Politically Exposed Persons (PEP): what they are and why they matter
A politically exposed person (PEP) is an individual who is or has been entrusted with a prominent public function. PEP in Singapore is specifically defined by ACRA as someone who is or has been entrusted with any prominent public function in Singapore (domestic PEPs) or in a country or territory outside Singapore (foreign PEPs). “Prominent public function” includes the role held by a head of state, head of government, government minister, senior civil or public servant, senior judicial or military official, senior executive of a state-owned corporation, senior political party official, or a member of the legislature but excludes the role held by middle- ranking or more junior officials. Similar term is used internationally by Financial Action Task Force (FATF) and in many foreign countries, with some categorising PEP into various level from level 1 head of state to level 4, junior and insignificant political persons, Interestingly, a different term “Senior Foreign Political Figure” is used in the US.
A person who is identified to be a PEP matters as he is higher-risk customers for financial institutions and other businesses. PEP is in a unique position with actual or perceived privileged power to acquire or influence the acquiring, transfer or disposal of assets through corruption or any unlawful means like embezzlement and bribe-taking. This makes PEP a potential hotbed for money laundering through the abuse of the financial system. Whether a PEP actually engages in unlawful activities is irrelevant as the AML CTF risk for a PEP is directly related to the position and degree/depth of political influence as well as on the mismatch if any between the net worth of the PEP, his known and declared sources of funds vs the value of the business structure or transaction in question. In most circumstances, the PEP is usually a formally unmatched criminal name in the UN, FATF or international or local regime. It is a much easier problem if the PEP is a listed criminal in international AML CTF database as businesses will just need to avoid and not have any relationship with such a PEP.
What complicates the AML CTF process is the extent of PEP due diligence that a business need to research, gather, assess and on on-going basis, implement monitoring controls to assess this AML CTF risk if you want to establish a business relationship with any PEP. It is not easy to perform a decent statement of affairs relating to the net worth or sources of funds from any PEP due to the inavailability of any reliable or transparent data. It is not an understatement that the worst nightmare for all bankers is on the KYC or CDD on on-boarding PEP or any recurring PEP review. With the 1MDB debacle, the regulatory compliance for more stringent review on PEP relationship will only get tougher and more complicated with the increasing sophistication of modern money laundering or terrorist funding trends. For businesses that are in an industry or businesses that inevitably deals with PEP, eg defence or infrastructure, banking etc, getting the compliance team more vigilant, keeping abreast of the lastest AML CTF trends, leveraging big data and AI to assessing, quantitifying, and implementing forward looking indicators to identify signs of ML or TF flags would be crucial going forward in the STR reporting. And more importantly, manage and mitigate an organisation AML CTF risk by perhaps providing advanced indicators for the management to be able to take the decisive call to terminate any PEP relationship. The sustainability and the reputational impact to an organisation hinges on the key management of AML CTF compliance and we have seen in recent history that many formidable businesses have been weakened by the non-compliance and no one has emerged unscathed.