Some few salient points for further debate, discussion and dialogue. In my book, Financial Crime Risk Management and Compliance (2016) , I have provided some simpler working definitions for everyone to be on the same page.
Money Laundering (ML) is the process by which criminals attempt to conceal or disguise the ownership and origin of the proceeds of criminal activity so that the funds appear to be derived from legal sources. Money Laundering (ML) process therefore does not make the funds legitimate or become clean, it just makes them appear to be legitimate or clean. It still remains dirty money.
Customer Due Diligence (CDD) is a process where Financial Institutions such as Banks, Insurance Companies, Securities, FinTech companies and Broking firms collect, maintain, periodically review and update information and data about their individual clients, corporate, commercial and Institutional customers. Customer Due Diligence (CDD) process is a Legal and Regulatory requirement to allow an informed choice to be made whether to onboard a new customer, continue with an existing customer relationship, or provide a new product or service or in worst case scenario, deny/reject the service and exit the relationship and close the Client’s or Bank account. It is also one of the most powerful and available tools at the banks disposal to prevent and deter financial criminals and terrorist financiers from using the banks as conduits to conduct their illegal activities.
So that is what ‘Customer Due Diligence’ (CDD) means – it’s the information the Banks must have to get on their clients before they open accounts for them and the way in which Banks verify that the information is true. It’s worth running through the process at a high level.
In essence, at account opening the Banks must first and they actually do screen all potential new customers against the ‘Watch list’ which ALL Banks across Globe maintain. Those Databases and Watch lists contain listing of persons and entities who are banned by the UN and various other authorities of which the Banks take note, from receiving financial services. The level of AML risk in the relationship is assessed according to the criteria of country or geographic risk, customer risk (including business type risk) and product risk.
Thereafter, Banks requirements are that customers are assigned into either the Standard Due Diligence (SDD) or Enhanced Due Diligence (EDD) categories, with appropriate action on information and verification then taken in accordance with the detailed business (Corporate, Institutional or Retail Customers CDD procedures). Some Banks have Lower Levels of Due Diligence depending on the Customers.
As Regulated Institutions by the Securities and Exchange Commission, FIC, Central Banks, Commercial, Retail, Community and Merchant Banks are expected to have clearly documented AML, KYC and CDD Policies and Procedures.
Now, regarding the question pertaining to Politically Exposed Persons (PEPs). This is a category of high risk customer which receives particular attention amongst the various international standards and guidelines (FATF 40, BIS, Wolfsburg, EU Third Directive, USA Patriot Act) is that of Politically Exposed Persons (PEP’s).
A PEP is defined by many Financial Institutions and Regulators as “…an individual who is or has, at any time , been entrusted with prominent public functions and an immediate family member, or a known close associate, of such a person.”
From the definition above, you will agree that PEP is not equal to Politicians, it extends to those appointed to higher Offices such as Commanders of the various Forces. PEP covers spouses, Children, friends and business associates of high ranked Citizens in whose names, a deal or bribe can be bequeathed. Lol!
Why are PEPs considered higher risk from an anti-money laundering perspective? The reasons stem mostly from the high profile which such individuals hold. They tend to attract a great deal of interest from business people, some of whom may have criminal connections or may even be criminals themselves. They often have substantial decision making powers (or, in democratic states, the prospect of obtaining these powers through the political process) including the power to allocate vast state funds to particular companies through the award of government contracts, and this therefore makes them vulnerable to bribery and corruption.
In Zambia a former Minister in Zambia once disclosed to the Nation on TV that the money he used to make out of the Copper Mines, was enough for him to fly to London, drink tea and come go back to Zambia in the evening – paraphrased). One former Defense Minister then during some altercations with Secretary General of a Zambian Political Party told the nation that he did join Politics to enhance his businesses and make money. One old , but now late politician in Zambia confessed that very few join politics to serve the people, they join in order to eat. He called the trend as the “Politics of the Belly”. The list goes on.
PEPs, in the worst instances, they may even themselves be of a criminal disposition where upon they will be well placed to misappropriate public funds. Finally, of course, by virtue of their positions they will likely be in possession of sensitive non public information which can allow them to benefit in a criminal manner at the expense of others (e.g. insider trading).
And because PEP’s are aware of the scrutiny which their activities are likely to be subject to, their use of family members, associates and, in some cases, ostensibly unknown “fronts” and Chola boys/smurfs as conduits through which to conduct their transactions and escape scrutiny, is often widespread and , of course, open to abuse, should temptation get the better of them.
FATF Recommendation number 6 and other relevant standards state that financial institutions should, in relation to politically exposed persons, and in addition to performing normal due diligence measures must have appropriate risk management systems to determine whether the customer is a politically exposed person.
The Banks must Obtain senior management approval for establishing business relationships with such customers, take reasonable measures to establish the source of wealth (SOW) and source of funds (SOF); and Conduct enhanced on-going monitoring of the business relationship.
On this very website and other social media platforms, I have shared and will continue to share some practical examples of actual Court Cases of PEPs arrested, prosecuted and convicted for bribery, corruption and money laundering cases. I deliberately took examples from the Continent of Asia and shared recently. We have several in Africa and Latin America and will share those together with Europe and North America very soon.