PEPs in the Panama Papers: Where rule makers are rule breakers


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AML, PEPs, and the Incendiary Panama Papers

Politically exposed persons—like David Cameron and the prime minister of Iceland—are a well-known risk in AML/CFT Compliance, and best-practices on-boarding carefully accounts for that. But the Panama Papers have revealed in stark relief the extraordinary magnitude of PEPs as high-risk actors in AML Compliance.

Frank Cummings, the co-founder and CEO of AML Partners, has specialized in AML Compliance for nearly two decades, and he explains that the long-held standard for determining risk levels of PEPs was whether they had access to state funds.

But Cummings said that doesn’t hold any longer because of revelations in the Panama Papers: “The same people who are designing the system are revealed to be cheating the system to place their money in hidden off-shore accounts,” Cummings said. For financial institutions striving to maintain AML Compliance, this magnifies the risk of PEPs immeasurably.

“The traditional risk-based approach for politically exposed persons has now gone out the window because of the Panama Papers,” Cummings said. “We now know that PEPs themselves are actively strategizing with legal teams to circumvent all the controls that are in place worldwide to detect and report money laundering. Given this grim reality, they can longer be afforded the determination of anything other than classification as extremely high risk.”

Cummings noted further that the Panama Papers illuminate the degree to which PEPs warrant a level of scrutiny that previously was applied only to criminals and terrorists.

“The Panama Papers have exposed the underbelly of money laundering,” Cummings said. “We have been focusing on the criminals and terrorists; clearly, we need to pay a lot more attention to leaders and politicians and to their associations.”

Cummings imagines a future in which the presence of high-level PEPs associated with customer accounts could make a bank radioactive to its correspondents.

“I can see some institutions applying the de-risking concepts that are happening in the Caribbean where correspondent accounts are closed due to broad-brush perceptions of high risk. Imagine that broad brush applied to PEPs. If there is a high-level pep associated with a high-level correspondent bank, institutions could apply the same level of due diligence and drop these accounts as being categorically too high a risk.”

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