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Specific Issues

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PEPs

 

The report states the
firm has “no clear approach to identifying and dealing with politically exposed
persons (PEPs)”.

 

This puts the firm at risk of
employees being unable to recognise prospective or existing customers as PEPs,
not having all the facts associated with a customer and therefore being unable
to properly assess and manage associated risks. The firm is also at risk of
non-compliance with AML Acts and Regulations.

 

In order to identify
PEPs, employees must be taught that a PEP is an individual who is or has, at any
time in the previous year, been entrusted with an important public function in
Bermuda (Domestic PEP), by a country or region outside of Bermuda (Foreign
PEP), or by an international organisation (International Organisation PEP).
Employees must be taught that Domestic and Foreign PEPs include heads of state
and government, ministers, members of parliament, senior government and
political party officials, supreme court judges, board members of central
banks, senior officers in the armed forces, and senior executives of
state-owned enterprises, and that International Organisation PEPs include
senior management, directors and deputy directors of an international
organization.

 

PEPs present a higher risk to RFIs
because a PEP’s position could make them susceptible to corruption, money
laundering and other financial crimes. Connection with a
high-risk industry or jurisdiction could also increase the risk of doing
business with a PEP. These risks extend to a PEP’s family members and close associates
including their spouse, common law spouse, child, the child’s spouse or common
law spouse, parents, siblings, girlfriend, boyfriend, important members of the
same political party or organization, and individuals with close business
relationships with the PEP.

 

Failure to have policies
and procedures to identify and deal with PEPs points to an overall weakness in
the firm’s know your customer (KYC) and customer due diligence (CDD)
procedures. Local and international standards dictate that a risk-based
approach be applied to CDD. Measures taken and information collected should
depend on customer type, the business relationship, the expected nature of
transactions, and the extent such factors expose the firm to risks of money
laundering and other financial crimes. The AML Acts and Regulations require
enhanced due diligence (EDD) measures be applied to all Foreign PEPs and to
Domestic and International PEPs considered high-risk.

 

The firm must determine
its risk appetite in relation to PEPs. That is, is it willing to establish
business relationships with PEPs or continue business relationships with
existing customers who are PEPs or who have become PEPs since establishment of
the business relationship? Given the firm’s current lack of directive, it is my
opinion that all PEPs be considered high-risk and therefore subject to EDD
measures, and prospective and existing business relationships with PEPs should
require senior management approval.

 

Determining PEP status
should be part of customer on boarding procedures. Existing CDD procedures
should be amended to include a PEP self-identifying question in the ‘Compliance
Form for Individuals’. EDD in the form of additional checks and verifications
to identify PEPs and mitigate risks are needed and can be achieved through a
combination of internet, media and social media searches, and subscriptions to
commercial databases like WorldCompliance or World-Check. EDD
procedures for PEPs should also apply to their family members and close
associates.

 

EDD procedures must be applied to
existing customers now and on an ongoing basis to ensure that none are PEPs or
have become PEPs since the establishment of the
business relationship. 

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