Banks with politically exposed persons as customers must stay alert

Due diligence exercises could ensure that bank services are not surreptitiously used for nefarious ends.
Due diligence exercises could ensure that bank services are not surreptitiously used for nefarious ends.

Summary

  • Power and corruption go together across a world rife with scruple-free politics, money laundering and worse. Banks should maintain a vigil to prevent their services from being used to facilitate illicit financial activities.

The general election currently underway is the only thing hotter than the weather in India these days. With talk of tempos full of cash, and the discovery of more than 30 crore of unexplained currency in a Jharkhand legislator’s home, it is time to shine a light on a somewhat obscure term: Politically exposed persons (PEPs). This term refers to individuals who hold political office or public positions such as judgeships and bureaucracy posts, or have a close association with those who hold such authority.

Data from Rzolut, a risk and compliance technology and data provider, reveals that there are over 2.3 million PEPs around the world, ranging from country presidents to municipality officials. These positions tend to have stronger links than others with cases of corruption, money-laundering and other financial crimes.

For instance, in December 2023, Senator Bob Menandez in the US was found in possession of several gold bars at his home. He was charged with having accepted bribes from various businesses.

The vast quantities of cash recovered time and again from our own politicians here in India have also often travelled through benami bank accounts and other dubious channels. Note that the currency notes printed by the Reserve Bank of India (RBI) are distributed only through what are described in banking regulations as ‘scheduled banks.’ There is no other way for them to enter general circulation.

Also read: Did Jan Dhan accounts really help in money laundering post demonetisation?

Within the bounds of privacy norms, it would be prudent for banks to keep a watch on the actions of customers who are PEPs, not just to manage their financial risks, but also to satisfy the regulatory requirements of India’s central bank and other regulators around the world.

Although there are no credible figures available to quantify political corruption, the scale of money-laundering that takes place globally is estimated to be monumental. According to the United Nations Office on Drugs and Crime, an estimated 2%-5% of global GDP is laundered. In today’s scenario, this would amount to more than $2 trillion annually. 

It is safe to assume that a significant proportion of this money is from corruption involving PEPs, though the estimate also includes the proceeds of other crimes, like illegal money made off drug trafficking and gold smuggling.

PEP-related corruption is especially insidious, as it nibbles away at the fabric of the nation and weakens democratic structures in ways that are still being discovered. From the distortion of elections to the award of contracts for flyovers and highways to contractors that deliver sub-standard quality, the impact covers a vast range of activities.

Connecting the dots between political corruption and India’s low-quality infrastructure—roads that barely survive monsoon rains, for example—does not require much imagination.

Also read: Govt blocks bank accounts of 200,000 dormant firms

For their own reputation and balance-sheet health, banks should maintain a vigil to prevent their services from being used to facilitate illicit financial activities. Negligence can prove costly. A few years ago, BNP Paribas was fined $9 billion for letting the governments of Sudan, Cuba and Iran conduct transactions through the bank. These governments are under US government sanctions, and when the regulator found out, it resulted in a court case and massive fine.

In extreme cases, PEPs may also have links with individuals or organizations involved in terrorist financing. Due diligence exercises could ensure that bank services are not surreptitiously used for nefarious ends. As recently as in 2020, it was found that banks in Syria were facilitating the transfer of millions of dollars to the terrorist group ISIS; these lenders paid a heavy price, as they were subsequently cut out of the international payments settlement system, as per Washington Institute.

Given the dangers faced by the world, it is no surprise that banks around are being asked by regulators to enhance their due diligence in dealing with PEPs, including obtaining information on their source of funds and nature of business relationships. Growing online transactions are also being kept track of.

Banks should invest in systems to identify, monitor and report to regulators their PEP relationships as part of their anti-money laundering and counter-terrorism financing obligations.

From RBI to the US Federal Reserve, bank regulators around the globe not only have well laid-out policies, procedures and rules, but are also raising the bar on these continually. While this adds to the cost of bank operations, it is seen as necessary to ensure that political corruption is stemmed and terrorist financing stops. Compliance need not be too burdensome, though. Digital technologies are playing a welcome role in ensuring effective compliance and helping banks manage complex processes and reporting cycles.

In election years, the challenge is steeper than usual. Countries with over half the world’s population are election-bound in 2024. The list includes robust democracies such as India and the US, but also countries like Russia and North Korea.

It is well understood that the pressures of election-funding needs could combine with the temptations of power to elevate levels of corruption and illicit financial activity. Banks should stay extra vigilant and ensure that their books and business reputations stay spotless.

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