A Guide to Anti-Money Laundering for Crypto Firms

Politically Exposed Risks in Times of Crisis

PEPs Knowledge & Training

Screening for politically exposed persons (PEPs) under normal circumstances is challenging — not least because there is not one single, agreed-upon definition for what constitutes a PEP.

Identifying an individual’s relatives or close associates (RCAs) further complicates matters, as these relationships change over time and always come with a certain level of ambiguity. Second cousins, for instance, may be thought of as immediate family in some cultures, or an estranged parent may represent a lower risk than the aunt who raised your customer, contrary to the norm.

Expanding the Role of Government

Times of crisis add yet another layer of complexity. Traditional rules, processes and governmental structures tend to experience significant shifts or are cast aside entirely. With citizens’ willingness to give up freedom for security at all-time highs during such crises, the usual checks and balances that limit governmental intrusion are suspended, even in the most democratic of societies.

Already, as a result of countries’ efforts to fight the spread of COVID-19, we’ve seen a consolidation of governmental power. Stimulus packages meant to provide relief are extending welfare programs, introducing government-backed loans and enabling government intervention in markets at a scale not seen before. Private operations, like the UK’s passenger railways, have also been partially nationalized — a long-standing policy position of the country’s Labour opposition — or, as in Italian airline Alitalia’s case, renationalized.

While many of these measures are touted as temporary — and several of the most drastic might be — the precedent has been set, and many extensions of state power are likely here to stay in one form or another.

A Higher Risk of Corruption

Power, of course, tends to corrupt. For cautionary tales, one need only look to authoritarian states such as Equatorial Guinea, known as one of the most corrupt countries in the world, and Russia, where bribe-taking is routine and where attempts to solve the systemic problem have been merely surface-level. Or consider South Korea, a democratic country: the Financial Action Task Force (FATF) called out high-level fraud and corruption as a major problem for the country in its most recent mutual evaluation report.

Even in relatively stable times, corrupt politicians have few qualms about using money designated for the public good to line their own pockets. A prime example: the 1MDB scandal, which turned a sovereign wealth fund meant for the economic development of Malaysia into a multi-billion-dollar slush fund from which several high-profile individuals worldwide profited.

So in times of crisis, when money designated for humanitarian purposes — such as foreign aid, stimulus money, and charitable donations — is free-flowing, the risk of corruption is elevated. Efforts to procure highly-coveted contracts to manufacture things like personal protective equipment (PPE) and ventilators present opportunities for bribery. And bad actors may try to use non-profit organizations to launder money. This may have already happened in some countries. In the UK, less than 10% of PPE orders that had already been paid for have been delivered. Of course, this doesn’t necessarily mean bribery or corruption are at play, but it is a possible explanation.

Further, given the haste with which this money is to be distributed, there’s the added risk that corrupt behavior will be overlooked or undetected.

Take Russia’s Direct Investment Fund’s (RDIF) partial investment in COVID-19-related relief to the US. The donation itself is commendable, but the source is questionable, given the fund’s sanctioned status and its connection to Russia and several high-risk PEPs. This raises other questions, including whether the US should even be accepting this donation.

Financial institutions (FIs) must not only carefully scrutinize PEPs from jurisdictions already established as high-risk; they must apply the same heightened level of scrutiny to all PEPs.

PEPs Screening in the Time of COVID-19

Scrutinizing PEPs is a lot to ask of FIs, even in the best of times. But a global public health crisis such as this one means FIs themselves are in a state of crisis. Social distancing measures have meant adjusting to new ways of working, and personnel and resources are stretched thin — that is, they’re being asked to spend more time doing administrative-heavy tasks that would be better served by automation while working with fewer resources.

Meeting the threat level efficiently amid heavier workloads requires FIs to have a strong understanding of what their risk level is when dealing with PEPs. Here are a few strategies that may help:

  1. Use a comprehensive, up-to-date PEPs screening tool – Since a variety of sources must be consulted to determine possible PEP status, choosing a tool that can easily collate information into a single, easy-to-navigate and continually updated database is key.
  2. Perform regular adverse media and negative news checks – Using adverse media and negative news checks as a complement to PEPs screening expands the pool of available customer data and provides additional context. In times of crisis, where PEPs screening is even more challenging, these checks go from being a nice-to-have to a must-have.
  3. Increased scrutiny of local officials – While power may become more centralized, it’s often the local government officials and nonprofits that determine who gets what and distribute the funds on the ground. The influx of money flowing to these entities warrants greater scrutiny to ensure the funds go where the law intended for them to go.

Looking to the Future

While times of crisis carry with them increased risks, especially when doing business with PEPs, COVID-19 is also unique. The pandemic isn’t limited to specific borders or regions like a natural disaster or a civil war would be. It is a truly global phenomenon, with many countries simultaneously under lockdown and with shifts in compliance obligations occurring everywhere.

Before the pandemic, we saw a shift toward nationalism. A post-COVID-19 world may accelerate that trend, both politically and economically. Further, as global supply chains suffer massive disruptions, a retreat to more localized supply chains may be more attractive. Screening may, as a result, become more localized as well.

With power dynamics shifting toward more government involvement, FIs should anticipate that, whether localized or global, increased due diligence measures targeting PEPs are here to stay. Therefore, ensuring comprehensive PEPs screening is part of an FI’s risk-based approach will be even more important as we adjust to a new reality through the pandemic and to the regulatory landscape that will come once it passes.

Originally published April 23, 2020, updated November 17, 2021

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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