Vigilance over politicians’ accounts urged as cash flows from Middle East

March 1, 2011

By Martin Coyle

LONDON, March 1 (Complinet) – An international financial crime watchdog has been urged not to relax its stance on monitoring political officials in the light of the desperate scramble to freeze the assets of deposed leaders in the Middle East and North Africa.

Global Witness, an anti-corruption pressure group, said it was “worrying” that the inter-governmental Financial Action Task Force, through a consultation exercise launched in October, was seeking to remove the need for banks to scrutinise family members and close associates of “politically exposed persons,” or PEPs. It added that recent events demonstrated that the regime needed to be tightened, not loosened.

Robert Palmer, a campaigner at Global Witness, said that FATF’s recent review of its “40+9” recommendations on monitoring of terrorism financing and money laundering was largely positive, but added that he was concerned that the requirement for banks to check the family members and associates of political officials might be removed. Under the current standards banks are required to determine whether a customer or beneficial owner is a family member or close associate of a PEP.

FATF is proposing to focus instead on cases where the PEP is a beneficial owner of an account. This would cover situations where a family member or close associate has a business relationship with a financial institution and a PEP is the beneficial owner of the funds involved in the relationship. The issue was discussed at a FATF meeting in Paris last week. FATF officials did not return repeated calls.

Palmer said: “In my view this fundamentally misunderstands the way wives and sons and business partners are used. They can be corrupt in their own right and I think we have seen this with some of the North African cases where you have got sons and wives that have their own independent business interests and there are some corruption allegations swirling around them. Corrupt PEPs will give money to their children and it will not be owned by them anymore; this is a potentially damaging step back.”

Palmer welcomed the fourth round of proposed revisions tabled by FATF and said he was pleased that the body was considering changes which would mean that domestic PEPs were subject to the same scrutiny as foreign officials. “Domestic PEPs can pose corruption risks, as we have seen recently in the UK,” he said, pointing to the recent criminal convictions of UK MPs over expenses fraud. FATF had also taken a positive step in discussing whether tax evasion could become a predicate offence, he said.

One counter-money laundering expert, who did not wish to be named, said that firms had welcomed the FATF initiative when it was announced as it had appeared to ease the regulatory burden. He added, however, that FATF would be brave to continue and push through the change. “The events of recent weeks mean that I would be very surprised if they follow through on it,” he told Complinet.

The expert, a former money laundering reporting officer, said that the issue of PEPs’ family relations was all the more pertinent since the UK Treasury had issued a financial sanctions notice against Libya over the weekend. The notice made specific reference to the embattled Libyan leader Colonel Muammar Gaddafi and his family. It stated: “The financial sector and other persons should bear in mind that (Gaddafi) and his family have considerable control over the Libyan state and its enterprises in deciding how to conduct proper due diligence over any transactions involving Libyan state assets.”

Lisa Osofsky, a regulatory adviser at risk consultancy Control Risks, said she was very surprised by the FATF proposals. She told Complinet: “Isn’t it just standard operating procedure for these guys to go through someone else? The idea that you would pull back the definition rather than expand the definition is a little bit surprising. This has been a problem that has been around for a while. No, we couldn’t have foreseen that Mubarak would have been gone by now but we have seen dirty leaders using relatives to launder their money forever.”


Osofsky, a former money laundering reporting officer (MLRO) at Goldman Sachs International in London, said there had been various definitions of PEPs over the years but she could not understand why the change was needed unless it was an implicit recognition from FATF that firms were not coping with the PEPs regime. “Defining PEPs for all jurisdictions and organisations has proved challenging; this one can be seen as the lowest common denominator that links the myriad definitions of PEPs that are out there,” she explained.

In its response to the FATF paper the Task Force on Financial Integrity and Economic Development, a coalition of government and non-government transparency groups, said it was concerned about the proposals. “The proposal is couched in language that gives the impression that FATF is talking about a change of emphasis rather than a substantive alteration of the requirement, but the proposed change itself is in fact substantive, with grave consequences for regulated institutions’ management of PEP risk,” it said.

Palmer welcomed the international consensus to freeze the assets of politicians fleeing from recently toppled regimes but questioned whether banks could have moved earlier. “It’s great they are now freezing these assets but what were they doing accepting [these funds]? Countries can be quite good at returning or freezing assets but they let them in the country in the first place,” he told Complinet.

Swiss banks have filed a number of suspicious activity reports related to the former president of Tunisia, Zine al-Abidine Ben Ali, but the SARs were made only after the Swiss government froze his assets, which Palmer said had raised questions about whether the banks should have acted more quickly, as they were supposed to file SARs as they went along.

“Our experience is that banks are all too willing to take money from corrupt politicians as they are too concerned with their bottom line. Regulators aren’t doing enough to make banks do this properly. The overall structure of the AML laws is broadly in place. There are some loopholes and there are some areas we would have issue with but broadly the underlying structure is there. What really concerns us is enforcement and whether the banks are putting sufficient resources or commitment into enforcing these laws and whether regulators are doing enough to make sure the banks do it.”

In the UK the Financial Services Authority recently warned firms to ensure that their screening and sanctions systems were fully resourced and updated following the political turmoil in the Middle East and North Africa. It ordered firms to be vigilant with regard to the flow of funds and patterns of financial activity. An FSA spokeswoman told Complinet that FSA supervisors had reiterated the message in e-mails and telephone calls to firms. She added that the FSA had noted the Treasury notice on Libya and was considering whether to do anything further. The FSA declined to comment on whether it was looking at individual firms and assets that had recently come in from the region.

The British Bankers’ Association said that it had not given firms any specific guidance on sanctions but had pointed them to the recent Treasury notice. “Banks are covered by this and you must comply with it. It is then down to the banks to put their individual processes in place at that point,” a spokesman told Complinet.

Reports have suggested that former Egyptian president Hosni Mubarak could have billions of dollars stashed in foreign banks, while Gaddafi tried to move 3 billion pounds into a Mayfair wealth manager last week; the latter led to the freeze being imposed on Gaddafi and his family’s assets. In a separate move, around 900 million pounds worth of recently printed Libyan currency notes were impounded in the north of England last week.


One anti-money laundering industry official questioned why banks had not moved sooner to freeze the funds of corrupt leaders. He said that banks should have questioned why any state leader with an official salary of a few hundred thousand dollars would suddenly attempt to deposit $50 million. “In an ideal world firms should have submitted these reports already. They should have been sending in reports on Mubarak, Gaddafi and the Tunisians. Have they really understood the beneficial owners and controllers that might be lurking in their accounts? You are going to be stuffed if you haven’t identified these relationships at the outset when taking the account on and have no notes anywhere. It will be like looking at a needle in haystack.”

Osofsky said that firms needed to “drill down” into their clients and conduct significant due diligence, even if they had previously been comfortable with the relationship. She said that firms could even apply some of the measures on intermediaries that will be introduced with the UK’s Bribery Act and apply them to third-party relationships, suggesting that it was often the links to intermediaries that got firms in hot water with the regulators.

“Firms need to look and see who they are dealing with, then look again and look at their track records. If there was a previous failure to place money, try to elicit information about prior accounts and attempted account openings. While an MLRO might not want to rely on someone else’s due diligence simply to accept a potential client, they should at least give some credence to prior red flags,” she said.

She suggested that money-laundering reporting officers also needed to take care if they were presented with unnecessarily complicated and complex transactions or money movements that went through risky jurisdictions. Firms needed to be sceptical and expect the worst when looking at money coming through the door. “Focus on the source of the funds and when in doubt, report. Don’t just sit on it. At the same time you shouldn’t both report and also take in money where you are truly suspicious about its provenance. That is not consistent and is not what the rules are there for,” she said.

Osofsky said that the pace of recent events had in many respects given MLROs the upper hand over deposed leaders and their families. “They are acting in a panic. The biggest tool that banks have on their side is a little bit of time. Take the time to be sceptical. They have got the crowds shaking at their gates so they are in a panic; we don’t need to be. If you are an MLRO don’t take the heat right now, you are not under that type of pressure. Take your time to do it right.”


The race to act has been taken up by Transparency International, which has called for the UK government to implement a four-point plan to return the plundered assets of corrupt Middle Eastern leaders. TI said that the UK should introduce a law similar to that recently enacted in Switzerland which would allow the government to freeze stolen assets unilaterally without waiting for a formal request from the victim country’s government. It said that mutual legal assistance requests were likely to be in short supply from countries wracked by turmoil and also called for enhanced due diligence procedures by UK firms to ensure they avoided doing business with people from countries where assets might be illegally transferred.

Thirdly, it called for the Serious Fraud Office to start investigating assets that might be the proceeds of corruption. Finally, it called for victim countries to start their own investigations into funds that had been sent overseas, which would pave the way for the UK to start its own legal proceedings. Chandrashekhar Krishnan, executive director of Transparency International UK, said: “Recent events in the Middle East have thrown into sharp relief the need for urgent action by the UK to freeze stolen assets and help to return them, as well as prevent more dirty money from entering the UK. The UK has a moral obligation to cooperate in freezing and repatriating such illicit assets, because they should never have found a safe haven here in the first place.”


Palmer said that compliance officers and MLROs often found themselves in a tight spot when dealing with these types of issues, and suggested that they often struggled against the demands of the deal-making front office. “Compliance officers need to be empowered and to be given more power within banks to say no,” he said. He added that, when speaking to compliance officers at a recent conference, he had heard of one organisation where a compliance officer’s bonus was linked to how well the business unit liked him and thought he was doing a good job. His manager, the head of compliance, publicly admonished him for “saying no” to the business, stating that his bonus had been reduced as a result. Palmer said this was clearly the wrong approach. “It is about making banks realise that money laundering and compliance is a really big risk factor for them and that they take it seriously,” he said.

(This article first appeared in Complinet ( Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.)

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