The Madoff Ponzi scheme: how can investors be protected?
If you thought that 2009 was the last time Bernie Madoff made the headlines, you were wrong. The mastermind of the world’s largest Ponzi scheme reminded us of the fragility of the financial world when his death was announced last month. The former investment banker was serving a 150-year sentence in jail for siphoning more than 40,000 people across 125 countries of their money. Being a giant in the sector and someone of repute did not stop him from turning into a fraudster, which teaches us some important lesson. A Ponzi scheme running for four decades This whole operation was a very high-scale one. It involved top celebrities like Steven Spielberg, Kevin Bacon, Sandy Koufax, Fred Wilpon and Elie Wiesel. How did it work and succeed? Bernie Madoff, the founder of Madoff Investment Securities LLC, had already built the reputation of being a wizard of the Wall Street. He boasted of credibility, financial influence, power and an offer of exclusivity. So investors did not really suspect anything about him or his scheme. How does a Ponzi scheme work? The operation mode is quite simple. Old investors’ money is siphoned off and new investors’ money is used to offer them their gains/dividends. This is exactly what Madoff did. He had not conducted a single trade for his clients for years. Millions and billions were invested by investors in a portfolio that did not even exist. During the whole process, he defrauded them of an estimated $17 billion. The Great recession sours things However, things started going wrong in 2008 when the US Capital market crashed. During the Great recession, thousands of investors were afraid of the potential collapse of the American economy and they decided to withdraw their money from the scheme. However, having siphoned off the money, Madoff did not have the funds needed to meet these demands. After that, Madoff decided to confess everything to his children, Andrew and Mark Madoff. Both of them work at the same company. However, it is believed that they are not involved in the Ponzi scheme. They alerted the authorities about the fraud and an arrest followed. Bernie Madoff confessed to the crimes and he was given a sentence of 150 years in jail. Then the news of his death hit the headline recently… A trail of despair and loss While Madoff was serving a sentence of 150 years, is this justice enough for what he did? He left behind a trail of despair and loss for his family, friends and even Palm Beach. Thousands of people’s savings and retirement plans were destroyed and a lot of his clients had to come out of retirement, return to work and even move in with friends and families, when they should have been spending the rest of their lives leisurely. In December 2010, on the second’s anniversary of his father’s arrest, Mark Madoff killed himself. Mr. Shapiro, who is one of Madoff’s first investors and friend for a long time is presumed to have lost millions because of this scheme. Nonetheless, he and his family agreed to pay $550 million to resolve claims and an additional $75 million was settled to the Department of Justice for civil forfeiture claim. Besides individuals, Palm Beach as a whole was affected by this scandal. Already, 2008 was a year of financial turmoil and Palm Beach felt the impact because it became ground zero for the scandal. Many of its islanders, such as Mr. Shapiro and Jeffry Picower, were victims of this. The actions of Bernie Madoff and the collapse of Lehman Brothers, which also took place in 2008, left a trail of financial ruin in Palm Beach. The island was propelled into the recession that was dominating the US. How can investors be protected? If this scandal has taught us one thing, it is that you cannot blindly trust an investor or a firm when it comes to money. Even the reputable Bernie Madoff was tempted. This raises the question: how can investors protect themselves? There are several measures that can be taken to ensure that your money is in safe hands. Background checks First of all, it is very important to conduct background checks. The person that you are dealing with must be licensed or registered with a firm. This means that they have the minimum credentials required to work in the industry. Another good idea is to conduct a little search on the advisor or broker’s name to see if any news about past indiscretions or lawsuits appear. If there are any issue or complaints, you will learn about these in regulatory databases. These will feature disclosures, complaints or arbitrations and it is not recommended to work with these individuals. Nonetheless, as the case of Bernie Madoff has proven, even the most reputable individual can turn rogue. That is why it is advised to conduct business in a jurisdiction where investors are protected. For instance, in Mauritius, there are laws and regulations that protect investors who are victim of fraud. As such, selecting the right financial firm to work with is crucial. Communication Whenever you are dealing with someone, you must review statement accounts regularly and, of course, ask your financial advisor f you notice something funny going on. If you do not have a satisfactory response within an appropriate time frame, then you must be on your guards. Another red flag is in the investment banker’s response itself. If while seeking answers, you cannot understand what is being said and the explanations that are being given to you are confusing you more than clarifying, then this is a bad sign. Someone very persuasive can talk you into investing into something that is not legit. That is why you should not act on a rush, think well and conduct all the necessary checks. If you have questions or you need a piece of advice, do not hesitate to get in touch with our customer support team which consists of trained and responsive agents.
Enron Corporation scandal: lessons to be learnt from the havoc
This scandal is not something recent. However, the lessons it involves is something useful and relevant even in today’s time. The firm peaked in the industry and fell down and crashed! The crash was even bigger than its success and it affected the whole of Wall Street. Thousands of employees lost their jobs and the most shocking part is that one of the most powerful firms in the US just crumbled overnight. Enron Corporation: a high street darlingThe firm saw its beginnings in 1985 when the two natural gas companies Houston Natural Gas Company and InterNorth Incorporated. Following this, Kenneth Lay, the CEO of the former firm became Enron’s CEO and chair. The firm was rebranded into an energy trader and supplier and being very ambitious, he wanted to expand the firm’s capabilities beyond natural gas. As such, it made an aggressive move into electrical power. It invested into power plants and other electrical generation assets. However, Enron took another direction from other energy companies. Its executive tried to generate a profit from energy trading. How did it do so? Instead of producing and delivering natural energy to clients like conventional firms would, it used future contracts to deliver energy at specific times in the future, which allowed it to make money via the bias of those who wanted to speculate on price movements or to hedge against the risks of unexpected energy-price volatility. As such, Enron became more like a Wall Street investment company. In 1999, Enron created Enron Online (EOL). This was an electronic trading website that looked at commodities and the firm Enron became the counterparty to all transactions completed on EOL. The company managed to entice a lot of clients because of its reputation, credit and expertise in the energy sector. Following trades etc, it ended up creating completely new markets, such as contracts tied to weather events and internet bandwidth. However, these were only loosely connected to weather events and internet bandwidth capacity. Despite this, the firm was highly praised in the industry. By 2000, its stock grew at a very rate and Enron became one among the top 10 businesses in the country. It was applauded by many for its expansions and ambitious projects. Moreover, for six consecutive years, Fortune named the firm “America’s Most Innovative Company”. The fall of the Wall Street darling Nonetheless, by fall 2000, the firm started to crumble under its own weight and its success turned out to be a mirage. It turns out that the firm used accounting techniques to conceal the fact that it was undergoing huge business losses and it was in massive debt. For instance, it used mark-to-market accounting. This is a technique which measures the value of a security based on its current market value instead of its book value. While this is a strategy that can be efficient for trading securities, it is disastrous for businesses. Nonetheless, thanks to this, Enron appeared to be a success financially. Moreover, executives used off-balance-sheet special purpose vehicles to hide its debts and toxic assets from investors and creditors. However, with time, the techniques stopped working and by 2001, the firm revealed a huge quarterly loss and debts. It was then revealed that it had been consistently overstating its earnings for at least four years. After that, it had to file for bankruptcy and the authorities started paying attention to its operations. As everyone would have guessed, criminal charges against executives ensued. They were charged with conspiracy, insider trading and securities fraud and Wall Street’s darling experienced a fall from grace. In fact, the whole industry felt the impact of this fraud. It is estimated that shareholders lost $74 billion during the years leading up to the bankruptcy and the havoc that was caused led to new regulations and compliance measures being implemented. Lessons learnt from the debacles If there is one good that came out of this situation, it is that we could learn several lessons from this chaos. Learn about a firm well before investingAs mentioned before, Enron was quite different from other traditional energy companies and many of its investors did not understand its business model. Even experts in the sector could not understand some of the transactions. Moreover, the firm used a lot of fancy derivatives which were unnecessary. One of the dangers of the firm is that it relied too much on these speculations and derivative contracts. As such, as an investor, you must be careful when dealing with a firm. Some of the red flags that you must be on the lookout for is whether the company has a complicated business model or its financial derivatives are completely different from others. There is a lack of transparency or a false semblance and these may confuse you. Prioritise firms that are completely transparent in their operations and that offer help and support whenever you need it. For instance, Blue Azurite has a team of experts at your disposal. They are always available to answer your questions, clear your doubts and make sure that you are completely satisfied. Another important factor that comes into play when speaking about Enron its ethic-a moral code of conduct. All companies have a set of rules that they have to abide to and these are based on principles and values. Enron completely disregarded this structure of trust that support a firm and instead, it built a mirage of a reliable one. The fact that that this was possible and the charade kept going on for years says a lot about the jurisdiction in which the firm operates. It is only after the scandal that the US set up more rules and regulations to ensure that such a havoc does not happen again. But by then, it was too late. That is why it is important to choose firm in jurisdictions having well-established laws protecting investors and the likes. For instance, in Mauritius, in which Blue Azurite operates, there are several institutions regulating the activities of financial
Money Laundering of Serious Tax Crimes: The IEWG Public Bulletin is now available
Tax fraudsters use increasingly complex, transnational schemes that enable them to launder their crimes’ substantial illicit proceeds. Serious tax crimes have significant negative effects on governments’ abilities to use public finances for the benefit of society. Tax crimes are also sometimes interconnected with other financial crimes, like corruption. Therefore, combatting serious tax crimes is a key issue for tax authorities, FIUs and, more broadly, law enforcement agencies (LEA) and judicial systems. With this situation in mind, the Egmont Group’s IEWG launched the “Money Laundering of Serious Tax Crimes: Enhancing Financial Intelligence Units’ Detection Capacities and Fostering Information Exchange” project at the Egmont Group’s 26th Plenary in the Hague (July 2019). To better understand the issues linked with ML of serious tax crimes, the project team sent questionnaires and case surveys to the Egmont Group’s member FIUs. Overall, the project team analysed 50 responses to the questionnaire and 33 to the case survey. The information gathered provided an overview of national legal frameworks on ML of serious tax crimes, the powers and competencies of the competent authorities, including FIUs, to combat it and the role of the private sector. They drafted a general report which is available to competent authorities and observers of the Egmont Group. The “Money Laundering of Serious Tax Crimes” report intends to enhance FIU knowledge on their powers, capacities, and best practices in the fight against ML of serious tax crimes. Moreover, this report, through a best practices toolkit, seeks to provide opportunities for FIUs to consider improvements to both national and international cooperation in order to strengthen their abilities to respond to these crimes. The tools provided in the report and public bulletin will ideally enable FIUs to have timely access to quality tax-related information to assist them with analysis and, in turn, share this information with the relevant national and international competent authorities. UIF-Argentina and TRACFIN, France jointly led this project, which also included collaboration with the FIUs from: Australia Brazil Germany Guernsey Luxembourg Poland Tanzania Ukraine Kindly refer to the bulletin as per link below: https://egmontgroup.org/sites/default/files/filedepot/2020%2C%20Public%20Bulletin%20Money%20Laundering%20of%20Serious%20Tax%20Crimes.pdf
Mauritius legislative amendments – Prevention of Money Laundering & Terrorist Financing
The Code on the Prevention of Money Laundering & Terrorist Financing issued by the Financial Services Commission (the Commission) in March 2012 (‘Code 2012’) is hereby repealed as of 6 Nov 2020. Further to legislative amendments to the Financial Intelligence and Anti-Money Laundering Act 2002 (FIAMLA) and the enactment of the Financial Intelligence and Anti-Money Laundering Regulations 2018 (FIAML Regulations), whereby the AML/CFT legal framework has been revamped, the Code on the Prevention of Money Laundering & Terrorist Financing issued by the Financial Services Commission (the Commission) in March 2012 (‘Code 2012’) is hereby repealed until the issuance of any additional enforceable AML/CFT requirements. The repeal of the Code 2012 shall not: Affect any obligations or liability incurred under the repealed Code 2012; Affect the previous operations of the repealed Code 2012 or anything duly done or suffered under the repealed Code 2012; Affect any regulatory action already taken as a result of non-compliance with the repealed Code 2012; Affect any investigation carried out under the repealed Code 2012. The FSC clarifies that this shall not affect any obligations or liability incurred, the previous operations or anything duly done or suffered, inter alia, under the repealed Code 2012. *As released by the Mauritius Financial Services Commission
Major Money Laundering Countries
In recent years, money laundering is rapidly growing. So the amount of dirty money. Governments and financial institutions try to protect themselves from this crime. What Is The Basel AML Index? Basel Institute of Governance is an independent, international, non-profit organization committed to preventing and combating corruption and other financial crime. The organization was established in Basel, Switzerland. Each year Basel prepares an independent score and ranking that assesses the risk of money laundering and terrorist financing in the world. This ranking is the Basel AML Index. This year (2020) published the ninth raid. Published by the Basel Institute of Governance since 2012, this document gives risk scores based on data from 15 publicly available sources such as the Financial Action Task Force (FATF), the World Bank, and the World Economic Forum. Risk scores cover five areas: Quality of AML / CFT framework Bribery and corruption Financial transparency and standards Public transparency and accountability Legal and Political Risks The primary objective is not to rank countries superficially compared to each other, but to give an overall view of different countries ‘and regions’ risk levels and their progress in addressing vulnerabilities over time. The average money laundering risk increased compared to last year, as the Basel Institute of Management published the 2020 anti-money laundering index, which assesses the risks of money laundering / terrorist financing of 141 countries. Basel AML Index 2020: Weak oversight and dormant systems leave countries’ doors open to money laundering. The 2020 Basel AML index disappointed everyone seeking concrete progress in fighting money laundering and terrorist financing global. The average risk score across all 141 countries on the list remains unacceptably high, at 5.22 out of 10. 10 here is equal to the maximum risk. Only six countries have increased their scores more than once. 35 countries went backward. However, many countries’ financial systems are extremely vulnerable to money laundering, terrorist financing, and related crimes. SCORES AND RANKING Top 10 countries with the highest AML risk are Afghanistan (8.16), Haiti (8.15), Myanmar (7.86), Laos (7.82), Mozambique (7.82), Cayman Islands (7.64), Sierra Leone (7.51), Senegal (7.30), Kenya (7.18), Yemen (7.12). Top 10 countries with the lowest AML risks are Estonia (2.36), Andorra (2.83), Finland (2.97), Bulgaria (3.12), Cook Islands (3.13), Norway (3.19), New Zealand (3.24), Sweden (3.32), Slovenia (3.35), Denmark (3.46) REGIONAL FOCUS The Basel AML Index follows the World Bank classification of countries, with an additional separation of Europe and Central Asia into two regions: European Union and Western Europe Europe and Central Asia East Asia and Pacific Latin America and Caribbean Middle East and North Africa North America South Asia Sub-Saharan Africa 1)European Union and Western Europe The region generally has a lower risk than the global average. Its biggest shortcoming is the quality of AML / CFT frames. Overall risk score is 4.01 Quality of AML / CFT framework is 4.6 Bribery and corruption 3.16 Financial transparency and standards 3.26 Public transparency and accountability 1.93 Legal and political risk 2.89 Countries are; Estonia (2,36), Andorra (2,83), Finland (2,97), Bulgaria (3,12), Norway (3,19), Sweden (3,32), Slovenia (3,35), Denmark (3,46), Lithuania (3,51), Spain (3,66), Portugal (3,66), Greece (3,73), France (3,92), Slovakia (3,95), Croatia (3,95), Belgium (3,98), United Kingdom (4,02), Iceland (4,25), Czech Republic (4,29), Poland (4,36), Austria (4,38), Germany (4,42), Ireland (4,46), Netherlands (4,56), Italy (4,61), Latvia (4,62), Switzerland (4,74), Luxembourg (4,74), Romania (4,79), Cyprus (4,81), Hungary (4,99), Malta (5,48) We list Belgium, Cyprus, Malta, Netherlands, Spain, and the UK as a significant money-laundering destination. High levels of financial secrecy undermine AML/CFT frameworks in Switzerland, Luxembourg, Netherlands, and the UK 2) Europe and Central Asia The risk average of the region is close to the global average. Weaknesses; corruption, bribery, and legal and political risks. Overall risk score is 5.22 Quality of AML / CFT framework is 5.28 Bribery and corruption 5.93 Financial transparency and standards 5.16 Public transparency and accountability 2.85 Legal and political risk 5.73 Countries are; Montenegro (3,75), North Macedonia (3,98), Georgia (4,54), Armenia (5,00), Kazakhstan (5,08), Moldova (5,14), Ukraine (5,23), Azerbaijan (5,24), Serbia (5,47), Russia (5,51), Bosnia-Herzegovina (5,63), Albania (5,69), Uzbekistan (5,71), Turkey (5,76), Tajikistan (6,02), Kyrgyztan (6,32) The weakest areas are Corruption and issues with political and civil rights, media freedom, and the judiciary’s independence. We list three-quarters of the countries as major money laundering destinations. The area faces high risks of human trafficking, with the highest exposure level in Russia 3) East Asia and Pacific The region’s risk average is slightly higher than the global average. The most prominent weaknesses relate to the quality of the AML / CFT framework itself and underperformance regarding public transparency and accountability. In both areas, technical and legal adjustments and effective implementation would need to be the focus of future reform. Overall risk score is 5.46 Quality of AML / CFT framework is 6.08 Bribery and corruption 4.41 Financial transparency and standards 4.68 Public transparency and accountability 4.08 Legal and political risk 3.91 Countries are; Cook Islands (3,13), New Zealand (3,24), Australia (3,84), Taiwan-China (4,31), Singapore (4,56), South Korea (4,61), Indonesia (4,62), Hong Kong SAR-China (4,99), Japan (5,16), Malaysia (5,25), Samoa (5,27), Vanuatu (5,29), Marshall Islands (5,57), Philippines (5,67), Macao SAR-China (5,72), Thailand (6,01), Mongolia (6,24), China (6,76), Vietnam (7,04), Cambodia (7,10), Laos (7,82), Myanmar (7,86) Weakest area is the quality of AML/CFT frameworks. We list nearly half of all countries as a major money-laundering destination – China, Hong Kong, Indonesia, Laos, Macao, Malaysia, Myanmar, Philippines, Thailand, and Vietnam. Hong Kong, Japan, Singapore, and Taiwan face the most massive issues with financial secrecy. 4) Latin America and Caribbean Only around half of the countries in this area have undergone a FATF fourth-round evaluation. The primary deficiencies lie in high levels of corruption and bribery, low financial transparency levels, and weak public transparency and accountability. Overall risk score is 5.36 Quality of AML / CFT framework is 5.39 Bribery and corruption 5.77 Financial transparency and standards 5.59 Public transparency and accountability 4.41 Legal and political risk 4.7 Countries are; Chile (3,82), Dominica (3,88), Uruguay (3,94), Grenada (4,12),
Money Laundering of Serious Tax Crimes
Tax fraudsters use increasingly complex, transnational schemes that enable them to launder their crimes’ substantial illicit proceeds. Serious tax crimes have significant negative effects on governments’ abilities to use public finances for the benefit of society. Tax crimes are also sometimes interconnected with other financial crimes, like corruption. Therefore, combatting serious tax crimes is a key issue for tax authorities, FIUs and, more broadly, law enforcement agencies (LEA) and judicial systems. With this situation in mind, the Egmont Group’s IEWG launched the “Money Laundering of Serious Tax Crimes: Enhancing Financial Intelligence Units’ Detection Capacities and Fostering Information Exchange” project at the Egmont Group’s 26th Plenary in the Hague (July 2019). The information gathered provided an overview of national legal frameworks on ML of serious tax crimes, the powers and competencies of the competent authorities, including FIUs, to combat it and the role of the private sector. They drafted a general report which is available to competent authorities and observers of the Egmont Group. The “Money Laundering of Serious Tax Crimes” report intends to enhance FIU knowledge on their powers, capacities, and best practices in the fight against ML of serious tax crimes. Moreover, this report, through a best practices toolkit, seeks to provide opportunities for FIUs to consider improvements to both national and international cooperation in order to strengthen their abilities to respond to these crimes. The tools provided in the report and public bulletin will ideally enable FIUs to have timely access to quality tax-related information to assist them with analysis and, in turn, share this information with the relevant national and international competent authorities. UIF-Argentina and TRACFIN, France jointly led this project, which also included collaboration with the FIUs from: Australia Brazil Germany Guernsey Luxembourg Poland Tanzania Ukraine The bulletin can be accessed here: https://egmontgroup.org/sites/default/files/filedepot/2020%2C%20Public%20Bulletin%20Money%20Laundering%20of%20Serious%20Tax%20Crimes.pdf
EU blacklist – Cross-border transactions: authorities attempt a maneuver with foreign banks
While the entry into force of Mauritius on the blacklist of the European Union is effective, the Ministry of Finance has, through a press release issued this Thursday, October 1, once again insisted on the fact that Mauritius is in the process of doing everything to get out of the gray list of the Financial Action Task Force (FATF) as soon as possible. Following this, the process of delisting from the blacklist should be done automatically. Thus, the government has undertaken to follow to the letter the recommendations of the European authorities with a view to applying the FATF Action Plan. In addition, the Ministry of Finance specifies that the competent authorities have also provided the necessary clarifications to foreign banks and correspondent banks in order to facilitate cross-border transactions from October 1, 2020. “This approach has largely contributed to providing the necessary comfort with regard to compliance standards and to maintaining confidence in the jurisdiction,” says the ministry. Below is the press release from the Ministry of Finance:
EU policy on high-risk third countries
EU delegated act on high-risk third countries – October 1 /2 reminder – the following countries have been identified as strategic deficiencies in their AML/CFT regimes that pose significant threats to the financial system of the Union (‘high-risk third countries’). 1 October 2020 : The BahamasBarbadosBotswanaCambodiaGhanaJamaicaMauritiusMongoliaMyanmarNicaraguaPanamaZimbabwe2 October 2018 = Pakistan On 7 May 2020, the European Commission adopted a new delegated regulation in relation to third countries which have strategic deficiencies in their AML/CFT regimes that pose significant threats to the financial system of the Union (‘high-risk third countries’). Identification of such countries is a legal requirement stemming from Article 9 of Directive (EU) 2015/849 (4th Anti-Money Laundering Directive) and aiming at protecting the Union financial system and the proper functioning of the internal market. The delegated regulation amends delegated Regulation (EU) 2016/1675. Jurisdictions identified as having strategic deficiencies in their AML/CFT regimes. High-risk third country Date of entry into force Afghanistan 20 September 2016 The Bahamas 1 October 2020 Barbados 1 October 2020 Botswana 1 October 2020 Cambodia 1 October 2020 Democratic People’s Republic of Korea (DPRK) 20 September 2016 Ghana 1 October 2020 Iran 20 September 2016 Iraq 20 September 2016 Jamaica 1 October 2020 Mauritius 1 October 2020 Mongolia 1 October 2020 Myanmar 1 October 2020 Nicaragua 1 October 2020 Pakistan 2 October 2018 Panama 1 October 2020 Syria 20 September 2016 Trinidad and Tobago 14 February 2018 Uganda 20 September 2016 Vanuatu 20 September 2016 Yemen 20 September 2016 Zimbabwe 1 October 2020 Refer to link below: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/anti-money-laundering-and-counter-terrorist-financing/eu-policy-high-risk-third-countries_en
FATF statement following unauthorised disclosure of confidential FinCEN documents
Paris, 23 September 2020 – The FATF is aware of press reports about the disclosure of suspicious activity reports (SARs) documents filed by financial institutions with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). We will not comment on information from SARs or suspicious transaction reports (STRs), which is confidential information under the FATF standards. Irrespective of this, the FATF emphasises the importance for all countries to fully and effectively implement the FATF standards and for the private sector to fulfil its responsibility to detect and help prevent money laundering and terrorist financing, which includes filing suspicious transactions reports with competent authorities. In supporting the fight against money laundering, terrorism financing and proliferation financing, the FATF has not only developed robust standards that over 200 countries and jurisdictions have agreed to comply with, but initiated multiple projects in recent years to improve the efficiency of anti-money laundering prevention systems. The FATF’s work helps ensure a co-ordinated global response to prevent organised crime, corruption and terrorism in which both the public and private sectors have important roles to play.
Why PEP Screening Is Important for Business?
Political Exposed Persons (PEPs) are defined as high-risk customers who have greater opportunities than ordinary citizens to acquire assets through illegal means such as taking bribes and money laundering. PEPs have to be identified and screened in financial institutions because of the risks they have. The process of identifying PEPs and determining their risks is generally referred to as PEP Screening and is a very important screening for the best implementation of AML compliance programs, especially in financial institutions. Why Should PEPs be Determined? Bribery and corruption crimes are very important problems globally, and the effects of these crimes are quite negative. Approximately $ 1 trillion in bribes are processed each year, and the amount of corruption is estimated at almost 2.6 trillion. These numbers have serious implications, so financial institutions try to prevent these crimes. PEP Screening is an activity aimed at preventing crimes such as bribery and corruption. PEP Screening allows PEPs to be detected. The most important reason for the detection of PEPs is that they are defined as high-risk people because they have more opportunities to earn illegal income such as money laundering, terrorism financing, corruption, and bribery. Therefore, according to the regulations, businesses have to detect PEPs and control their transactions. Businesses that do not detect PEPs and do not control their transactions are penalized for failing to comply with local or global regulations. PEP Screening Process Unfortunately, there are no universally accepted rules to define people in the PEPs category clearly. When conducting a PEP screening, it is necessary to identify the politically exposed people and their relatives and close associates (RCA). Besides, it cannot be said that every PEP has the same risk because PEPs are separated within themselves; The risk created by domestic PEP, foreign PEP, international organization PEPs, and for example, foreign PEP is much higher than the risk created by domestic PEP. No matter how complex it is to identify PEPs, financial institutions should implement and improve PEP Screening processes. The PEP Screening should be performed in accordance with the risk understanding of a FI applying a risk-based approach. The PEP Screening should be performed during the customers’ initial engagement process while periodically reviewing customers when any triggering event requires a Customer Due Diligence review. In most cases, PEP Screening is not the primary control for identifying PEPs. Responsibility for the definition of PEP remains with the lines of business that are in direct contact with the customer and must be included in the CDD processes. Data quality standards required for PEP Screening Financial institutions have to have complete and accurate electronic customer data records so that the databases used for PEP Screening contain sufficient unique identification data. Without this information, the PEP Screening would be both inefficient and ineffective and yield irrelevant results inconsistent with an RCA. Therefore, the minimum data financial institutions should know for an effective PEP Screening include: Full name Date of birth or year Country of political exposure Gender Politically exposed roles, appointment dates, and years The date PEP left its post Screening Existing Customers Against PEP Lists Periodically The precautions and procedures applied in customer purchases to determine whether a customer is a PEP is the first step, and PEP Screening alone is not enough. After the first screening process, these scans need to be performed at certain periods, but there is no clear definition of this period and these periods vary according to the enterprises. It is scanned periodically because the risks of the customer may change; for example, it may not be PEP when a customer opens an account for the first time, but there may also be ongoing processes. These examples can be reproduced, but as a result, PEP Screening should be carried out periodically to change risk levels and place these people in appropriate risk categories. PEP Risk Management Framework There are a wide variety of controls to define and manage PEP relationships. Financial institutions should also properly perform these controls. Here are some of these controls: New Customer Identification: Financial Institutions must have risk-based procedures to determine whether a customer is a PEP before or shortly after the relationship is established, in accordance with applicable laws. If a new client is designated as a PEP, financial institutions should apply appropriate due diligence measures to the client promptly. Existing Customers Identification: Financial institutions should implement risk-based due diligence and controls if they become aware of their current customers becoming PEP. Customer Risk Assessment: Once a new or existing customer has been identified as a PEP, financial institutions must perform a risk assessment to determine the level of financial crime risk posed by that customer and appropriate levels of due diligence and monitoring. Financial institutions should take into account risk factors such as business type, geography, and product, and make risk assessments accordingly. In determining geographic risks, financial institutions should consider information from reliable and independent sources in the country of political exposure. Approval: Financial institutions should also be approved by senior management, who have PEP relationships, financial crime risk, and responsibilities within the entity’s AML control environment. Enhanced Monitoring: Customers (accounts) with a PEPs relationship should be subject to enhanced proportional monitoring to detect unusual and potentially suspicious activity. These people can generally be called Relatives and Close Associates (RCA). Training: Financial institutions are the first line of defense in preventing and detecting financial crimes such as money laundering. In addition, financial institutions play an important role in identifying PEPs or potential customers. Therefore, it is very important that the risks, policies, procedures, and processes associated with PEPs are communicated to relevant employees and their managers, and form part of the regular AML training program.
