Politically exposed entities: how to tailor PEP requirements to PEP owned legal entities

Abstract

Purpose This paper aims to address the money laundering risk posed by politically exposed person’s (PEP’s) controlled legal entities. International standards and national legislation require enhanced due diligence of political office holders but no specific requirements exist on entities controlled by PEPs. While regulators expect the stringent AML risk mitigation regarding this type of entities, financial institutions have no guidelines to follow. This gap produces inconsistent due diligence measures applied to entities with significant PEPs’ connection. Design/methodology/approach The paper uses comparative analysis to identify discrepancies between legal requirements and their interpretation. Moreover, an empirical approach results in a standardised solution to address these discrepancies. Findings The paper defines the concept of politically exposed entities and the applicable due diligence framework. Anticipating legislative measures, it proposes to introduce this concept via best practices of financial institutions and private banking initiatives such as the Wolfsberg Group. Research limitations/implications The research addresses the topic from a legal point of view. However, the implementation of proposed ideas depends on decisions which are political by nature and are not within the scope of this paper. Practical implications The paper aims at stimulating a debate in both the private and public sector to form a consistent approach to AML due diligence of legal entities associated to PEPs. Originality/value This paper responds to an identified need to study how legal entities connected to PEPs should be defined and monitored.

Reexamining the anti-money-laundering framework: a legal critique and new approach to combating money laundering

“…Additionally, politically exposed persons (PEPs) pose a money laundering risk as they are deemed vulnerable to corruption because of their political status and public profile (Canestri, 2019). PEPs include anyone trusted with important civic duties -members of supreme courts, parliament, state ambassadors, high-profile international company directors, family members of politicians and potentially royalty [Financial Conduct Authority (FCA), 2018].…”

Challenges faced by financial institutes before onboarding politically exposed persons in undocumented Eastern economies: a case study of Pakistan

“…as an alternative to PEP (Canestri, 2019). PEP is a natural person (The Wolfsberg Group, 2008a, 2008bFCA, 2015); therefore, requirements for the classification of PEP are ideally crafted for a natural person (Canestri, 2019). The PEP is technical and politically sensitive topic (Oji, 2014).…”

“…Further, through a series of multifaceted financial operations, the PEPs conceal the source of ill-gotten money and it is effortless in undocumented economies. It makes the identification, verification and prosecution difficult (Canestri, 2019;Oke, 2016;Geary et al, 2010;Greenberg et al, 2010;Gilligan, 2009). Further, FIs may face understaffing or less trained staff to perform the verification as per the requirements of CDD/EDD for sensitive accounts (FATF, 2013;Menz, 2020).…”

“…And at that time, FIs had detailed trails of their financial matters during their service from start to end. Legal entities controlled by the PEP are the main channel for ML for PEPs (Canestri, 2019). But, the FATF is not very clear in advising FIs on what to do in case legal entities related to PEPs (Canestri, 2019).…”

Challenges of identifying and monitoring politically exposed persons (PEPs) in Latin America

“…Through a series of complex financial operations, the latter try to hide the source of illegal money. This makes the identification and prosecution difficult (Canestri, 2019; Oke, 2015; Geary et al , 2010; Greenberg and Schantz, 2010; Gilligan, 2009).…”