No company wants to be implicated in a client’s or partner’s illicit activity, whether that’s money laundering, bribery, or any other form of financial crime. Whether you’re an accountant in a finance department or you work in an accounting firm, it’s vital to stay up-to-date on anti-money laundering (AML) law and know-your-customer (KYC) regulations in the jurisdictions in which you operate.
One important way to mitigate a company’s exposure to risk is to ensure proper management of the accounts and client relationships of politically exposed persons (PEPs). If you are responsible for AML policy or operation for your company, you may well already be required to take account of PEPs under the laws or regulations in your jurisdiction.
The Financial Action Task Force (FATF), an intergovernmental organisation founded in 1989 by G-7 member states to combat money laundering, defines PEPs as “an individual who is or has been entrusted with a prominent public function”. Think of heads of state, high-level ministers, military officials, or senior executives of state-owned corporations. In addition to the PEP, the accounts of “close associates” — which include people in the PEP’s inner circle, such as family members, close friends, and business and romantic partners — should also be carefully assessed and monitored.
“The definition is a technical one, but it’s supposed to capture that by virtue of their position, a person is able to make money through corruption,” explained Tom Neylan, a senior policy analyst at FATF. “And if you’re an accounting firm, working with PEPs carries the risk that you are dealing with corrupt officials who have stolen the money they want you to manage, which is why there’s additional due diligence required when dealing with PEPs.”
While many PEPs are honest and make excellent clients or partners, the potential abuse of power inherent to their position automatically puts PEPs into a higher-risk category that warrants additional screening. That’s why after identifying a PEP, it’s important for accounting firms and finance departments to do a full risk assessment to protect themselves from the various risks that PEPs can present.
“There’s the legal risk that you might be aiding and abetting the crime, the risk of failing in your obligations to report to regulators, and also the danger to your reputation,” said Neylan. “Making sure that employees know how to identify PEPs and potential red flags can mitigate those risks.”
Here are some tips for identifying risks associated with PEPs and what management accountants can do when engaging with PEPs.
A lack of transparency. If the PEP is unwilling to be transparent about the content of their business or how they generated their wealth, it’s a red flag. A PEP who appears to go out of their way to avoid conducting business in their own name — for example, by using shell companies, multiple intermediaries, offshore accounts, or other obscure corporate vehicles — warrants further scrutiny, as such behaviours are indicative of potential money laundering.
“Generally speaking, the more complex and opaque the structure is in terms of control and ownership, the redder the flag,” said Christopher Robinson, a partner who runs the London financial disputes and investigations practice at the global law firm Freshfields Bruckhaus Deringer. “A complex structure doesn’t mean that your client is a criminal, but you have to ask, ‘Why is the corporate entity structured that way?’ And if your client is reluctant to give you an explanation, you need to be more cautious about doing business.”
Suspicious behaviour. Examples of evasive behaviour include being reluctant to explain their transactions or how the parties of a given transaction are connected or providing false or counterfeited documentation. Also, if a PEP receives large deposits that are not commensurate to their salary or personal wealth and that they cannot explain, it’s a red flag.
“If you have a client who is the grandson of a dictator and they are being used as a channel for money laundering, you might see large sums of money coming on a regular basis that are being spent on real estate in London, but are inexplicable based on their job or day-to-day economic activity,” said Neylan. “That sort of unexplainable payment is definitely a red flag.”
Bribery risk position. PEPs who exert direct authority over state assets, funds, policies, and operations, or who are in a position to grant licences or permits are at an elevated risk for bribery, as compared to PEPs whose roles are more legislative in nature. So are PEPs who downplay the importance of their public function, or whose connection to power is largely informal in nature. For example, someone known as the president’s “right-hand man” or chief of staff warrants additional assessment. The risk may be more difficult to identify in countries where bribery and corruption are an accepted part of the financial system.
“Those who have informal power are at a higher risk than people who are in formal positions, because they aren’t under as much scrutiny and feel they are more protected,” said Robinson. “They can be the individuals directly doing the grubby work so the officials don’t have to get their hands dirty.”
Power over a high-risk industry. PEPs in positions of power over industries known to be vulnerable to corruption — for example, trade, defence, mining and extraction, government procurement, construction and large-scale infrastructure, health, development, privatisation, or banking and finance — should be considered to be high-risk clients or partners. This is particularly true if, as a routine part of their job, they are in a position to grant licences and permits, or to grant access to natural resources or government procurement.
“Industries that are reliant on government licences or involvement are generally at a higher risk for bribery,” said Robinson. “So if you have a person who is in a position to give people something they need to do business, like a licence or an approval, that they can’t get in any other way, you may be dealing with a higher risk.”
Countries that rank high on bribery indices. While geography alone is not a red flag, PEPs operating in countries with economies reliant on a relatively small number of exports or a single product are generally considered higher risk than PEPs in countries with more balanced economies, according to Robinson.
“As with any red flag, this one red flag on its own is unlikely to tip the scales,” said Robinson. “It’s when you assess them as a whole that red flags inform your risk profiling.”
Additional guidelines and tools for how to identify PEPs, red flags, and recommended risk mitigation strategies can be found in the FATF Guidance for a Risk-Based Approach for the Accounting Profession, which was updated earlier this year.
— Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.