Making good on the Dublin Declaration: Politically Exposed Persons

Two years since the Financial Action Task Force (FATF) issued its revised standards, the FATF Recommendations, for combating money laundering and terrorism financing, all OSCE participating States have committed themselves to them. Some countries have achieved high levels of technical compliance while stumbling to effectively implement them. Other countries have work to do in both areas. FATF Recommendation 12, on reviewing the financial activities of Politically Exposed Persons, or PEPs, is proving particularly challenging.

PEPs are individuals who have been entrusted with prominent public functions, including but not limited to heads of state or government and other senior politicians. State officials rarely find it enjoyable to have others scrutinize their finances, but the public interest in doing so is clear: many of the countries that have recently faced political turmoil and violence, including Egypt, Tunisia and Ukraine, have identified high-level corruption among political elites as a major destabilizing factor.

The OSCE’s Dublin Declaration on Strengthening Good Governance, adopted in 2012, clearly notes the negative impact of financial crime on social cohesion, stability and security. The Dublin Declaration recognizes “the need to enhance the implementation of our international and national anti-corruption commitments” and acknowledges “the fundamental importance of effectively preventing transfers of proceeds of crime.”

Indeed, had the proceeds of corruption in Egypt and Tunisia remained in the country from which they were stolen, they may, at a minimum, have been reinvested into the national economy. The reality, however, is that enormous sums of money were transferred from these countries to international financial centres, many of which are in OSCE participating States.

According to the World Bank’s Corruption Cases Search Centre, asset recovery cases linked to former Egyptian President Hosni Mubarak and former Tunisian President Zine El Abidine Ben Ali and their entourages are pending in Canada, Spain, Switzerland and the United Kingdom. Media reports and official statements indicate that these OSCE participating States have frozen hundreds of millions of US dollars that are believed to be linked to the former regimes in Egypt and Tunisia.

That powerful political figures move proceeds of corruption into financial centres is not a new phenomenon. Financial regulators around the world have long called upon banks to monitor the accounts of foreign PEPs and their immediate family members for signs of financial crime.

What is new under the revised FATF standards, however, is that countries must now require banks under their supervision to monitor the financial activity of their own domestic PEPs. This is certainly a step forward in preventing proceeds of corruption from being laundered abroad, but doing so is effectively hindered by several challenges.

A key question is the extent to which a particular PEP’s financial activity should be monitored. While some PEPs are corrupt, many are not. There is a resulting need to weigh expectations about financial privacy against the security risks of unchecked corruption. Privacy concerns are legitimate, but the cost of corruption to countries and their citizens is staggering, both in economic and security terms. Many countries have struck a balance by requiring PEPs to submit detailed asset and income declarations. In a well-functioning system, banks and law enforcement can jointly use those declarations to monitor financial transactions for any activity that does not match a PEP’s officially declared financial profile.

One challenge to an effective system is the fact that, within a given country, the officials who are to be subjected to additional scrutiny are often the same individuals responsible for applying the stricter oversight. Numerous examples have shown that individuals who control the enforcement mechanisms for the rules by which they are ostensibly bound are often able to act in violation of them and, at least while in power, with impunity.

Surely the limit to what we can do is little more than what we are willing to try.

Christian Larson, Economic Officer in the OSCE Secretariat in Vienna

The simple matter of defining what constitutes a PEP can also be difficult. Some countries define a PEP as “a high-level official together with his or her spouse, parents and children.” A PEP under these terms seeking to launder proceeds of corruption, however, may face little difficulty in doing so, simply by placing funds into the account of an attorney, business partner or other individual outside of the letter of the definition. Banks and law enforcement agencies that rely only on strict definitions and fail to make common sense connections based on known information about a PEP’s business partners and other close associates, make it all too simple for PEPs to steal from their country and transfer funds abroad.

Banks that rely on clients opening accounts to declare themselves as PEPs similarly do a disservice to the population in the PEP’s country of origin. Presented with such an opportunity, it should be unsurprising that some PEPs seeking to avoid scrutiny have simply declared themselves to be non-PEPs and some banks have accepted those declarations without digging deeper.

To fully comply both with the letter and the spirit of the revised FATF standards on anti-money laundering, countries must turn away from these easy-to-flout rule-based approaches. They must instead require and empower their financial institutions to make their own risk-based determinations of whether and to what extent to scrutinize a particular individual’s financial activity. By basing the scope of their monitoring activities on an ongoing assessment of all available information about a PEP, including that provided by law enforcement authorities, financial institutions can use broader and less predictable definitions of PEPs and, consequently, be better at identifying suspicious activity.

To be truly effective, however, banks need support from governments. Lists of PEPs around the world are commercially available, but the companies that produce them generally have access only to publicly available information. Individual countries know the names of their key officials, their family members and their close associates, and could assist banks and law enforcement by making that information public.

Civil society and individual citizens can also play a role. English language lists of PEPs often miss information contained in publicly available reports in other languages. By including key publicly available information in an English language wiki, journalists and regular citizens can assist both the producers and end users of commercial PEPs lists.

The OSCE Secretariat and field operations offer a number of tools to participating States. At the technical level, we help set up training, produce handbooks and maintain networks of experts. At the political level, we provide a platform for the exchange of good practices and the identification of gaps in political will.

What is discussed less, however, is the extent to which the OSCE participating States, both east and west of Vienna, use the tools the OSCE provides. Surely the limit to what we can do is little more than what we are willing to try, and so I close with an idea. Create a voluntary initiative for countries that wish to mutually monitor the financial activities of ministers, heads of state and their families for discrepancies from official asset and income declarations. A single country, or a single bank, can have but a limited picture of a PEP’s financial activities, but joint monitoring across a number of countries can provide a picture that is much more comprehensive and accurate.

A concerted international effort to monitor the highest-level PEPs will build trust among all who choose to be bound by a shared standard for income and asset declarations. If effectively implemented, the system will directly fulfil the ideals of the Dublin Declaration: money that might have been stolen and transferred abroad will instead remain in the PEP’s country, producing public goods and strengthening security.