What is a politically exposed person?

As defined by the Financial Action Task Force (FATF), a politically exposed person (PEP) is a “an individual who is or has been entrusted with a prominent function”. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or other predicate offences such as corruption or bribery.

 

Types of politically exposed persons

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) identifies three different types of politically exposed persons:

  1. Domestic PEP: an individual that holds a significant public role or position in an Australian government body
  2. Foreign PEP: an individual that holds a significant public role or position in a non-Australian government body and may also be living or working in Australia
  3. International organisation PEP: someone who holds a significant public role or position in an international organisation (e.g. the International Monetary Fund, World Health Organisation)

 

PEP risk levels

Reporting entities must have “risk-based systems and controls” in place to deal with discrepancies observed when attempting to verify a PEP’s identity, and all PEPs must go through a customer identification and verification procedure when seeking to engage with a reporting entity. At present, there are two different levels of risk:

  • low and medium risk
  • high-risk

Low or Medium risk PEPs

If a domestic or international organisation PEP is classified as low or medium risk, their customer identification and verification procedures will be the same as that of a standard individual.

High-risk PEPs

While domestic and international org PEPs can have both low and medium risk and high-risk statutes, all foreign peps must be treated as high risk customers. High risk PEPs, and foreign PEPs who have been identified as being “customers or beneficial owners of a customer” must go through the standard customer identification and verification process used for individuals, as well as an enhanced customer due diligence (ECDD) verification process.

Even after they’ve left their position, former PEPs may still be high risk and therefore should have ECDD processes applied to mitigate and manage risk levels.

 

Customer identification and verification processes

Prior to providing a designated service, reporting entities must determine if a beneficial owner is a PEP. This can done via risk-based procedures that include an extensive background check, and can involve checking sanctions lists, PEP databases, corruption assessment organisations, and even social media.

 

AML/CTF Plans

Reporting entities that have relations with PEPs must have an AML/CTF plan that explains their procedures for identifying and dealing with PEPs. This plan must be reviewed and updated regularly to guarantee currency with money laundering and terrorism financing (ML/TF) risks.

 

Signs of suspicious behaviour

To assist organisations in identifying if and when a PEP is involved in potentially illegal activities, the Australian Transaction Reports and Analysis Centre (AUSTRAC) has a list of potential signs or activities that, if observed, should lead to an increase in monitoring and examining a PEP and their activities. They warning signs include but are not limited to:

  • Unusual banking or financial activities out of sync with expected behaviour
  • The involvement of a holding or transactions in other countries – notably high-risk jurisdictions, tax havens, and countries with known corruption or poor governance problems
  • obscuring or showing an unwillingness to be transparent with their financial information

 

How PEPs can hide their crimes

PEPs who choose to engage in illegal or criminal activities are known to use a variety of different methods to conceal their crimes and their outcomes, which can include the following:

  • Using thirty party organisations such as a shell company to hide illicit funds
  • Obtaining the services of a professional facilitator to manage and obscure criminal activities
  • moving illicit funds through trade transactions for services rendered between two entities (i.e., international trade in service payments)
  • corporate entities with limited liabilities such as partnerships or trusts, to engage in money laundering

 

Managing money laundering and terrorist financing risks

Potential ML/TF risks can be reduced by:

  • Taking into consideration a PEP’s ML/TF risks when supplying a designated service
  • Providing staff training and maintaining ongoing customer due diligence (OCDD) procedures
  • When appropriate, submitting suspicious matter reports (SMRs) to AUSTRAC

 

Foreign PEPs and AML/CTF legislation

Even if a foreign PEP is not an Australian citizen, AUSTRAC says reporting entities can continue providing designated services provided ECDD policies are in place and SMRs are submitted when necessary.

 

Information and Privacy

When collecting information about PEPs, reporting entities ought to be mindful of the rules in the Privacy Act, as well as the Australian Privacy Principles, which treat AML/CTF-related information concerning PEPs as sensitive and therefore should have an increased amount of protection.

 

Key Takeaways

Given the higher risk of involvement in illicit or criminal activity among politically exposed persons, it is vital to have up-to-date AML/CTF policies and procedures in place, understand how to properly evaluate, report on, and verify the risks categories of PEPs, and have appropriate due diligence measures in place to identify suspicious activity and prevent potential criminal misconduct.

Nyman Gibson Miralis provides expert advice and representation in complex transnational cases involving bribery, corruption and money laundering.

Contact us if you require assistance.