In 2017, Parliament passed the Money Laundering Regulations (MLRs) on the back of the EU’s Fourth Money Laundering Directive (4AMLD). With the aim of tackling terrorist financing and money laundering, the MLRs represented the government’s push to encourage businesses to undertake a substantially more rigorous risk-based approach to due diligence.
The revelation that a significant percentage of the IRA’s funding came through tax fraud thrust the relationship between fraud, money laundering and terrorist financing into the limelight. In the wake of 9/11, it was discovered that approximately 30% of al-Qaeda’s finances were the direct result of charity fraud, some of which was committed in the United States itself. As modern terrorist organisations move away from state sponsorship and towards financial crime as a source of income, it has become not just a government directive, but a corporate responsibility to undertake appropriate AML due diligence.
One such integral factor in AML due diligence is the treatment of Politically Exposed Persons or “PEPs”. The level of scrutiny afforded to PEPs is a result of their ability to abuse their position in public office for personal and financial gain. The power to manipulate the financial system provides the opportunity to launder any proceeds.
In the recently updated Financial Crime Guide, the FCA stated that best practice for institutions dealing with PEPs and high-risk customers entails “using, where available, local knowledge and open source internet checks to supplement commercially available databases when researching potential high risk customers including PEPs.”
Despite the clear message from the FCA, firms are still running afoul of regulatory bodies. Last month Khalid Mohammed Sharif, a partner and AML Officer at London firm Child & Child, was fined £45,000 for a lack of appropriate enhanced due diligence. He failed to recognise his clients as PEPs when simple searches of open source information would have revealed their status.
Identifying PEPs is not always easy. Whilst some are obvious: Theresa May, Mark Carney and Jeremy Corbyn to name a few, many are not. Especially when we bear in mind the FCA’s requirement to consider not just an individual’s prominence, but both familial and business connections as indicators of PEP status. Unfortunately, there is no globally agreed upon list of PEPs. The EU’s Fifth Anti-Money Laundering Directive (5AMLD) requires member states to release a functional list of politically exposed positions, but this does not mean a list of PEPs themselves. These lists have limitations and discrepancies between them are common. Often a person’s PEP status is unclear or does not fall within a well-defined function. PEPs from outside the EU are not considered. This is where Open Source Intelligence becomes of paramount importance.
Interrogating open sources of information such as social media, company records and news articles is crucial in mapping out an individual’s network of significant connections. At Neotas we have uncovered potential indicators of PEP status through open sources for several of our subjects of research. All individuals that did not appear on any publicly available PEP lists.
The use of open sources forms a powerful part of enhanced due diligence. It provides firms with actionable intelligence to accurately determine the PEP status of their clients and subsequent level of risk. This means compliance with AML regulations that may not have been guaranteed otherwise; going beyond skin deep checks. Being equipped with deeper insights to help recognise a PEP is of the utmost importance to a compliant institution and open sources provide the perfect way to do it.
~ by Alex Penn, Higher Intelligence Analyst
Neotas go beyond traditional and structured database checks. We provide deeper insights on people risk by interrogating social media, the deep and the dark web. Request more info today -> email@example.com