In recent years, we have seen the impact that the flow of illicit money can have on the financial sector; its integrity, stability and reputation have all suffered, posing a threat to international development. Today, money laundering, terrorism financing and organised crime are seen as increasingly significant threats.
In 2008, Iceland was hit, like the rest of the world, by the financial crisis. In this country it was the commercial banks’ debts that triggered the decline. This had a significant impact on Iceland’s economy and resulted in a consolidation of its financial sector.
In the years following the financial crisis, a number of improvement areas were highlighted by FATF for the Icelandic financial sector, ranging from money laundering to terrorist financing risks. One area identified as high risk in its 2018 report was the misuse of corporate structures. For example, there was limited information on beneficial ownership, such as identity information on foreign trusts and Politically Exposed Persons (PEPs), provided by competent authorities.
Inspiration from 4AMLD
Although not part of the European Union, Iceland is a member of the EEA-agreement and is therefore obligated to implement the EU AML Directives.
The Ministry of Justice in Iceland has been preparing a new Anti-Money Laundering bill to submit to Parliament, which is expected to be approved before the end of 2018. The draft bill implements the measures outlined in 4AMLD as well as various recent recommendations made by FATF.
Based on the new draft bill, Icelandic regulated entities will need to take a more risk-based approach. The bill defines Politically Exposed Persons (PEPs) as those who have been entrusted with a prominent public function, or an individual who is closely related to such a person.
Organisations will have to conduct more comprehensive screening of domestic and foreign PEPs in a bid to fully understand the potential risk of doing business with such individuals. The intention of this increased supervision is not to indicate that those who are ‘politically exposed’ are necessarily involved in criminal activity, but is rather a preventive measure taken to understand the full picture of risk, taking into account multiple factors.
As a result, regulated companies are now obliged to have systems and processes in place to detect whether a customer is a PEP and if they pose a potential risk.
Why do PEPs pose an increased risk?
PEPs hold positions of power or influence on society, potentially making them and their close associates more susceptible to bribery or corruption. When corruption by a PEP is left unchecked, it can undermine the rule of law and have a detrimental effect on the overall health of the economy.
For example, in 2008 Bjarni Benediktsson, then an Icelandic MP on the parliament’s economy and tax committee, sold assets in a Glitnir Bank investment fund worth several million króna in the days prior to an emergency law, which placed Iceland’s failed financial institutions under state control. On its own this may be of little consequence, however Benediktsson was one of the bank’s most valued clients, sharing a privileged relationship with Glitnir. Although there is no evidence Benediktsson broke any laws, it does suggest a possible conflict of interest between his role as an MP and as one of the bank’s high value clients.
Julius Vifill Ingvarsson is another example of a PEP who has faced money-laundering charges. A former member of Reykjavik city council and a former member of a leading political party, Ingvarsson was found to have used a foreign bank account in Switzerland storing millions of krónur, which was in part the benefit of criminal offences.
Red Flags and Risk Indicators
All companies, from large financial institutions, to law firms, to gaming companies, must seek to avoid potentially damaging media scenarios, such as the Panama Papers scandal. The Panama Papers incident was a giant leak of 11.5 million financial and legal records detailing the crime, corruption and wrongdoing of 140 politicians and public officials from around the world, and included substantial information on Icelandic citizens.
The challenge is with PEPs is that there is no government or authority that publishes and maintains an official international PEP database. The list of potential PEPs is huge and continually evolving, making this an enormous undertaking. Thus, PEP due diligence is among the most difficult elements of customer due diligence to implement, mainly due to the volume and the vague international guidance which exists. However, there are data providers, like Accuity, that carry out continuous research and analysis to build and maintain a comprehensive PEP database which companies can use for screening.
Once an institution identifies a PEP, they must monitor all possible money laundering and financial crime indicators in order to take a risk-based approach, which varies from organisation to organisation, depending on its compliance policy. Activities such as frequent transfers to offshore accounts, wire transfers under the reportable thresholds, or existence of funds in tax haven territories or territories with strict secrecy laws and low tax rates should raise an alert within a financial crime compliance screening system.
So what does this really mean for Iceland? Regulated companies must now implement and maintain a PEP due diligence programme, as stated within the EEA agreement. Companies must now take a risk-based approach to any person who is deemed to be a PEP and determine their level of risk ahead of doing business with them.
This regulation is not about painting all PEPs as corrupt; it is simply a way for organisations to understand their customers better and be aware of the full spectrum of factors that could affect the risk of doing business. Organisations have a responsibility to protect their customers and an interest in protecting their reputations. PEP screening can help them to fulfil those needs.
Thanks to Jóhann Tómas Sigurðsson, Partner at Lagahvoll for his contribution to this article.