Why Relationships with PEPs May Represent an Increased Risk for Financial Institutions

Politically Exposed Persons (PEPs) and close associates thereof may wield powerful influences in society that can place them at higher chances of abusing their position. They can leverage this influence for personal gain instead of benefiting the public to which they’ve been entrusted. They are in a position to favour business interests because of bribes that they may receive, and they may embezzle funds for public works projects.

PEP corruption undermines the rule of law, pillages a state’s assets, muddles business transparency, stymies fair competition, and restricts innovation. Furthermore, if left unchecked, corrupt PEP behaviour is detrimental to the overall health of the economy, which will eventually negatively impact any firm hoping to penetrate that market.

As an example, Sani Abacha, the ex-President of Nigeria, hoarded $4.3 billion US that he stole from the state, crippling the nation’s economy after he hid his stolen wealth in multiple foreign bank accounts in the UK, US and Switzerland. At present, the funds are not completely recovered.

International rulings and local Anti-Money Laundering (AML) guidelines typically include a PEP due diligence clause; thus, there is a legal obligation to which we must adhere.

In recent years, AML compliance has taken a larger role in international business relationships, and numerous banks have begun to “de-risk” potentially high-risk business relationships with potentially little profit margins. This can be seen in the reduction of correspondent banking relationships globally by Western banks.

PEP due diligence is often a clause in the AML questionnaire that Western banks raise. Thus if a bank does not maintain an active and strong PEP due diligence program, it may negatively impact its reputation and may lead to severance of lucrative correspondent relationships.

In summary, PEP relationships pose risks from a regulatory, reputational and moral aspect.