Lawyers’ challenges in dealing with Politically Exposed Persons

What is a Politically Exposed Person?

FATF defines a politically exposed person (PEP) as an individual who is, or has been, entrusted with a prominent public function. This definition includes:

  • Foreign PEPs:

Individuals who are, or have been, entrusted with prominent public functions by a foreign country (e.g. heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials, etc.).

  • Domestic PEPs:

Individuals who are, or have been, entrusted domestically with prominent public functions.

  • International Organisation PEPs:

Persons who are, or have been, entrusted with a prominent function by an international organisation (e.g. members of senior management or individuals who have been entrusted with equivalent functions such as directors, deputy directors and members of the board or equivalent functions).

  • Family members of PEPs:

Individuals who are related to a PEP either through consanguinity or through marriage or other civil forms of partnership. The number of family members who are considered to be close or who have influence may be small (e.g. parents, siblings, spouses/partners and children), may include grandparents and grandchildren and extend to cousins or even clans.

  • Close associates of PEPs:

Individuals who are closely connected to a PEP, either socially or professionally. They may include partners outside the family unit (e.g. girlfriends, boyfriends, mistresses), prominent members of the same political party, business partners or associates, especially those that share ownership of legal entities with the PEP or who are otherwise connected (e.g. through joint membership of a company board).

Family members and close associates of PEPs are treated as PEPs because of the potential abuse of the relationship for the purpose of moving the proceeds of crime, or facilitating their placement and disguise, as well as for terrorist financing purposes.

What are the main challenges?

Many PEPs are in positions that potentially can be abused for the purpose of conducting activities related to money laundering and terrorist financing, as well as corruption and bribery.

Lawyers considering whether to establish (new client) or continue (existing client) a business relationship with a PEP, should focus on the level of money laundering and/or terrorist financing risks associated with the PEP, and whether they are able to mitigate that risk in order to avoid being abused for illicit purposes should the PEP be involved in criminal activity.

It may be beneficial for lawyers to differentiate between a client (new or existing) who might be a PEP and the beneficial owner of a client who might be a PEP.

  • The client as PEP

This decision to establish/maintain or end the relationship with a PEP should be taken with an understanding of the particular characteristics of the public functions that the PEP has been entrusted with.

FATF does not recommend automatically refusing a business relationship with a PEP simply based on the determination that the client is a PEP.

The decision should be guided primarily by a risk assessment, even if other considerations, such as commercial interests, are taken into account. The risk assessment may be based on due diligence measures which include, but are not limited to, obtaining additional information on the client, on the legal services requested and on the source of funds or source of wealth of the client. The assessment may take into account, among other factors, the country risk factor of the client, the nature of the prominent public function that the PEP holds (e.g. the level of seniority, access to or control over public funds, etc.).

Even if a business relationship with a PEP client is not initially deemed by the lawyer to be high risk, it may evolve into a higher risk business relationship at a later stage. Therefore, lawyers should conduct ongoing due diligence on their existing business relationships to ensure they identify any changes to the risk level of the client relationship.

In all cases, if a lawyer suspects or has reasonable grounds to suspect that funds used by his PEP client are the proceeds of criminal activity, he/she should apply the mechanism established by the Beirut Bar Association and the Tripoli Bar Association which requires any lawyer engaging, on behalf of or for a client, in a financial transaction in relation to specific activities, to notify the President of the Bar, in writing and in person, of any suspicion in this regard, along with the necessary documents and information.

  • The beneficial owner of the client as PEP

The PEP could be the client or the beneficial owner of a legal entity that is the lawyer’s client. There is a risk that corrupt PEPs could establish business relationships or conduct transactions by using third parties, such as intermediaries or legal entities. Corrupt PEPs may use legal entities to obscure their identity by being the beneficial owner of the lawyer’s client, in order to distance themselves from transactions and remain undetected.

For this reason, lawyers are encouraged to identify the beneficial owner of their corporate clients, and take reasonable measures to verify the identity of that beneficial owner. If there are objective grounds to believe that a beneficial owner is a PEP, complete verification is highly recommended in this case. Where a person is purporting to act on behalf of a beneficial owner, it is recommended to inquire the reason for doing so. This may lead to awareness that the beneficial owner of the client is a PEP.

How to identify PEPs?

Determining whether clients or beneficial owners of clients are (or have become) PEPs and/or finding out who are their family members and close associates can be challenging for a lawyer, particularly when dealing with foreign PEPs for whom up-to-date information may not be available.

The key source of information for the purpose of determining if a client is a PEP is the client’s principle occupation or employment. However, there are several other sources of information that can be used to assist in determining if a client is a PEP.

Lawyers may consider using the following additional sources of information:

  1. Self-declaration by the client of their PEP status (i.e. by disclosing present or former employment or principal occupation clearly recognisable as a PEP).
  2. Information provided by client for past legal services provided by the lawyer.
  3. Internet and media, for the determination, monitoring, verification of information in relation to PEPs, knowing that this type of information may not always be comprehensive or reliable.
  4. Commercial databases, which may assist in the detection of PEPs, knowing that these databases are neither necessarily comprehensive nor reliable as they generally draw solely from information that is publicly available and thus the accuracy and quality of the content cannot be verified.
  5. Lists of domestic PEPs or prominent public functions published by governments. There are two types of lists that countries may publish: a list of positions/functions that would be held by a PEP, or a list of actual names of PEPs. In general, while the inclusion on a list can confirm the fact that a person is a PEP, not being featured on a list does not exclude the possibility that a person might be a PEP. Such lists of PEPs can become quickly outdated and usually do not contain family members or close associates. To date, the Lebanese government has not published a list of positions nor a list of actual PEPs.
  6. Asset disclosure systems put in place by some countries that apply to individuals that hold prominent public functions where agencies managing asset disclosures are legally compelled to publish a list of the public officials required by law to file disclosures. It should be noted nevertheless that in many disclosure systems, including Lebanon (Law No. 154 dated 27/11/1999 related to illicit enrichment), the accuracy of the disclosures can not be verified due to the secret nature of such disclosures.

PEPs Red Flags

Determining if a customer is a PEP is not an aim in itself but forms part of the process that enables lawyers to assess the risks presented by certain type of clients. In addition, as mentioned above, determining that a client is a PEP does not presume a link to criminal activities. Nevertheless, lawyers need to be aware of the risks that a PEP may abuse the relationship with the lawyer to launder illicit proceeds or commit other illegal acts. The following non-exhaustive list of red flags may help lawyers detect such abuse:

1. Suspicious behaviour

Some client behaviour may be considered by the lawyer as a cause of suspicion:

  • Using of legal entities to obscure the involvement of a particular country.
  • Transferring funds from countries which the client does not have ties with.
  • Seeking to make use of the services of a financial institution that would normally not cater to high value clients.
  • Providing inaccurate or incomplete information or information inconsistent with other publicly available information.
  • Inquiring persistently about AML laws or PEP regulations.
  • Having previously been denied a visa request to enter Lebanon.
  • For a foreign client, being reluctant to explain the reason for doing business in Lebanon.
  • Being uncomfortable to provide information about his/her source of wealth/funds.

2. Attempts to hide identity

If the client is conducting an illicit activity, he/she will want to hide his/her identity. For this purpose, the client may require the lawyer to create several layers of legal entities, usually in the form of holding companies, with the intention of obscuring the beneficial owner.

The client may also require incorporating legal entities without a valid business reason, or use intermediaries when this does not match with normal business practices in order to shield his/her PEP identity, or even use family members or close associates as legal owner of the business.

3. Country-specific indicators

In addition to what was previously mentioned regarding the country risk factor of the PEP client, the following indicators relating to countries can be taken into account when doing business with a PEP client:

  • The client is a national of a high-risk country (see above).
  • The client is a national of a country with an autocratic political system.
  • The client is a national of a country with a poor governance and accountability.
  • The client is a national of a country that is known to be dependent on the export of illicit goods (e.g. drugs).
  • The client is a national of a country that has not ratified relevant anti-corruption conventions, such as the United Nations Convention against Corruption and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
  • The client is a national of a country that has a dependency on one or a few export products.
  • The client is a national of a country having high levels of organized crime.

4. Types of involvement in business

If the lawyer is faced with one of the following situations, it is prudent to consider the possibility of the client being a risky PEP:

  • The client owns, even partially, or controls a financial institution or the financial institution that is a counter part in a transaction.
  • The client is a director or beneficial owner of a legal entity that is a major client of a financial institution.
  • The client has control over regulatory approvals, including awarding licenses.
  • The client has access to, control or influence over, government or corporate accounts.
  • The client has a substantial authority over or access to public assets or funds.
  • The client actively downplays the importance of his/her public function.

5. Industry-specific indicators

If the client is strongly connected with a high-risk industry, this may raise the risk presented by the PEP client. High-risk industries include, but are not limited to:

  • Privatisation of public assets.
  • Mining and extraction.
  • Government procurement.
  • Construction of large infrastructures.
  • Banking and finance.
  • Arms trade and defence industry.

6. Finance-related indicators

Some finance-related red flags in connection with the client may be taken into consideration by the lawyer to assess the risk level that the PEP client presents:

  • Use of large amounts of cash in the business relationship.
  • Use of bank cheques or bearer instruments to make large payments.
  • The client’s corporate account shows inexplicable substantial activity shortly after starting the business or shows substantial flow of cash or wire transfers into or out of the account.
  • The client uses multiple corporate bank accounts for no apparent commercial reason.
  • The client moves funds to or from an account or between financial institutions without a business rationale.
  • Personal and business-related money flows are difficult to distinguish from each other.
  • One or more financial institutions have terminated the business relationship with the client or have been subject to regulatory actions for doing business with the client.
  • Payments of legal fees made to the lawyer’s account by wire transfers from an account that lack relevant originator information.
  • Inexplicable deposit or withdrawal of large amounts of cash from an account.

7. Certain types of businesses

If these industries, products, services, transactions or delivery channels are used by the client, then this adds an additional risk factor depending on the nature of the PEP client. The following is a non-exhaustive list of products, industries, services, transactions or delivery channels that can become vulnerable to illicit manipulations when used by PEPs:

  • High-end real estate dealers.
  • Dealers in precious metals and precious stones.
  • Dealers in luxurious transport vehicles (such as sports cars, ships, helicopters and planes).
  • Businesses that cater mainly to high value foreign clients.

 

Source: ACAMS. FATF.

The author hereby expresses his gratitude to the contribution of Mr. Michel Semaan.

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