The Pandora Papers provide an eye-opening look at the tax haven files of the rich and the powerful. This cache of nearly 12 million documents has unexpectedly revealed the global scope of the hidden offshore accounts of some 35 current and former world leaders, as well as more than 100 billionaires, business leaders, and celebrities. It’s essentially brought to light the very secret, often unethical, and flat-out corrupt dealings of many in affluent and elite circles.
These cases, in particular, highlight the importance of a financial institution’s access to information on politically exposed persons (PEPs) as a critical component of anti-money laundering (AML) initiatives. According to the Bank Secrecy Act, banks must ‘take all reasonable steps to ensure that they do not knowingly or unwittingly assist in hiding or moving the proceeds of corruption by senior foreign political figures, their families, and their associates.” These initiatives reduce the risk of hefty fines and more long-term brand damage – a likely result of the negative associations with a prominent customer connected to fraudulent activities.
Yet there is no universal definition of a politically exposed person, making a bank’s due diligence a lot more challenging. The Financial Action Taskforce (FATF), a global money laundering and terrorist financing watchdog, defines these individuals as someone ‘entrusted with a prominent public function.’ Heads of state, ambassadors, presidential advisors and other senior civil servants, state politicians, board members of state-owned companies and central banks – a long list that demonstrates the broad slate of politically-connected account holders.
Identifying PEPs alone is insufficient. Banks and financial services organizations must also screen data for their relatives or close associates (RCAs), possibly also linked to fraudulent behavior.
A best practice approach includes six critical steps:
Seek global sources of trusted data
Use an automated tool to continually screen for PEPs and RCAs, collecting and synthesizing data from the broadest range of trusted global sources. Ideally, this includes resources like government data and credit agencies, platforms which are continually scanning for updated information. Automated solutions significantly streamline PEP screening and ensure the timeliest updates on customer data and status.
Scan the news for adverse media insight
Supplement the standard PEP review process with checks on adverse media reports. This approach considers global news media, providing a powerful mechanism for financial services organizations to keep informed of any breaking information on the status of an existing PEP customer or prospect. Source key names, for example, those featured in the Pandora Papers and general news on sanctioned individuals and those with legal actions pending.
Reduce costs with a risk-based approach
Foreign PEPs generate greater risk than domestic individuals. It is generally more complex for a financial institution to fully understand their background and connections, and corruption may be more extreme in some global regions than in others. Sadly, those in the most senior roles often have a greater propensity for fraud. To manage costs and long-term anti-fraud budgets, enhanced due diligence measures must focus on high-ranking PEPs and their RCAs in regions recognized for their history of corruption.
In fact, U.S. banking institutions are not required to accommodate domestic PEP screening. Yet, it is advantageous that financial services organizations – particularly those headquartered in fraud hotspots – consider the global nature of their customers’ business and determine an appropriate level of domestic screening to mitigate overall risk.
Maintain consistent PEP operations
Monitoring risk posed by any specific PEP is a constant process. Financial organizations must maintain their investments in training compliance staff charged with risk assessment and monitoring the organization’s relationship with PEP customers. Adequate and ongoing training– focused on the most current internal processes, risk categories, and relevant regulations – is crucial to consistent PEP operations that meet regulatory guidelines.
Once a PEP, always a PEP
Political connections don’t necessarily disappear when a PEP retires or changes professional roles. Yet these individuals may or may not pose the same level of risk in a new position. Perhaps they can be re-categorized as a lower risk, with alert thresholds moved to match. Evaluate this based on factors such as their time in the post, extent, and level of political connections, their ongoing degree of influence, and the corruption index of their region of operations.
Automate PEP operations as a component of overall anti-money laundering initiatives
Automated PEP review is an ideal component of comprehensive anti-money laundering operations. Electronic identity verification (eIDV) tools work in real-time, cross-checking information provided by prospective customers against datasets proven to be current, verified, and reputable. Processes such as onboarding can be accelerated and improved, with document scanning based on optical character recognition and machine readable zone technologies. With these tools, banks are empowered with instant insight into the authenticity of documents presented.
PEP has risen in importance, with headlines such as the release of the Pandora Papers drawing attention to the murky tax schemes of the wealthy and connected. Banks are on the front lines and must avoid being party to the secret deals and hidden assets that have been laid bare by this leaked information. A commitment to best practices in PEP monitoring is just good business, including automated processes and enhanced PEP operations that tap into smart, current global data.