AT A RECENT ANTI-MONEY LAUNDERING RISK CONFERENCE, a heated discussion broke out over whether it would be okay to employ a close relative of a politically exposed person (PEP) as an anti-money laundering compliance officer.
Robust arguments revolved around undue influence on the one hand and discrimination and denial of human rights on the other. It represented the kind of conundrum compliance people face when dealing with PEPs.
In a small country like Barbados, a strict reliance on the interpretation of what constitutes a PEP could make almost all of us PEPs. In anti-money laundering regulation, it is recognised that PEPs operate in an environment rich in opportunities for unprincipled persons to perpetrate crime and corruption; hence the more stringent protocols for dealing with PEPs.
A PEP is defined by the Financial Action Task Force (FATF) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing. This has been confirmed by analysis and case studies.
The potential risks associated with PEPs justify the application of additional anti-money laundering/counter terrorist financing preventive measures with respect to business relationships with PEPs. Regulators have also created an extended family for PEPs by including family members and close associates. Close associates including known sexual partners outside the family unit (for example, girlfriends, boyfriends, and mistresses) and business partners who share beneficial ownership of legal entities with the PEP. The wide circle is emblematic of the challenges financial institutions face but also illustrates the extent to which regulators are going to deny corrupt officials a safe haven for tainted assets.
It is important to note that regulators are at pains to point out that the regulations should not be interpreted as stigmatising PEPs as being involved in criminal activity. Refusing a business relationship with a PEP based on the determination that the client is a PEP is contrary to the letter and spirit of FATF guidance. Someone who is classified as a PEP may continue to be so regarded even after leaving office. Indeed, it is a widely held belief that “once a PEP always a PEP”. The extent to which a person continues to be so regarded should be based on a risk based approach, having regard to the influence that the individual could still exercise; the seniority of the position that the individual held as a PEP; or whether the individual’s previous and current functions are linked in any way.
With regard to PEPs, the international compliance regulatory regime provides an important backstop for small island states. We have seen how the definition of PEPs is wide ranging to the extent that a wide cross section of small island populations could fall within the ambit of that definition. As a result, merely investigating a PEP becomes a matter of grave political consequence and where these states may prefer to hesitate, an international obligation and action by an external force may provide a way out.
The recent FIFA arrests are a case in point. It is arguable whether the two nationals of two Caribbean countries would ever have faced sanctions in their own countries without the intervention of the United States and Switzerland authorities.
Louis Parris is a certified compliance professional, consultant and publisher in the Caribbean Banking Intelligence Anti-Money Launder Compliance Newsletter. This series, entitled Nowhere To Hide, concludes next week. Email: louisp@caribsurf.com
