THE WOLFSBERG GUIDANCE OF PEPS
…“those holding senior, prominent or important positions, with substantial authority over policy, operations or the use or allocation of government-owned resources”

FINANCIAL ACTION TASK FORCE (FATF)
…“individuals who have been entrusted with a prominent public function—not only foreign PEPs but also important functionaries of international organisations” and also includes “family members and close associates of these identified PEPs”…

Different countries have their own definition and system of laws dealing with risks associated with PEP, thus making a consistent standard impossible.

“A customer, or a person purporting to act on behalf of a natural person, or a beneficiary of a transaction is a foreigner, or performs an important public function (current or previous), is a head of state, [including] heads of government, senior politicians, important government, judicial or senior military officials, senior executives of state-owned enterprises, political party officials, etc. or family members or close associates.”

“An individual who has a prominent function in a place “outside” or “inside” the People’s Republic of China.”

The definition for PEPs is in line with uniform international standards.

PEPs are defined differently across the notices and guidelines that outline enhanced due diligence measures on foreign and domestic PEPs.

In response to the increasing rate of money laundering and terrorist financing, a growing list of Customer Due Diligence regulations in Asia has centered on PEPs—a high-risk category for conducting business.

Those holding senior, prominent or important positions with substantial authority over policy, operations or the use or allocation of government-owned resources, pose a greater risk for a financial institution due to their far-reaching influence.

With the exception of customer background and sources of wealth, the due diligence requirements for PEPs are similar throughout Asia.

Financial institutions should understand the source of their high-risk customers’ funds, the use of the funds, their economic status, and their operating status.

While the understanding of the source of funds is a requirement, China has not explicitly included the source of wealth and should address it.

Customer background information must be more carefully scrutinized.

At a minimum, high-risk customers need to be subjected to an annual review, more frequently if necessary, of their profile to ensure that CDD information retained remains up-to-date and relevant.

The Securities Commission’s update, in 2014, set new requirements.

The reporting institution is required to take reasonable measures to assess the money-laundering/terrorist-financing risks of a domestic PEP or a person entrusted with a prominent function by an international organisation.

The requirements break due diligence down to three levels: customer due diligence, simplified customer due diligence and enhanced due diligence.

When a customer is classified as high risk, that customer must undergo enhanced due diligence including approval from senior management.

The main due diligence matrices laid out by the 4 countries to identify, verify, monitor and review shows relative uniformity.

Each of the aforementioned jurisdictions has an independent anti-bribery and corruption agency that supervises, investigates and enforces breaches related to public officials.

Each agency, however, employ varying judicial powers. In some of the jurisdictions they have been employed more readily to enforce the legislation and investigate breaches in conduct relating to PEPs.

RECENT CORRUPTION FIGURES

In China, the Central Commission for Disciplinary Investigation has chief investigative powers, governing the behaviour and ethics of public officials and state functionaries. The volume of investigations into corruption and the subsequent media coverage is particularly high in China, though prosecutions figures involving public servants are significantly lower.

In Hong Kong, the Independent Commission Against Corruption investigates violations against the main anti-bribery and corruption legislation, The Prevention of Bribery Ordinance. Convictions in the territory are relatively low, although there has been a 23% increase in the last two years.

Under the Malaysian Corruption Act (2009), the Malaysian Anti-Corruption Commission is responsible for investigating and enforcing corruption offences. Prosecutions are somewhat rare, as the reported number of offenders among public officials has only been 118 in the last two years.

The Prevention of Corruption Act (1960) states that it is an offence for a person to give “any gratification as an inducement to or reward for any member, officer or servant of a public body doing or forbearing to do anything in respect of any matter or transaction whatsoever, actual or proposed, in which such public body is concerned.”

State-owned enterprises (SOEs) are businesses that are either wholly or partially owned and operated by a government. SOEs are widespread across Asia and are managed differently in each jurisdiction resulting in varying risk levels.

Stringent compliance management practices are encouraged when working with SOEs since high-ranking officials within an SOE are generally considered to be PEPs.

SOE SHARES AMONG COUNTRIES’ TOP TEN FIRMS (%)

The Central Commission for Disciplinary Investigation has overriding criminal investigative powers and sets rules and regulations for anti-corruption campaigns. In China, enhanced due diligence could be considered particularly prudent regarding SOEs, due to a recent crackdown on their corruption and malpractices.

Hong Kong is party to the Government Procurement Agreement within the framework of The World Trade Organization. Industry observers have recommended that the government establish a separate entity to coordinate its ownership of government-held enterprises and initiate a transparent process of nomination to the boards of government-affiliated entities.

Established the Putrajaya Committee on GLC High Performance to implement and oversee extensive SOE policies to improve governance practices and increase transparency. However, questionable business practices including bribery and unfair competition still occur.

The Corrupt Practices Investigation Bureau (CPIB) investigates any suspicions of corrupt practices at SOEs. Economists say that the “Singapore model” of insulating SOE management from politics will improve performance. To that point, state-owned industrial groups earned an average pre-tax return on assets of 2.9% in 2016, versus 10.2% for private companies.

AVERAGE PRE-TAX RETUN ON ASSETS EARNINGS IN 2016

Clearly, the urgency of PEP identification is accelerating and evolving throughout Asia. The 2017 Wolfsberg report states that in order to carry out effective screening, financial institutions should have complete and accurate data records for identifying PEP risk.

Despite the lack of consistencies across countries’ jurisdictions, fortunately, data-driven solutions exist to streamline regulatory compliance. For example, LexisNexis® Bridger Insight® XG is a fully integrated compliance platform that enables organisations to boost efficiency through a single point of entry. Combining a best-in-class matching algorithm with access to the industry’s most robust global screening data, this solution is powered by LexisNexis® WorldCompliance™ Data.

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Using a rigorous investigative process to provide robust databases of high-risk individuals, WorldCompliance Data enables financial institutions to increase PEP transaction screening. Importantly, WorldCompliance Data is building an SOE content set, with SOE and mSOE tiered into primary and subsidiaries for information available for profiling.

Through partnership with WorldCompliance Data, financial institutions can gain the expertise of deeper research and precise vetting combined with authoritative global PEP perspective to better identify and manage PEP relationships

This interactive story explores the due diligence requirements in relation to PEPs under the legislation of China, Hong Kong, Malaysia and Singapore. It confirms that:

  • PEP related due diligence in each of the jurisdictions is driven by international standards and national laws on AML and combatting terrorist financing.
  • It is acceptable for PEPs to be integrated into an overall RBA, thereby becoming subject to a more tailored and risk-based control framework.
  • The supervisory structure involved in complying with relevant legislation differs from country to country.

Moving forward, appropriate management of PEP risk should focus on a number of notions according to the Wolfsberg report:

  • Zeroing in on those in senior, prominent political positions who have substantial authority over policy, operations or allocation of government-owned resources.
  • The definition of a PEP should not be diluted by the inclusion of categories of natural persons who may exert considerable influence and are politically connected, but do not hold public office.
  • The belief that “once a PEP, always a PEP” is inconsistent with an RBA to managing financial crime risk.

PEPs generally present a higher risk for possible involvement in bribery and corruption. However, bright spots have emerged:

  • Although enforcement figures seem to be rather low outside of China, the local and international media are increasingly reporting about investigations into corrupt practices in the region.
  • The severity of punishments that can be administered to companies that have broken anti-corruption or AML regulations is more prominently spotlighted, as evidenced by the recent BSI Bank case in Singapore.
  • Crackdown on corruption is occurring at the political level, amongst SOEs, through stringent anti-corruption strategies and within public forums.

Additionally, all four jurisdictions have tightened their AML laws, making anticorruption a central element of new legislation. International corporations and banks doing business in Asia are expected to maintain best practice compliance programmes.

The key starting point is to ensure the use of PEP screening databases to manage risks effectively and to develop appropriate risk mitigation measures with enhanced due diligence. Solutions like LexisNexis® Bridger Insight® XG, powered by LexisNexis® WorldCompliance™ Data are becoming an increasingly important part of the overall solution.

In order to carry out effective PEP screening, financial institutions need complete and accurate identifying data on the PEP. LexisNexis® Bridger Insight® XG delivers effective and efficient screening by combining best-in-class matching algorithm with access to the industry’s most robust global screening data, powered by LexisNexis® WorldCompliance™ data.

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