Integrity risks around PEPs are alive and well

September 14, 2016 Stephen Mulrenan

Some companies aim to gain benefits by means of political influence, and merely being involved with one of these companies could be detrimental to your reputation. Many organisations therefore have a policy about engaging political parties in order to protect the impartiality of the company and also to ensure that there is minimal risk of bias towards a particular government or political party.

This risk can also affect organisations at an individual level with politically exposed persons (PEPs). These are individuals who are in, or have been entrusted with, prominent public functions in a country/state or at international level, as well as their immediate family members and close associates.

Two high profile cases have recently highlighted the integrity risks that are often inherent when engaging PEPs.

Firstly, in Russia, a senior anti-corruption official was arrested for accepting bribes reportedly worth more than US$120 million. Russian police raided the Moscow flat of Dmitry Zakharchenko, the acting head of an anti-graft agency at the Russian interior ministry, and discovered the ill-gotten gains in banknotes. Zakharchenko’s arrest follows the detention in July of officials from Russia’s Investigative Committee – the country’s equivalent to the Federal Bureau of Investigation (FBI) – as a result of bribery claims.

Secondly, in Australia, Labor Party senator Sam Dastyari was forced to resign following newspaper allegations that he permitted Chinese donors – linked to the Chinese government – to make payments on his behalf for travel and legal bills. Fairfax Media reported that the former manager of opposition business in the Senate and shadow spokesman for consumer affairs might have broken federal and state Labor Party rules on political donations by accepting the funds. Senator Dastyari’s resignation followed subsequent revelations that he had then taken a pro-China line over the country’s territorial disputes in the South China Sea that contradicted Labor Party policy.

The Financial Action Task Force on Money Laundering (FATF) defines PEPs as:

  • current or former senior officials in the executive, legislative, administrative, military or judicial branch of a government (elected or not)
  • senior officials of major foreign political parties
  • senior executives of foreign government-owned commercial enterprises, being corporations, businesses or other entities formed by or for the benefit of any such individual
  • immediate family members of such individuals (meaning spouses, parents, siblings, children, and spouses’ parents or siblings)
  • any individuals publicly known (or actually known by the relevant financial institution) to be close personal or professional associates of other PEPs.

Risky relationships with PEPs can be effectively managed by conducting due diligence on potential partners and customers. This should be standard practice. If you discover that one of your third parties is a PEP and could be a high risk, it would be in your company’s best interest to learn more about that entity, their relationships with the government, and the work that they will be doing for your company.

In jurisdictions where integrity and compliance risks are prevalent – such as China and Russia – organisations need to conduct a more in-depth, high level analysis on target third parties that could be ripe for graft. This holds particularly true if your business needs to coordinate with the local government or key individuals that may be classified as PEPs. The level of due diligence that is ordered on third parties need to be proportional to the level of risk.

Previous Article
Letter from the Editor in Chief
Letter from the Editor in Chief

Dear Valued Compliance Insider® Reader, as you know, Compliance Insider® is a part of The Red Flag Group an...

Next Article
Reputational concerns mount for Apple following EU tax ruling
Reputational concerns mount for Apple following EU tax ruling

A poor understanding of complex cross-border fiscal and taxation policies can result in the possible violat...

Looking for the perfect due diligence programme for your business?

Contact us