Politically Exposed Persons. PEPs. PEPs are the reason I am back here for my yearly post. There is he who shall not be named from the UK PEP rigmarole, let's code name him, Mugface. That didn't bother me too much, other than seeing Mugfaces face all over the place. Then, last week Mr Ari Ben-Menashe (ABM from hereon) was brought to my attention via the AFC news feeds. A Canada based lobbyist, former Israeli military, political consultant cum arms dealer and general international man of mystery. Unfortunately for him, you don't get points for mystery during the banks Know Your Customer (KYC) checks. The mystery therefore has seen him de-banked from Canadian/North American banks and financial institutions over the last decade or so. He is definitely politically exposed, he definitely rolls in high risk jurisdictions (HRJs), he is a person and he is, in anti-financial crime regulation and banking terms, a liability. He, however, claims to be a victim of unfair banking policy and political revenge schemes.
While his most recent endeavours in Canadian court leave him debanked, there are things that I need to get off my chest, and others that need to be debunked. Now much of this will be known to those who are in the know, but if you aren't then maybe some information herein will give you a deeper insight into these kinds of incidents and situations. This is a good example as the guy is basically a open and shut case for any anti-financial crime compliance team. I only know of him via the new articles noted here, I hadn't heard of him before this week, nothing against him personally but professionally he's a good example of a type of PEP, and why they are high risk. I will touch on a few areas and try to paint a picture.
Why are banks making a fuss?
Criminals are bad people who make their money doing bad things. These bad things are usually illegal, but they make lots of money and the bad people want to put that money in the bank so they can do with it, move it, spend it, as they please. There are criminals everywhere trying to get their 'dirty money' into banks and launder it so it looks clean. Laundering might just be transferring it to a less risky country so it appears legit, or passing it through the accounts of legit businesses and people - they want to create distance between the illegal origins of that dirty money and where they intend to spend it.
In general, as was previously the case, banks and greedy bankers will happily take the dirty money if you let them, as they can earn off it too, the more investment and funds the bankers attract, the bigger their bonuses. Countries, represented by their politicians, do not want their jurisdictions and financial systems to be known as havens for dirty money, because they do not want criminal elements to be attracted or to flourish in their jurisdictions, as crime is bad for trust in government, public safety, economic development, reputation, equality, etc. So, a government might create or adopt anti-money laundering (AML) legislation, establish a Financial Investigation Unit (FIU) to monitor, regulate and sanction banks. The FIU oversees and monitors the controls and systems the banks have in place to prevent and detect money laundering and its predicate (fund generating) crimes.
For instance, bribery is a crime that generates funds that might need laundering before they can be utilised in desired locales. For example, a corrupt official, Mr X in landlocked 'country A' wants to buy a condo on the beach in 'country B', his accumulated bribes are easily deposited in a local bank. In country B however, the AML controls are fit for purpose and they want to know how Mr X made his money, before they open his account. Mr X says, wages, savings and inheritance, the analyst for the country B bank does some due diligence, checks the average salary for officials in country A and finds it to be pretty low. Then, after being unable to find further information in public sources, asks for proof of inheritance such as death certificate or bank account statements for proof of transfer of funds. Mr X doesn't have any of these and instead provides a letter from a solicitor confirming this. The solicitor cannot be found on the countries law regulator register and doesn't have any online presence. As the customer cannot satisfy this request and he is a public official in a high risk country, the decision is made to not allow Mr X to open an account. The analysis of Mr X's existing net worth are known as 'source of wealth' checks, as his source of wealth cannot be clearly established with suitable evidence, he does not pass the due diligence checks or meet the risk appetite required to open an account.
This is how banks help fight crime, and though they supposedly aren't very good at it, the rules make sense. Stop dirty money getting into the global financial system and you disrupt criminal activity and networks. If criminals can't clean their money one way, they will try another but the deterrent may hinder operations to the extent that further criminal activity is not feasible. This is an oversimplification, but it's the goal, and it is these types of controls that are stopping Mr Ben-Menashe getting a bank account in Canada.
No PEP is and island.
So that's criminals, but PEPs aren't criminals are they so what's big deal? Ok then, a quick introduction to PEPs, actually firstly a quick introduction to the Financial Action Task Force, aka FATF. The FATF "leads global action to tackle money laundering, terrorist and proliferation financing. The FATF researches how money is laundered and terrorism is funded, promotes global standards to mitigate the risks, and assesses whether countries are taking effective action.
- FATF continuously monitors how criminals and terrorists raise, use and move funds.
- The FATF Recommendations, ensure a co-ordinated global response to prevent organised crime, corruption and terrorism.
- The FATF holds countries to account that do not comply with the FATF Standards."
The FATF 40+9 recommendations are a wide reaching set of, you guessed it, recommendations geared to bolster and align the anti-financial crime framework of countries and the banks that operate in them. In line with these rules, there are sets of predicate crimes which might lead to money laundering, the EU 6th Money Laundering Directive (6MLD) set are below. When banks create their policies and requirements for checks on customers they are looking for any links to the below categories amongst other things.
source: ComplyAdvantage
Politically exposed persons are "defined by the Financial Action Task Force (FATF) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing (TF)."
Alongside PEPs are their are close associates and relatives of PEPs who can also pose higher risk, a corrupt politicians' partner may be using the funds she has embezzled from her government department. The main characteristics leading to the increased risk of criminal behaviour is power. The definition of corruption I like to use is, "the abuse of power for illicit gain." Many positions in government are those of power and influence, hence there is more risk of corrupt behaviour. The ministers, politicians and civil servants therein, are the conduits to big money deals, resources and in various contexts.
We are going to use FATF examples and definitions, though there are various others and banks tend to have their own frameworks, versions and descriptions, they are largely aligned per guidance from oversight organisations like the FATF.
Why PEPs are high risk.
Just because you work in a prominent public role, it doesn't mean that 'you' are more susceptible to corruption, does it? Or does it mean that you are more likely in a position that is susceptible to corruption. Is it the the person or the position, both maybe, does the susceptibility gradually increase? Is this just semantics, maybe yes, maybe no, you can argue either way. But I say that corruption exists where there is room to abuse the power your role gives you, and then it depends on 'you'.
Here is where we open up a can of proverbial worms, that is the cause, the psychology of the individual, the state of governance, the state of the government, the culture, the need - as in, is the official getting paid pennies. Rational choice theory is the academic tool of choice for analysing corruption which it explains as the function of deliberate, strategic, self-serving behaviour, with this behaviour likely to occur where certain individuals hold more power than others. There are other ideas around behaviour and rational choice - we aren't particularly rational beings after all.
Let's put that aside for now, corruption happens, the exact behaviour mechanisms aren't the point here. The point is that we can see that corruption happens, dirty money wants to be cleaned, and governments don't want banks in their countries to be doing that cleaning. Most people will agree that if a bank can identify, stop and freeze the funds of a criminal that has been trafficking children for slavery and worse, they should be empowered to do so. The same applies to a minister who has embezzled funds from the education or health budget hindering development and causing suffering. These are the processes that are causing the problem for ABM. When it comes to these processes, the policies that govern them are lengthy and take into consideration a number of factors to assess overall risk. These include, amongst other things;
the industry in which the person works and funds are generated,
the countries of domicile or business operations,
the counterparties and countries business is conducted with/in,
any adverse information/new stories found and
where/how their wealth has been generated.
There are scoring systems which determine how risky a customer is based on these factors and at a point, banks will draw the line.
High Risk Jurisdictions
Now let's have a look at some of the reasons why ABM is having problems. In this a National Post article (link) covering his part and the particulars of his fight against the banks and state, there are a number of countries mentioned, including Zimbabwe, Libya, Russia, Sierra Leone amongst others.
As mentioned above the anti-financial crime policies banks have in place have a risk scoring system that is pulled from guidance by FATF and other organisations like Transparency International, whose Corruption Perceptions Index is often used as part of the scoring for country risk, the more prone to corruption, the more risky. The less developed, weaker the money laundering controls (per FATF measures) a country has, the more risky it is. An industry that is cash intensive is riskier than one that uses solely card payments, because criminals can mix illicit cash (from street drug sales for instance) with legit funds (hair dressers/restaurants) to get it into the bank. If we go full stereotype, a lithium mining company in a less-developed economy is more exposed to having poor working conditions, use child or slave labour, this makes mining a high risk industry. Banks do not want to deal with funds that involve child labour in the supply chain. There are a plethora of such categories which go towards a customers risk rating.
The country risk rating is a major factor in assessing risk. It takes into account any country are a citizen or resident of, you do business in, have operations in, receive or send funds to, and generally have any material connection to. The Know Your Country website give an idea of the kind of system banks use to assign a risk rating to countries, using FATF, sanctions, terrorism, corruption and tax blacklist indicators.
Now, we will take as closer look at a few of the countries listed in the aforementioned article through the lens of a risk rating system provided by KnowYourCountry.com. They have a traffic light system to rate risk, red being high risk, orange medium, and green low. Some of their parameters are noted in the table below. The corruption score is out of 200, with a higher score meaning less corrupt (e.g. Canada scores 166).
Country | Risk rating | International Sanctions | Corruption |
Israel | Medium | Yes | 130 |
Libya | Medium | Yes | 20 |
Russia | High | Yes | 48 |
Sierra Leone | Medium | No | 65 |
South Sudan | High | Yes | 11 |
Venezuela | Medium | Yes | 18 |
Zimbabwe | Medium | Yes | 33 |
Personally, I disagree with the risk rating for most of these, some are far too lenient. You can't have a country with a corruption score of 18 or 20 (on this scale) as medium risk. You can't balance out the high risk of corrupt activity with compliance with EU tax rules when scoring, it doesn't work like that, but let's not get into it...
Now, let's say that someone is doing business in all the above countries and they have significant amounts of payments to and from businesses and individuals in these countries. Here is what would happen to a customer of a bank, each counterparty for any significant transaction would be identified and screened to ascertain what sector they were doing business in and whether the transactions and relationship make sense per the expected activity of the customer. If your customer owns a shop, you expect payments to suppliers and wages for staff, and payments from customers, etc.
If we look at a bank customer, an international political consultant, doing business in high risk country A and there is a large payment from an individual. On investigation the individual turns out to be a government official, and the customer states the payment is for consulting fees - with no specific detail. Further checks for that official, she has previously been investigated for bribery. So here, we are talking about the source of funds, where the money is coming from and what it is for. Do the source of funds make sense, and how much exposure to high risk factors such as industry and jurisdiction is there?
Is Ari Ben-Menashe a PEP?
I wouldn't class ABM as a strict PEP as he doesn't hold a permanent prominent role with any one government, score, one point for him! If he had links to or a role for one government, you might classify him as a close associate in his capacity as a consultant working very closely with particular government officials. Due to his former career, diverse list of former and current clients, exposure to HRJs and the nature of his relationships, you would classify him as a de-facto PEP. And in line with these points and his various connections you would be justified in saying the risk he poses is elevated. In some ways being an actual PEP would be more suitable, as it is your official role making you a PEP, ABM chooses to work in his field, chooses the governments he does business with, and chooses to be exposed to the risks therein. In the regulatory landscape the reality of his decisions are the cause for his current problems.
In the world of customer due diligence there are what we call adverse information or negative news checks, which are pretty self explanatory. Tailor made systems screen for, you guessed it, any adverse information that might have been in the media - you search the name (in aggregator systems) and see what comes up. If you get a hit, you make sure it's the right person and not a namesake, then determine whether that news has a material impact on your risk assessment or if it poses any reputational risk to the bank, if it were take on the customer. You might also screen the transacting counterparties for further information.
It's complicated but it's not the case that everyone is tarred with the same brush. Each customer is assessed on their own merits, using a risk based approach. Which is "assess, and understand the risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk."
So, ABM is getting adverse information hits due to being in the news linked to high profile military cases in Israel, high risk countries in various contexts, he is subject to tax evasion investigations and has been referred to as an arms dealer. These are things that are going to get flagged, and that flag is very red.
Risk Based Approach
Leave aside this case for a second, and think about how much extra work you have to do to get comfortable with a very active high risk individual or business, every year, checks on every high risk vector. Then think about the result of these checks, potential payments from heavily corrupt governments, active war zones and unverifiable parties. And remember this isn't the banks being lazy, they spend millions of pounds a year on software, skilled staff, on training/development and fines to stay in line with regulations. Everything is in place for them to protect themselves and the financial system, so if they are saying 'no' there is a usually a well assessed and considered rationale.
Here's the kicker, if they take him on as a customer and he passes the due diligence, he'll give them good business but they'll be expending all those resources with a likely regular stream of negative news and one day potentially serious negative news/information per the risks he is exposed to. On that day, the bank may find it has been taking money from an illegal source (be it crime/corruption/sanction circumvention) and they will be prosecuted and fined alongside him - the reputational and operational risk is significant - that's the kicker.
The fact is that ABM is not the same as a regular person who has been denied a bank account. A normal denial might be due to a conviction for fraudulent behaviour, or not providing the required financial information or personal details. From my experience banks will try their best to take on as many customers as possible, they want money after all. They do get it wrong sometimes, I can't deny that.
ABM is a bona-fide high risk, high net worth individual, whose source of wealth has been generated from high risk countries and counterparts, and his current source of funds remains so. If I was deciding whether he was allowed to bank with a bank, I would baulk and he'd have to walk.
I hope this has been helpful and cleared up a few things. Thanks for stopping by.
Al.
P.S.
An aside and a ever-present thorn in my side is that in general banks have been happy to take dirty money, as general consensus in banks is the more money the better. One might claim that our ethical compasses have become more sophisticated over the years and the top brass at banks want to stop the criminals and dirty money, but if the regulations weren't there banks would be happy to take any money without many or any questions. For the purist capitalist, the invisible hand might be the way, but I need a visible and tangible hand to slap a few faces when greed becomes the defining factor of a sector. Nowadays, banks budget for financial penalties and have large anti-financial crime departments to appease regulators and regulation, it may now correlate with doing the right thing but it wasn't the cause. I guess capitalism is problematic because people are human.
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