PEPs and Corruption Risk

Corruption is an issue of growing relevance in the international community and in government policy. In recent years, cases have been investigated that expose how politically exposed persons (PEPs) have unlawfully accumulated significant wealth, and also how those funds have been laundered in foreign jurisdictions and hidden in trusts, private companies, foundations or in the name of front men, who in many cases may be their own relatives, close associates or even business partners.

That is why, through the Recommendations of the Financial Action Task Force (FATF), standards have been set to define PEPs properly, and countries are encouraged to establish policies and mechanisms to identify and regulate them, with the aim of detecting and preventing possible cases of corruption and related offences.

What is a Politically Exposed Person (PEP)?

A PEP is an individual who holds, or has been entrusted with, a prominent public function. Their position and influence place them in a situation of particular prominence, which would facilitate the potential misuse of public funds.

FATF Recommendation 12

In this recommendation, the FATF states the following:

"Financial institutions should be required, in relation to foreign politically exposed persons (PEPs) (whether as customer or beneficial owner), in addition to performing normal customer due diligence measures, to:

• have appropriate risk management systems to determine whether the customer or the beneficial owner is a politically exposed person;
• obtain senior management approval for establishing (or continuing, for existing customers) such business relationships;
• take reasonable measures to establish the source of wealth and source of funds; and
• conduct enhanced ongoing monitoring of the business relationship.

Financial institutions should be required to take reasonable measures to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organisation. In cases of a higher risk business relationship with such persons, financial institutions should be required to apply the measures referred to in paragraphs (b), (c) and (d). The requirements for all types of PEP should also apply to family members or close associates of such PEPs."

How do we define corruption?

The Royal Spanish Academy defines corruption as "the action and effect of corroding", "alteration or defect in a book or document" or "vice or abuse introduced into non-material things".

The World Bank defined corruption as "the abuse of public office for private gain".

In 2004, the United Nations Development Programme (UNDP) defined corruption as: "the misuse of public power or authority for private benefit, through bribery, extortion, influence peddling, nepotism, fraud, money trafficking and embezzlement".

For the United Nations Office on Drugs and Crime (UNODC), corruption is a social phenomenon involving three fundamental elements.

Risks associated with corruption

Among the risks associated with corruption we can cite material, legal, economic, operational, reputational and contagion risk.

Material risk

There may be corruption risk in three ways:

• Corruption from within the organisation: the organisation becomes a source of corrupt acts, carrying them out itself through the officers who make it up.

• Corruption through the organisation: the organisation is the instrument or tool through which third parties carry out corrupt acts.

• Corruption against the organisation: the organisation is the victim of corrupt acts.

Legal risk

The possibility that the organisation or one of its officers ends up involved in administrative or court proceedings; sanctioned administratively or judicially; or found liable by a court and ordered to pay a fine or compensation.

Economic risk

The possibility that, as a result of an act of corruption, the organisation suffers financial losses. In the case of public bodies, economic risk arises from the possible diversion of State resources, or any form of damage to public assets.

Operational risk

This may arise as a consequence of an inappropriate, insufficient or inadequate procedure. It also arises when processes are not followed correctly, or are followed imperfectly, setting off a series of risks.

Reputational risk

The possibility that the organisation's name, or that of one of its officers, is mentioned publicly in the media or is simply perceived by public opinion as linked to acts of corruption.

Contagion risk

The possibility of loss that an organisation may suffer, directly or indirectly, through the action or experience of a related party. A related or associated party includes individuals or legal entities with the ability to exert influence over the organisation.

Causes and effects of corruption

In conclusion, corruption not only erodes trust in institutions but also acts as a key predicate offence for money laundering. It is imperative that the authorities strengthen control and supervision measures, and that society as a whole commits to promoting transparency and accountability. Only then can we build a safer, fairer environment for everyone.

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