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Fighting Corruption: The Politically Exposed Persons Factor

SUBMITTED BY LARISSA GRAY ON MON, 04/02/2012

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Last month, the Financial Action Task Force on money laundering (FATF), revised its 40+9
Recommendations on the fight against money laundering and the financing of terrorism (AML/CFT)
with a new set of 40 Recommendations.

These revised recommendations introduce

some significant changes, some of them critical for World Bank client countries. One of the main
challenges going forward will be for those stakeholders tasked to implement them, whether policy
makers and legislative drafters, government agencies (supervisory authorities, financial
intelligence units, law enforcement), banks and other financial institutions, and what are referred to
as designated non-financial business service providers (DNFBPs) (e.g, casinos, real estate agencies,
dealers in precious metals/stones, lawyers and accountants, and trust and company service
providers).

Take for example the new Recommendation 12 on politically exposed persons (PEPs), individuals
who are or have been entrusted with prominent public functions, for example Heads of State or of
government, senior politicians, senior government, judicial or military officials, senior executives of
state owned corporations, important political party officials. This recommendation does not imply
that all senior public officials are corrupt. Established to target grand corruption and to recognize
that these senior officials present specific risks, it now requires financial institutions to adopt risk
mitigation measures for both domestic and foreign PEPs previously these measures had only
applied to foreign PEPs. Senior officials from international organizations are also covered under the
new standard. These risk mitigation measures also apply to family members and close associates
of such PEPs.
This addition of domestic PEPs was supported by the Bank through its study on Politically Exposed
Persons, one of the publications of the Stolen Asset Recovery Initiative (StAR) not least because
this is what is required by the United Nations Convention against Corruption. The enhanced due
diligence on PEPs has raised significant implementation issues since the requirement was
introduced by FATF in 2003. The recent reports by the Financial Services Authority (FSA) of the
United Kingdom and the Swiss Financial Market Supervisory Authorityand fines imposed by the FSA
against Coutts Bank are evidence of how much more needs to be done, and of how lack of strict
implementation facilitates the laundering of corrupt money. While some banks are already applying
additional measures for both domestic and foreign, this new recommendation raises important
implementation challenges for the others. How to identify who is the PEP? How to gather the
information to conduct an informed risk assessment and adopt proportionate risk mitigation
measures? Are there additional tools that might be more helpful for detecting and monitoring
domestic PEPs?Fortunately there are tools available.
Just this year the Financial Market Integrity Unit released a paper on how asset disclosures can be
used to identify PEPs. Like the PEPs requirements, disclosure legislation is another means for
combating corruption that generally requires a certain range of public officials (MPs, heads of
state, cabinet members, etc.) to declare their financial and business interests. These systems have
been found to be widespread across different countries and regions, and their prevalence is
growing as the importance of fighting corruption and promoting transparency also increases.
Currently, there are about 137 countries globally that implement disclosure regulations.
The paper explores how asset disclosure information can be used by financial institutions or
government agencies (e.g., financial intelligence units) to identify PEPs. It can provide guidance on
who is a PEP, the types of positions that would be filled by prominent public officials, distinguish
false positives, and provide information on family members.
To be useful for end-users, an asset disclosure system (or the information a system holds) needs to
be easily accessible (on-line), contain relevant information, and be user-friendly. The paper
provides some recommendations in this regard, including practical recommendations on
information that needs to be held and ideas for increasing accessibility and user-friendliness, as
well as suggestions for institutional arrangements.
Both effective asset disclosure systems and implementation of PEPs requirements form an
important part of a jurisdictions corruption prevention regime. The two have operated separately
to date; however, there are potential synergies that could foster corruption prevention efforts and
ultimately produce better results than under a silo-approach. By sharing asset disclosure
information and making it accessible to financial institutions and financial intelligence units, asset
disclosure regimes can help with PEPs identification and ultimately help to fulfill their own mandate
of preventing corruption essentially a win-win scenario for both sides.
The reality is that corruption is devastating developing countries, with an estimated US$20-40
billion loss per year through corruption. It can be tough to get away from our silo-approaches and
share information. Having a requirement on paper on PEPs is good, but far from sufficient.

Providing more information to financial institutions on who are PEPs and how to have better
knowledge and understanding of these clients and hold the financial sector accountable for its
preventive role, can make a difference.