Understanding the risks associated with Politically Exposed Persons (PEPs) is essential to a financial institution’s due diligence efforts. Any connections to government officials – whether personal or professional – can create the appearance of impropriety. By virtue of their position and influence, PEPs present a higher risk for potential involvement in bribery and corruption.
What exactly is a PEP? There are a variety of definitions, but many experts agree on the Financial Action Task Force (FATF) definition of a PEP:
“A Politically Exposed Person is defined as an individual who has been entrusted with prominent public functions in foreign or domestic countries, such as Heads of State, senior government officials, judicial or military officials, senior executives of state-owned corporations, or important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves.”
Bribery, money laundering, and corruption are an ongoing global problem, and significant dollars continue to escape notice due to nefarious schemes perpetrated by corrupt individuals. In fact, estimates of bribery around the world – in both developed and developing countries – hover around $1 trillion, according to Daniel Kaufmann, president of the Natural Resource Governance Institute, a nonprofit organization that provides policy advice, advocacy, and research.
The challenge for financial institutions (FIs) is that identifying PEPs is complicated by PEPs’ use of methods designed to hide beneficial ownership. Those involved in bribery, money laundering, and facilitation payments are not going to be transparent about it. According to the FATF, past cases have demonstrated that corrupt PEPs often use legal entities to obscure their identity in order to distance themselves from transactions and to access the financial system undetected. Third-party intermediaries, such as lawyers, real estate and escrow agents, lobbyists, and bankers, have accessed the financial system on behalf of PEPs to conceal the true controller of the assets.
There are legal and reputational risks FIs can incur due to noncompliance, including fines and damage to the brand, so recognizing a PEP and the risks entailed – beyond the obvious ethical concerns – will ultimately protect businesses.
Risks to Businesses Associated With Politically Exposed Persons
- Legal Risk. Legal risks in the form of judgments, defense costs, and fines and penalties can hobble businesses. Any association with third parties, such as family members and close associates of the PEP, as well as terrorists and organized crime members, leaves companies vulnerable and exposed. While most PEPs are not corrupt, they represent a more significant money-laundering risk since they are in a position to abuse their power to accept or extort bribes or misuse state assets and then use financial systems to launder any proceeds.
- Reputational Risk. Association with PEPs who have perpetrated bribery and money laundering schemes will damage a business’s reputation and brand equity. That can in turn undermine confidence in the banks’ integrity, and it can potentially lead to loss of business. A business’s relationship with a PEP may also raise red flags among suppliers or customers performing their own due diligence.
PEP Risk Mitigation
Businesses should assess PEP risk both from a contextual perspective that accounts for specific information and circumstances and on an individual, case-by-case basis to determine exposure and the degree of due diligence and risk mitigation that should be conducted.
Financial institutions can minimize risk from corrupt, third-party business partners, suppliers and others and protect their reputation by using a systematic approach to third-party due diligence. Dun & Bradstreet provides comprehensive insight into third parties to ensure complete compliance with Anti-Bribery Anti-Corruption (ABAC) laws, Anti-Money Laundering (AML) laws, sanctions, and other global regulations. Its beneficial ownership capability includes third-party verification, automation, and ongoing monitoring of third-party entities and a comprehensive audit trail to meet regulatory compliance requirements.
D&B Beneficial Ownership also provides the linkage data needed – delivered through APIs, batch, or online – for insights into corporate entities and individuals. That capability gives FIs a transparent view of exactly who they’re doing business with, and it includes a visualization tool that displays company hierarchy and complex beneficial ownership connections.