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Stolen Asset Recovery Initiative
POLITICALLY EXPOSED PERSONSSTRENGTHENING PREVENTIVE MEASURES
Strengthening Regional CooperationSofia, Bulgaria
December 2-4, 2009
Theodore S. Greenberg
Financial Market Integrity
World Bank
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Politically Exposed Persons
• Individuals who are, or have been, entrustedwith prominent public functions
• Includes family members and close associates
R ML i k b f h• Represent a greater ML risk because of thepossibility that they will abuse their positionand influence to carry out corrupt acts (e.g.,extort/pay bribes, steal assets)
• “Not all PEPs are bad” but all require EDD
Stolen Asset Recovery (StAR) Initiative
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Why Focus on PEPs? (1/2)
• Devastating effect on development outcomes.Individual PEP can have disproportionate impact.– $1 trillion in bribes each year (World Bank estimate)– Marcos (1972 – 86): $5 – $10 billion– Abacha (1993 – 98): $2 - $5 billionAbacha (1993 98): $2 $5 billion
• Portion of the recovered assets could providemuch-needed funding for social programs orinfrastructure. Every $100 million:• 250,000 household water connections• 50-100 million drug treatments for malaria• 240 kilometers of two-lane paved road
Stolen Asset Recovery (StAR) Initiative
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Why Focus on PEPs? (2/2)
• Legal and reputational risk to individual bank, andreputational risk to a jurisdiction’s financial sectoras a whole.
• Standard CDD is not sufficient• Level the playing field banks are already taking• Level the playing field – banks are already taking
action on PEPs and many go beyond theinternational standards
• The problem continues: Corrupt PEPs arebecoming more effective in hiding their identitythrough associates, legal entities, andintermediaries.
Stolen Asset Recovery (StAR) Initiative
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Response – UNCAC & FATF
• UNCAC, Article 52 (entered into force Dec 2005):– “to conduct enhanced scrutiny of accounts sought or
maintained by or on behalf of individuals who are, orhave been, entrusted with prominent public functionsand their family members and close associates ”and their family members and close associates.
• FATF 40+9 Recommendations: Rec. 6 (June 2003)– Risk management systems to identify PEPs– Senior management approval– Establish source of funds and source of wealth– Conduct enhanced ongoing monitoring
Stolen Asset Recovery (StAR) Initiative
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The Reality: Low Compliance
• More than 80% ofjurisdictions have notimplemented effectivemeasures. Only 3j i di ti li tjurisdictions compliant
• Compliance lower in FATFjurisdictions
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Link between PEPs and AML Policies
• PEPs should beidentified in course ofCDD procedures(including identificationof beneficial owner)of beneficial owner)
• Failures in CDD createsrisk that PEP will not beidentified
• FATF Recommendationratings build on this link
Stolen Asset Recovery (StAR) Initiative
Recommendation 5 = CDDRecommendation 6 = PEPs
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Little Evidence of Monitoring
What is reported by banks?
• No corrupt PEP activity in banks or in othersectors
F PEP STR• Few PEP STRs
• Few investigations or prosecutions for grandcorruption
Where is the corrupt money?
Stolen Asset Recovery (StAR) Initiative
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Why is PEPs Compliance a Problem?(1/2)
• Lack of political will– Failure to pass and implement legislation and
regulations
– No regulatory sanctions on PEPs
– Little interest in measuring effectiveness of PEPsmeasures (e.g., collection of statistics, studies)
– Few cases
Stolen Asset Recovery (StAR) Initiative
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Why is PEPs Compliance a Problem?(2/2)
• Need for clarification and harmonization ofinternational requirements – differences have led toconfusion about definitions and how to implement
UNCAC FATF
Basicdefinition
Individuals who are, or have been,entrusted with prominent publicfunctions, and their family
Individuals who are or have been entrusted withprominent public functions in a foreigncountry…Business relationships with family members
• “The classic corrupt PEP is dead” -- corrupt PEPs areusing complex corporate and trust arrangements andclose associates or relatives to veil the identify of thePEP or the PEP’s beneficial ownership
Stolen Asset Recovery (StAR) Initiative
u ct o s, a d t e a ymembers and associates
cou t y us ess e at o s ps t a y e be sor close associates of PEPs involve reputational riskssimilar to those with PEPs themselves
Foreign ordomestic
Foreign and domestic (not explicit) Foreign only
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Principle Recommendation 1
Apply EDD to All PEPs, Foreign and Domestic• UNCAC - domestic and foreign PEPs; FATF –
foreign only• Why?y– Legal and reputation risks remain same – domestic
politicians are subject to same pressures and perverseincentives.
– Increase credibility of commitment to fightingcorruption and money laundering
– Reality: Many banks are already covering both
Stolen Asset Recovery (StAR) Initiative
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Principle Recommendation 2
Require a Declaration of BeneficialOwnership
• Provides background to assist withidentification and verification
• Assist regulatory authorities inevaluating BO practicesevaluating BO practices
• Requirement to sign under criminalpenalty, where existing, serves asdeterrent
• One tool – not only tool—to identifyand verify BO. Not sufficient to letbanks “off the hook”
Stolen Asset Recovery (StAR) Initiative
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Principle Recommendation 3
Request Asset and Income Declarations
• Required in more than 110 countries
• Provides a “snapshot in time” that bank cani h fil i iuse to compare with profile or account activity
• Addressing refusals
• Issues: Verification is uneven
• Other uses: PEP identification if public list offilers, analysis of STRs by FIUs
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Principle Recommendation 4
Periodic Review of PEP Customers
• Review of the “big picture” on risk-basedapproach, at least yearly
H l il h• Helps to overcome silo approach
• Should include consideration by at least onesenior manager
• Good Practice: PEPs Committee
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Principle Recommendation 5
Avoid Setting Limits on the Time a PEP Remainsa PEP
• UNCAC and FATF – “once a PEP always a PEP”
P bl i h i li i• Problems with time limits
• Consider on case-by-case basis using risk-based approach
Stolen Asset Recovery (StAR) Initiative
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Other Recommendations & Issues
• PEPs are an asymmetric risk – no one singletool will solve problem
• Ensure inclusion of “family members” andclose associated in definition of PEPsclose associated in definition of PEPs.
• Commercial Databases
• Involvement of group AML/CFT complianceofficer in decision to accept customer
• Issue: National List of PEPs
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Regulatory Authorities, FIUs
• Include PEPs component in on-site inspections
• “Red flags” or typologies to help identify PEPs,including close associates, and indications ofcorruptioncorruption
• Enforcement, use of sanctions
• Guidance on filing PEP STRs
• Collection of statistics
Stolen Asset Recovery (StAR) Initiative
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National Cooperation & Training
• Partnerships with government authorities andprivate sector on PEP issues– Strategy
implementation of PEPs policy– implementation of PEPs policy
– suspicious indicators
– typologies and trends
• PEP training within banks, regulators, FIU– Harm caused, culture of compliance, “red flags”
Stolen Asset Recovery (StAR) Initiative
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THANK YOUTed Greenberg
Financial Market Integrity, World Bank
L i GLarisa Gray
Financial Market Integrity, World Bank
Delphine Schantz
UNODC – Global Program against Money Laundering
Proceeds of Crime and Financing of Terrorism