Risky business – The status and declassification of politically exposed persons after exiting office

The FATF categorises foreign and domestic PEPs as individuals who have been entrusted with a prominent public function in a foreign country or domestically. International organisation PEPs are those individuals entrusted with a prominent public function, such as positions in senior management, by an international organisation.

PEPs are at a greater of risk of exposure to bribery and corruption because of their prominent and influential positions. For instance, a PEP may possess political influence, authority over procurement processes or access to state funds. 

The FATF has published recommendations which provide a comprehensive framework of anti-money laundering (AML) and counter-terrorist financing measures which are recognised internationally as the AML standard of best practice. Recommendations 12 and 22 specifically require financial institutions (FIs) and designated non-financial business and professions (DNFBPs) to implement enhanced due diligence (EDD) measures when dealing with PEPs. These include:

• having appropriate risk management systems in place to determine whether a customer or its beneficial owner is a PEP;
• obtaining senior management approval for establishing business relationships with PEPs;
• taking reasonable measures to establish the source of wealth and the source of funds; and
• conducting enhanced ongoing monitoring of the business relationship.

Family members and close associates of PEPs are also subject to EDD because of their potential instrumentality in concealing, moving or disguising the proceeds of crime (or ownership thereof) on behalf of a PEP. South Africa has passed legislation that requires EDD of PEPs. This is set out in the Financial Intelligence Centre Act, No 38 of 2001.

According to the Wolfsberg Group - an association of 13 global banks aimed at developing guidance to mitigate financial crime risks within the private banking sector - there is no agreed or accepted method for determining the period to declassify a PEP once the individual has exited the office which gave rise to the initial classification. 

The local division of the Gauteng High Court considered this issue, along with the question of whether continued listing as a PEP is defamatory, in a recent judgment: Kassel v Thompson Reuters (Markets) SA (16/34227) [2018] ZAGPJHC 413 (12 June 2018).

The case concerned an application made by Kassel who is listed as a PEP in the World-Check database hosted by Thompson Reuters. World-check is an international database used by its subscribers, which include FIs and DNFBPs, to identify whether individuals are listed as PEPs as part of the process of fulfilling their EDD obligations. Kassel’s classification as a PEP occurred as a result of his former position as a senior official of a state-owned enterprise. 

Kassel argued that his continued listing as a PEP, long after his exit from the office which gave rise to the initial classification, is defamatory. He, accordingly, argued that his name should be removed from the listing.

In considering the matter, the High Court reasoned that political exposure attached to individuals by reason of their occupancy of a high office does not itself imply that such individuals have abused their office or are otherwise corrupt. It reasoned further, that it is the office itself which gives rise to the risk because of the influence attached to it. There is, accordingly, no presumption whatsoever that merely listing a person as a PEP renders them suspect. The court further stated that listing a person as a PEP and the office that gives rise to this designation neither anticipates nor implies the outcome of the EDD procedures that are to be undertaken.

The High Court’s finding is aligned with the widely accepted AML principle that mere classification as a PEP does not suggest wrongdoing or involvement in corruption and FIs should not stigmatise PEPs on that basis. In its guidance note, the FATF explicitly states that refusing a business relationship with a PEP simply based on their PEP status is contrary to the letter of its recommendations. 

In the circumstances, the High Court found that Kassel’s continued listing as a PEP is not defamatory and, at most, amounts to an incorrect assessment of Kassel’s exposure to political risk.

The categorisation of PEP does not preclude a FI from entering into or maintaining a business relationship with a PEP. It merely necessitates EDD measures commensurate to the level of risk posed by that PEP. The application of varied levels of due diligence commensurate to the degree of risk identified in relation to a potential customer is central to the risk-based approach (RBA) to customer due diligence. The RBA is the internationally preferred approach to customer due diligence in the banking sector.