Financial Crime Risks: Politically Exposed Persons

by Kerry Grass
TINZ Member with Delegated Authority

The Financial Action Task Force (FATF) sets international principles and recommendations for national laws linked to Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).  

Under one of its 40 recommendations, the FATF expects AML/CFT laws to require financial institutions and other professional services to give special attention to business relationships with Politically Exposed Persons (PEPs). The broad definition of a PEP is an individual who is or has been entrusted with a prominent public function. This includes heads of government, senior politicians, senior judicial or military officials, senior executives of state-owned corporations and important political party officials. As those engaging in money laundering often seek to disguise their beneficial ownership, the FATF definition of a PEP includes a PEP’s family members and close associates.

What is the purpose of the PEP principle?

The mandatory rule for enhanced due diligence is to confirm that the PEP’s source of wealth and/or source of funds have legitimate origins.  

The requirement to conduct enhanced due diligence on relationships with foreign PEPs recognises that political corruption has a particularly devastating effect on development outcomes in some of the world’s poorest countries.  For these countries, a corrupt PEP can have a disproportionate impact on a country or region.

The domestic PEP rule recognises people in positions to influence government policy, decision making and spending are more susceptible to being targeted for bribery and corruption.

What are New Zealand’s AML/CFT laws concerning PEPs?

When FATF first introduced the PEP principle in 2003, the definition of a PEP was limited to “foreign PEPs”. It was not until 2012, that the FATF extended the PEP principle to include risks arising from ‘domestic PEPs’ and ‘persons of prominent positions in international corporations’.  

Though New Zealand’s current AML/CFT law captures foreign PEPs, the risks relating to domestic PEPs and heads of international corporations are not captured. Omitting to include the full extent of international standards lessens New Zealand’s ability to detect domestic political corruption. Nevertheless, as New Zealand’s AML/CFT laws are risk-based, businesses can voluntarily incorporate AML/CFT policies to capture financial crime risks arising from domestic PEPs and persons holding prominent positions in international corporations.

How to determine ‘real’ PEP risks?

Treating all public officials as having the same level of financial crime risk fails to recognise the specific and contextual risks of public official corruption.  AML/CFT policies should be able to distinguish the individual characteristics of a PEP that increase risks.

Real risks include:

  • A PEP from a country that has a reputation for weak law enforcement to prevent bribery and corruption;
  • A PEP with strong influence in directing government policy or managing public assets or funds;  
  • Government sectors where PEPs have higher ML/FT risk includesome text
    • (a) the defence industry
    • (b) the banking and finance sector
    • (c) government procurement
    • (d) public infrastructure
    • (e) health
    • (f)mining
    • (g) privatisation
  • Individuals holding prominent positions in reputable international corporations such as CEOs of listed companies.
  • Businesses with increased exposure to facilitating illegitimate PEP funds include those that cater tosome text
    • (a) high net-worth foreign clients
    • (b) trust and company service providers
    • (c) facilitation of international transfers
    • (d) dealing in precious metals and precious stones, or other luxurious goods
    • (e) dealing in luxurious transport vehicles such as cars, sports cars, ships, helicopters and planes.

Political corruption can affect a country’s economic performance by diverting public funds away from essential services including education, health, housing and law enforcement.  For these reasons, it is in the interest of all businesses to play their part in detecting and preventing domestic or international political corruption.

Kerry Grass

Kerry holds an International Diploma in Anti-Money Laundering and has 20+ years’ experience working in financial crime compliance, specialising in anti-money laundering and countering financing of terrorism.

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