There are different factors that influence the level of risk when it comes to money-laundering. This may come from customers, regions, products, or financial instrument risk. Understanding these risks, as well as the contributing factors, allows the reporting authorities to guard against corruption-related money laundering more efficiently.
Politically Exposed People (PEPs) are a risk when it comes to money laundering because of their social status. This status means that companies see them as a higher risk customer because of their opportunities to gain assets through unlawful means being greater than usual. PEPs may use their position to get involved with corrupt practices.
What are PEPs?
The Financial Action Task Force stress that different types of PEP are regarded as presenting different levels of risk depending on their roles and what that entails. They define a PEP as:
- A senior official in the executive/legislative/administrative/military/judicial branch of government (they can be a current or former executive)
- A senior official in a major political party
- A senior executive for a government owned commercial enterprise
It isn't just if you hold any of these positions yourself, if you are an immediate family member of the PEP or you're publicly known as being linked with the PEP, then you are considered to be a PEP too.
The Risks that come from PEPs
All PEPs have the opportunity to engage in corrupt practices to a certain extent, but those that have substantial authority over state assets and funds, policies and operations, and any other public expenditures can have additional opportunities. Their vulnerability to corruption varies depending on their level of power. They are in a unique position of influence, something that some choose to take advantage of.
Unfortunately for the innocent PEPs, the term "politically exposed person" emerged in the late 1990s after the Abacha affair, giving PEPs a bad reputation. This event was a money laundering scandal in Nigeria where Sani Abacha, the national military director, transferred £5 billion of national funds into forging bank accounts for his eventual own personal use. His position in power meant that he gained the unauthorised access to large sums of money without anyone suspecting anything before it was too late. Although some of the money was recovered, most was never returned. This case pushed for global efforts to prevent the abuse of the financial system by political figures.
The sources for the funds that a PEP may try to launder are:
- Illegal kickbacks (a form of negotiated bribery)
- Embezzlement (theft of funds placed in trusts or belonging to an employer)
- Outright theft of assets or funds from political parties and unions
- Tax fraud
Dealing with PEPs:
If you are dealing with a PEP, businesses must apply additional anti-money laundering measures to the business relationship to make sure that they don't get into any problematic situations. They are the ones that are responsible for conducting due diligence checks specifically tailored to the PEP.
Customer Due Diligence
- Customer due diligence checks mean that you are carrying out a background check on who you are potentially going to do business with. An added security that means you are reducing the chances of problems occurring in the future due to dodgy customers.
- Failing to do these checks could allow launderers to use your business through a PEP figure, and as a result you become involved in the crime without even realising it.
- The checks have a win-win result because they'll either give you peace of mind before getting involved with customers, in this case customers of impressive status, or it keeps you out of the way of money laundering.
Internal Controls and Monitoring
- A business must have efficient internal controls and monitoring systems to alert anyone that needs to know when criminals are attempting to use the company for laundering, they can take the right steps to prevent the threat from progressing to an incident.
These controls can include:
- Appointing a nominated officer, this is the figure within the business that employees can go to with their suspicions
- Appointing a compliance officer, they can create a shared understanding within larger workforces
- Making sure senior managers know their responsibilities and importance in the process of AML by providing them with regular information and updates on the risks in money laundering on the business
- Providing relevant employee training, this means that the business has a strong front line of defence to deal with threats that come their way
- Regularly updating AML policies, controls and procedures