People with different social classes are potentially involved in Money Laundering. Somehow, they manage to outwit the Anti-Money Laundering system. The risk that influential Money Launderers pose to society is serious. Seemingly, there is a high chance of illicit activity involved at the back end for such people. Politicians in almost every country have shown corruption, fraud, malpractice and serious crimes. Actually, not all but a few black sheep pollute the system. Usually, a Politically Exposed Person is a part of such a group that may be involved in Money-Laundering. Several cases have been reported where the PEPs have misused the Foreign Banking service for Money Laundering. This article sheds light on the issue of how PEPs use the banking system for Money Laundering. Also, we shall discuss how banks can prevent ML in the case of PEPs.
What is a Politically Exposed Person (PEP)?
A person with a prominent position and who is influential in society is known as the Politically Exposed Person or PEP. As they have a sensitive role, they are exposed to illicit activities such as Money-Laundering and corruption.
5 Types of PEPs
1. Domestic PEPs
The Head of State of Government Departments, Provincial Ministers or Senior Executives and the Financial Regulators. Such PEPs are in a prominent position publicly or domestically.
2. Foreign PEPs
A PEP representing his country is appointed in a foreign country. Any of the related categories.
3. International PEPs
Prominently, the board members of an organization operating internationally and the senior management.
4. Friends and Family
Direct and indirect relatives of the PEP. They can be friends, family members and other close acquaintances
5. Close associates
Social or Professional peers of the PEP. Loyal subordinate employees and other close members come under this category.
PEPs and the Banks
Now, Banks identify PEPs as customers who can pose a threat of Terrorism Funding or Money Laundering at different levels. By the status of PEPs, the banks assign the risk levels to the PEPs and then deal accordingly. PEPs are considered sensitive and closely monitored as they are subjected to various regulations of AML. Hence, Banks closely check their transactions, funds and sources of finance. Similarly, they are asked to submit the reports of their details and update their KYC regularly.
The PEP, The Bank and the Money Laundering
Overall, Money laundering is a good activity for the criminally involved and Politically Exposed Person. Especially in banks, the PEPs use their services for all three steps of Money laundering to cover up their tracks. Since the banking itself is legal and highly regulated, the PEPs need strong influence or other way-outs for Money laundering through banks. Mostly, PEPs use banking services under the shell companies of an acquainted person's name. The following are some points that need to be understood in this course:
- PEPs can use foreign banks for the placement and layering
- They can use the banks for the integration stage of money laundering
- They can use the banks to deposit illicit money through influence, bribery and other illegal practices.
- They can risk others through corruption, fraud and other serious political crimes.
How do Banks prevent the PEPs from ML and TF?
Firstly, the Bank Secrecy Act (BSA) and the AML both regulate the Banks to act in this course. But these regulations do not define the PEP. Mostly, the PEP is confused with an SFPF, which is a type of PEP. Secondly, the customer's risk profile is used for Risk Mitigation where eKYC is needed. The basic BSA/AML requirements entail customer identification, verification and customer due diligence for banks. Moreover, the PEPs are also liable to comply with these requirements. The risk management approach defines the guidelines on how to prevent Fincrime in banks. However, there is no specific section that forbids the PEPs from using banking services. Also, they are not sanctioned by the banks as the Money Laundering charges are not proven on them.
Politically Exposed Person: cases of Money Laundering
Although there have been several Bank related Money Laundering cases reported in the recent past, they need to expose a PEP due to a lack of deep investigation. A few of those examples are given below:
Prominently, Danske Bank's Estonia Branch was fined $234 million in 2018 on the charges of laundering billions of dollars for the Russian and Soviet States. Recently, Danske Bank pleaded guilty in December 2022.
Similarly, Drug Cartels from Mexico were reportedly using the HSBC services to launder money for them. HSBC was fined $1.9 billion.
In 2012 Standard Chartered was found guilty of money laundering and was fined $ 1 billion. It was laundering money for Iranian banks and violated the US sanctions.
Now, these cases do not expose any PEP but still show the potential of the Banking system for being exposed to ML threats. It must be noted that the political status, reputation and everything is at stake for a PEP if he is charged with FinCrime like money laundering.
How can a Politically Exposed Person avoid Money Laundering?
Firstly, a Politically Exposed Person (PEP) must stay compliant at all costs. BSA/AML regulations are not directly being applied to a PEP, but still, the KYC requires them to update their information. So they can get their KYC (Know Your Customer) done and remain under the radar. Hence, by being ethical, they can prevent Money Laundering. Secondly, they can keep the regulatory authorities updated in case someone tries to exploit their power. This exploitation can be in terms of bribes and other offers. Here a PEP's moral training counts a lot. Also, being a dutiful citizen is necessary, which comes with character building.
A Politically Exposed Person might not be a criminal in every case. But the position and power entrusted to him can be misused. Therefore, the authorities and bodies of KYC, BSA and AML always keep a close watch on them. Likewise, PEPs should always stay compliant and honest about their earnings and financial status to the authorities. So they must contribute their part in combating Money Laundering on every forum.
A person becomes a PEP if the community or government appoints them in a high-profile position. This appointment is within the last 12 months.
The main risks associated with a PEP are:
- Misuse of authority and power.
- FinCrime such as Money Laundering & bribery.
PEP can be classified into three main categories based on risk:
- Medium or low-risk PEPs
- High-Risk PEPs
- Monitoring Transaction of High-Risk PEPs