/

            ²³For example, in the case of Raul Salinas, PB personnel at Citibank helped Salinas transfer $90 to $100 million out of Mexico in a manner that effectively disguised the funds’ sources and destination thus breaking the funds’ paper trail. In routine fashion, Citibank set up a dummy offshore corporation, provided Salinas with a secret code name, provided an alias for a third party intermediary who deposited the money in a Citibank account in Mexico and transferred the money in a concentration account to New York where it was then moved to Switzerland and London. The PICs are designed by the big banks for the purpose of holding and hiding a person’s assets. The nominal officers, trustees and shareholder of these shell corporations are themselves shell corporations controlled by the PB. The PIC then becomes the holder of the various bank and investment accounts and the ownership of the private bank clients is buried in the records of so-called jurisdiction such as the Cayman Islands. Private bankers of the big banks like Citibank keep pre-packaged PICs on the shelf awaiting activation when a private bank client wants one. The system works like Russian Matryoshka dolls, shells within shells within shells, which in the end can be impenetrable to a legal process.

For further information, see, http://www.globalresearch.ca/articles/PET108A

            ²⁴8 Pac. Rim L. & Pol’y J. 617, *617

            ²⁵ http://siteresources.worldbank.org/news/resources/star-rep-full.pdf

            ²⁶Ibid.

            ²⁷Ibid.