Certain individuals who hold positions of power and influence may present a “golden opportunity” for sophisticated criminals engaging in activities such as bribery and corruption, or money laundering. They can also present a risk for legitimate businesses engaging with them, unaware that the business relationship may potentially be facilitating illegal activity.
Such an individual may be referred to as a politically exposed person, or a “PEP”. AUSTRAC defines a PEP as “an individual who holds a prominent public position or role in a government body or international organisation, either in Australia or overseas.” This classification also extends to family members and close associates of these individuals.
On its website, AUSTRAC goes on to identify the key factors involved in identifying and mitigating the risks of engaging with PEPs, in accordance with Anti-Money Laundering and Counter-terrorism financing (AML/CTF) legislation.
Types of PEPs
The AML/CTF Act identifies three types of PEPs.
- Domestic PEP – someone who holds a prominent public position or role in an Australian government body.
- Foreign PEP – someone who holds a prominent public position or role with a government body in a country other than Australia.
- International organisation PEP – someone who holds a prominent public position or role in an international organisation, such as the United Nations (UN) or World Trade Organisation (WTO).
How is a PEP identified?
AUSTRAC recommends several procedures for identifying whether an individual customer or beneficial owner is a PEP, including:
- Checking the customer’s background via an internet search
- Checking databases and reports from organisations that specialise in analysing corruption risks
- Subscribing to a specialist PEP database
In collecting this information, it is important to ensure compliance with privacy laws. AUSTRAC states that “the personal information you collect about a PEP to comply with your AML/CTF obligations may be considered ‘sensitive’ and, according to the Australian Privacy Principles should be given a higher level of privacy protection.”
Assessing the risks
Not all PEPs pose the same level of risk for money laundering and terrorism financing.
All foreign PEPs must be treated as high-risk.
Domestic and international organisation PEPs may be either low to medium-risk, or high risk, based on risk assessment and due diligence procedures.
Although a person who has left their high-profile position is no longer considered a PEP, AUSTRAC states that they may still be high risk.
Dealing with high-risk PEPs
When dealing with high-risk PEPs, AUSTRAC recommends using both standard customer identification and verification procedures, as well as an enhanced customer due diligence (ECDD) program. This includes:
- Getting senior management approval before engaging in/continuing a business relationship with a customer or providing them with a service.
- Taking measures to establish the source of the customer’s and each beneficial owner’s wealth and funds, appropriate for the level of AML/CTF risk.
- Closely monitoring transactions and submitting a suspicious matter report (SMR) to AUSTRAC if it is suspected that a transaction involves funds linked to corruption or other criminal activity.
When engaging in a business relationship with a politically exposed person (PEP), such as someone holding a prominent government position, there are inherent risks for money laundering and terrorism financing. It is important for organisations to have a good understanding of how to identify PEPs, how to assess the level of risk, and how to comply with enhanced customer due diligence requirements for dealing with high-risk PEPs.