Posts Tagged ‘politically exposed persons’

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The risks of banking on the Arab Spring

December 13, 2011

This blog has a fair number of readers from the anti-money laundering and/or compliance sector.  Such readers may be interested in this friendly warning from self-proclaimed “former money launderer” Kenneth Rijock.  And he’s probably even more right in warning the banks than he realizes.  The risk isn’t just in taking on a politically exposed person (PEP) as a customer who may have received his wealth from the corruption characteristic of the Arab world, but that the new rising tide of Islamist governments that replaced them will wage an all out legal jihad against Western banks to shake them down for any wealth they feel they are “owed.”  Brace yourselves, banks.  From Mr. Rijock’s blog on Dec. 8:

Is Your New High Net Worth Client Really a Fugitive from the Arab Spring?

You are performing due diligence on a wealthy individual who wishes to open an account relationship with your bank. He plans on moving his substantial accounts over to you, but first, have you ruled out that he may just be a clever PEP, who is in reality fleeing a North African country that just became part of the Arab Spring?

I hear you say that his passport is not from a Middle East country. Have you:

  1. Checked to see what’s in the passport he is showing you? I know that you have already verified its authenticity, using Passport-Check, or some other resource, but are there sufficient visa stamps in it to indicate international travel during the last five years? Is it basically clean? Perhaps he holds dual nationality. Is this passport new?
  2. Where does it say is his place of birth? Is it in a Middle East country, even though his proffered passport is from outside that region.
  3. What about his accent? Does it agree with his professed nationality? Is he comfortable speaking the language that you would expect, given the jurisdiction he says he is coming from?

I am making these points to alert you to the possibility that a new client might just be in flight from one of the newly-emerging democracies in the Middle East, and that his wealth was stolen, obtained through bribes or kickbacks, or through some preferential business operated as a virtual monopoly in his home country. The new government in his country may soon be wanting that money back, leaving you with reputation damage you could have avoided.

The lesson: ensure, through effective due diligence such as is detailed above, that you are not taking in some corrupt PEP, human rights violator, or an enemy of the state. Rule out any chance that he is a PEP on the run from North Africa, before accepting his money, please.

Note:  Money Jihad made some very minor edits to the punctuation & capitalization in Mr. Rijock’s text above for readability.

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Weekly word: PEP

September 14, 2011

Admittedly, it’s been a lot longer than a week since our last effort at defining terms related to the money jihad.

This latest addition to the glossary will be “politically exposed person” (PEP):

PEPs are individuals who are or have been entrusted with prominent public functions in a foreign country, such as heads of state or government; senior politicians and party officials; senior executive, judicial, or military officials; and senior executives of state-owned corporations.*

PEPs normally include family members of government officials, but do not normally include low or mid-level government officials.

Being able to identify and screen PEPs can help prevent the transfer of ill-gotten funds from, for example, corrupt politicians to banks overseas.  But that is easier said than done.

In August, MoneyLaundering.com reported:

Three intergovernmental groups are questioning the effectiveness of anti-money laundering controls meant to curb abuses of corrupt political figures who steal from their countries.

The World Bank and United Nations said in a joint June 21 report that at least 74 of 124 jurisdictions examined have not complied with anti-money laundering (AML) recommendations to quash kleptocracy by political figures. The record indicates that financial institutions and the agencies that regulate them may be “deficient” in enforcing the controls, the report said.

In a separate report published July 29, the Paris-based Financial Action Task Force (FATF) warned banks and other companies that government officials, also known as politically exposed persons (PEPs), can exploit the “natural advantages” of their positions to launder ill-gotten funds through institutions, and then stymie investigations into the crimes.

The three organizations recommended requiring financial institutions to review their PEP accounts annually, sharing suspicious activity reports on the accounts of foreign politically-tied figures with their home country and eliminating the distinction between foreign and domestic PEPs.

The questionable effectiveness of PEP screening sheds further doubt on the world’s approach to preventing money laundering and terrorist financing.

The PEP concept is particularly relevant during the Arab Spring, where rulers like Muamar “Daffy” Qaddafi, Bashar “Butcher” al-Assad, Hosni Mubarak, and other leading thugs are being accused of holding secret bank accounts of wealth stolen from their people.

* World Bank, Combating money laundering and the financing of terrorism:
a comprehensive training guide, Volume 3, Part 1 (Washington D.C.:  World Bank Publications, 2009).

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Experts mock the whole AML/CTF model

August 22, 2011

If the IMF’s skepticism about the effectiveness of the Financial Action Task Force and the contemporary anti-money laundering (AML) system weren’t damning enough…

A separate report from the U.K.’s Financial Services Authority has shaken the very faith that AML and combating of terror finance (CTF) experts once held in the foundations of the modern system of international financial controls.

It’s about time.

It is a system that over-regulated banks, passed the expenses along to share holders who’ve endured lower returns; account holders in terms of more paperwork, intrusive data mining, lower interest rates; and to financial service employees who have had to make sense of the whole unprofitable mess.  And it’s all been in an effort to find needle-size transactions among giant haystacks of financial exchanges.

The modern AML system is very similar to contemporary airport security.  It treats everybody like a terrorist, and creates a vast bureaucracy that has never quite proved its worth.  It focuses on suspicious transactions rather than suspicious people.  It fails to profile.

The specific findings in this report are that Britain’s banks aren’t doing anything different now than they were doing 20 years ago with regard to opening accounts for corrupt foreign dictators who stole the wealth of their countries and deposited it in British banks.  All this has happened despite extensive regulations, oversight, and requirements for the British financial sector.

If one of the most advanced countries in the world with a first-class banking system cannot achieve what seems a relatively straightforward task of screening their customers and verifying their source of income, what hope can we possibly have that the banks will be able to identify and report a $10,000 transaction from Habib to Farouk so he can buy explosive materials?

The implications of the FSA report reach beyond Great Britain.  Editor Joy Geary of the Australia-based AML Magazine asked, “Does it mean that the AML/CTF framework, as currently in operation globally, is doomed always to fail?” and urged that “The damning contents of the FSA report should lead to a long and hard look at the underlying causes.”

Enough from me.  Here’s an extremely useful article from the above mentioned AML Magazine laying out what makes the FSA report so troublesome:

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