Politically exposed persons (PEPs) in focus; the nexus between corruption and money laundering

Corruption and money laundering are intrinsically linked; corruption creates illicit funds through crimes such as bribery, extortion and em­bezzlement, which are then laun­dered to appear legitimate, with money laundering then providing a way to enjoy and integrate these proceeds into the economy. This process allows corrupt individuals to enjoy their ill-gotten gains with­out fear of detection or confisca­tion of their proceeds of crime.

Globally, concerns have been raised regarding the financial ex­posure of PEPs and the potential misuse of funds by politicians, persons entrusted with prominent public functions and the involve­ment in these crimes by their close associates.

The World Bank and the In­ternational Monetary Find (IMF) have expressed concerns about Politically Exposed Persons (PEPs) because they pose a higher risk for money laundering and other finan­cial crimes, particularly given their proximity to wealth, influence, power and their ability to conceal proceeds of crime through cor­ruption and bribery. The misuse of legal entities by PEPs to mask the receipt of corrupt proceeds undermines financial integrity, dis­torts global markets and negatively impacts national economies.

The World Bank, in partnership with the United Nations Office on Drugs and Crime (UNODC), supports efforts to end corrupt funds and promotes initiatives like the Stolen Asset Recovery (StAR) Initiative, which works with coun­tries and financial institutions to prevent the laundering of corrupt funds by improving transparency and tracking the flow of illicit funds through corporate structures and financial systems.

Also, the United Nations Convention against Corruption (UNCAC) treaty, the only legally binding international anti-cor­ruption treaty that focuses on areas such as beneficial ownership disclosures, procurement breaches and asset recovery ensures com­pliance and mitigates the risks of financial crimes among PEPs.

A PEP can commit money laundering through their positions of influence and access to public funds, making them susceptible to bribery and corruption. PEPs are able to use sophisticated methods to conceal the origins of illicit funds, often involving third parties, complex corporate structures, sham invoices covering goods that are never procured, payments of travel expenses that never occurred, complex international transactions, abuse of power for selfish gains, misappropriation of public funds, dishonestly approv­ing s and disbursing public funds, use of public assets for private purposes, fraudulent financial statements among others.

To effectively mitigate these risks, financial institutions and relevant competent authorities are to conduct enhanced customer due diligence, establish a compre­hensive beneficial ownership (BO) register and promote asset dis­closure and verification regime as critical tools to help identify PEPs, improve transparency and prevent illicit financial flows.

Politically Exposed Persons (PEPs), their family members and associates, are in positions that can provide opportunities for corrup­tion, including bribery and embez­zlement. PEPs can use corporate structures to hide the proceeds of corruption, making it difficult to trace and recover stolen assets. Beneficial Ownership disclosure regime is an effective tool to help in the fight against corruption and illicit financial flows (IFFs) as it reveals the true owners behind corporate structures, including PEPs.

In relation to foreign politically exposed persons (PEPs), Financial Institutions are required to:

(a) have appropriate risk-man­agement systems to determine whether the customer or the bene­ficial owner is a politically exposed person;

(b) obtain senior management approval for establishing (or continuing, for existing customers) such business relationships;

(c) take reasonable measures to establish the source of wealth and source of funds; and

(d) conduct enhanced ongoing monitoring of the business rela­tionship.

Again, Financial Institutions are to take reasonable measures to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been en­trusted with a prominent function by an international organisation. In cases of a higher risk business relationship with such persons, financial institutions are required to apply the appropriate mitigation measures. The requirements for all types of PEP should also apply to family members or close associates of such PEPs.

In addition to performing the normal Customer Due Diligence measures on foreign PEPs, Finan­cial Institutions are to:

(a) put in place risk management systems to determine whether a customer or the beneficial owner is a PEP;

(b) obtain senior management approval before establishing (or continuing, for existing customers) such business relationships;

(c) take reasonable measures to establish the source of wealth and the source of funds of customers and beneficial owners identified as PEPs; and

(d) conduct enhanced ongoing monitoring on that relationship.

In relation to domestic PEPs or persons who have been entrusted with a prominent function by an international organisation, in addi­tion to performing the Customer Due Diligence (CDD) measures financial institutions are to:

(a) take reasonable measures to determine whether a customer or the beneficial owner is such a person; and

(b) in cases when there is higher risk business relationship with such a person, adopt appropriate mitigation measures.

Financial institutions are required to apply the relevant requirements on enhanced due dil­igence to family members or close associates of all types of PEPs.

The Companies Act, 2019 (Act 992) and related anti-money laundering regulations mandate companies to identify and disclose beneficial owners including PEPs, conduct enhanced due diligence, ongoing monitoring, establish risk-based procedures to identify PEPs and check background information of PEPs and their associates..

Individuals with Prominent Public Functions

These are the core individuals who hold or have held signifi­cant government or public roles including:

Heads of State, Senior Poli­ticians, Government Officials, the judiciary, Military Officers, Senior Executives of State-Owned Companies, Senior Political Party Officials, Diplomats and Interna­tional Officials.

Immediate Family Members

These are individuals who are closely related to a person hold­ing a prominent public function: siblings, spouses, children and their spouses, and parents of PEPs.

Close Associates

These are individuals who have close business or other relation­ships with a PEP:

• Individuals with joint beneficial ownership of legal enti­ties or arrangements with a PEP.

• Persons with close busi­ness relationships with a PEP.

• Individuals who are the sole beneficial owners of legal entities set up for the benefit of a PEP.

• Individuals such as personal assistants, body guards, special aides’ aide -de- camp of PEPs.

The inclusion of family mem­bers and close associates to ongo­ing monitoring of PEPs is crucial because they (including their accounts) can be used by these PEPs to facilitate the movement of funds or conceal illicit financial activities. These individuals are considered higher risk, requiring financial institutions to conduct enhanced due diligence on them, monitor their transactions, identify their source of wealth and identify beneficial owner of associated entities.

To conclude, it is evident from the foregoing discussions that should the relevant agencies, fi­nancial institutions and the general public effectively fight against corruption, they would simultane­ously win the fight against money laundering, and thereby save the public purse from further leakages.

The Writer is a Financial Crime Specialist

BY RITA YEBOAH QUAYSON