Seeing your country being pulled down by corruption is hard for anyone. As compliance officers, it's even more difficult as we are often faced with situations where clients and other businesses are actually involved in this to some degree. I can tell you, from experience, that it is not something that one should take lightly. Let's take a look at the risks one faces with PEP's and what to do with them.
The FIC Amendment Act of 2017 still includes the concept of PEPs, however, the naming conventions have now changed to distinguish between foreign and domestic PEPs as follows:
What is the risk?
We must be able to identify PEPs because their prominent public position may increase the risk of their involvement in bribery and corruption and consequently of laundering the proceeds of any such activity (as one can see from the recent corruption scourge that plagued our country).
A high ranking South African government official opened a number of accounts with an overseas bank. However, his activity raised a number of concerns that the account was being used to launder the proceeds of corruption. The value of cash deposits into these accounts was inconsistent with the stated purpose of the accounts and the customer’s income. In addition, the official opened an offshore company in a “tax friendly” jurisdiction with himself as sole director and sole shareholder. The deposits paid into the company accounts were considerably more than expected and, contrary to what is expected of a functioning business, there were no outgoing payments. After a Suspicious Transaction Report (STR) was submitted, the individual was investigated and charged with money laundering offences and subsequently sentenced to prison.
Their prominent public position may increase the risk of their involvement in bribery and corruption and consequently of laundering the proceeds of any such activity.
What are the proposed controls?
Due to the susceptibility of bribery and corruption associated with PEPs, businesses often don’t want to do business with them, however this is an unintended consequence of the associated risk. Processes and procedures need to be in place to identify customers who are PEPs and when you identify a PEP you must follow your business procedures and compliance policies.
When looking at guidance from international bodies such as the Wolfsberg Group and the Financial Action Task Force, PEP relationships are considered higher risk and should ideally be subject to Enhanced Due Diligence (EDD) such as verifying their source of wealth, regular CDD/KYC reviews and the requirement for Senior Management to give their approval prior to entering into or maintaining the customer relationship. It can also happen that a PEP is not a customer of the accountable institution, but rather a related party such as a beneficial owner. The accountable institution needs to decide what its approach will be in these instances as well. This will usually be contained in the internal rules/policy/processes.
It is important to remember that categorising a customer as a PEP does not mean that they are, or have been, involved in any criminal activity. The can also be risk rated in terms of the accountable institution’s Risk Based Approach (RBA).
The FIC Amendment Act also requires that the following requirements be met for higher risk Foreign Prominent Public Officials and Domestic Prominent Influential Persons:
Risk rating your customers are very important in the new improved version of FICA and PEP's are certainly no exception. Do not take any chances and report any instances of proven or suspected criminal activity via the right channels. You would be doing yourself and everyone, for that matter, a great service.
The new amendments of FICA changes the compliance framework for accountable institutions to a great extent and we'll discuss some of the more pertinent items in this blog post.
Risk Based Compliance
According to the new requirements of FICA, accountable institutions now need to take a risk based approach to FICA and the implementation thereof. This includes:
One must also now be able to risk rate clients according to the risk that they pose with regards to being used for money laundering or to channel the proceeds of any crime. Certain customers and businesses are a lower risk than others and some are a higher risk. Some of the aspects that one can look at to determine the risk a client poses are:
Enchanced Due Diligence
by: Horizon Compliance team