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Politically exposed persons (PEPs): risks and mitigation
Article (PDF Available) in Journal of Money Laundering Control 11(4):371-

387 · October 2008 with 1,932 Reads
DOI: 10.1108/13685200810910439
Cite this publication
Kim-Kwang Raymond Choo

35.64 · University of South Australia
Abstract
Purpose – The purpose of this paper is to consider the risks posed by politically exposed persons (PEPs) and explain the money laundering risk when
entering into nancial transactions and business relationships with PEPs. Risk mitigation by regulated entities and corruption prevention strategies are
also outlined. To minimise money-laundering risks associated with PEPs, legislation will need to adapt to deal with threats that organized criminals and
terrorists seek to exploit. Future directions for research in relation to PEPs are also identi ed. Design/methodology/approach – An analysis of how
regulated entities can reduce their risk of money laundering when entering into nancial transactions and business relationships with PEPs is presented.
Findings – It was found that there is a need to harmonise legally enforceable obligations targeting PEPs. PEP monitoring, arguably, should be extended
to individuals holding prominent public functions in their own jurisdictions, individuals exercising functions not normally considered prominent but who
have political exposure comparable to that of similar positions at a prominent level, and individuals holding important positions in private sectors such
as CEOs of listed companies. Regulated entities in the private sector need to play their part to mitigate their risks such as conducting ongoing
environmental scans of risks of money laundering and the nancing of terrorism. Originality/value – This paper improves awareness of the potential
money laundering risks when entering into nancial transactions and business relationships with PEPs and makes several recommendations to mitigate
the risk posed by PEPs.
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30/4/2018 Politically exposed persons (PEPs): risks... (PDF Download Available)
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
Politically
Politically exposed persons exposed persons
(PEPs): risks and mitigation
Kim-Kwang Raymond Choo
Australian Institute of Criminology, Canberra, Australia 371
Abstract
Purpose – The purpose of this paper is to consider the risks posed by politically exposed persons
(PEPs) and explain the money laundering risk when entering into financial transactions and business
relationships with PEPs. Risk mitigation by regulated entities and corruption prevention strategies are
also outlined. To minimise money-laundering risks associated with PEPs, legislation will need to
adapt to deal with threats that organized criminals and terrorists seek to exploit. Future directions for
research in relation to PEPs are also identified.
Design/methodology/approach – An analysis of how regulated entities can reduce their risk of
money laundering when entering into financial transactions and business relationships with PEPs is
presented.
Findings – It was found that there is a need to harmonise legally enforceable obligations targeting
PEPs. PEP monitoring, arguably, should be extended to individuals holding prominent public
functions in their own jurisdictions, individuals exercising functions not normally considered
prominent but who have political exposure comparable to that of similar positions at a prominent
level, and individuals holding important positions in private sectors such as CEOs of listed companies.
Regulated entities in the private sector need to play their part to mitigate their risks such as
conducting ongoing environmental scans of risks of money laundering and the financing of terrorism.
Originality/value – This paper improves awareness of the potential money laundering risks when
entering into financial transactions and business relationships with PEPs and makes several
recommendations to mitigate the risk posed by PEPs.
Keywords Money laundering, Due diligence, Corruption, Risk management, Australia
Paper type Research paper
Although the amount of money laundered will never be known with accuracy, money
laundering transactions in Australia are estimated to involve between A$2 billion
(Institute of Chartered Accountants, 2006) and A$4.5 billion per year (AGD n/a). Money
laundering could, potentially, lead to a shift of economic power to organized crime
groups, eroding political and social systems.
To disguise the origins of illicit proceeds, criminals can perform a series of business
transactions such as transferring electronic currency through a series of offshore
companies and purchasing goods for resale, prior to integrating the “cleaned” proceeds
into the legitimate financial system. The money laundering process is typically
segmented into three stages:
(1) Placement: in which illegal funds or assets are introduced into the financial
system or converted into monetary instruments.
Journal of Money Laundering Control
The views expressed in this article are those of the author alone and not the Australian Vol. 11 No. 4, 2008
Government or the Australian Institute of Criminology (AIC). Research was carried out in the pp. 371-387
q Emerald Group Publishing Limited
author’s personal capacity. Thanks also to Janet Smith (AIC) for her help in editing an earlier 1368-5201
version of this article although the author accepts responsibility for this final version. DOI 10.1108/13685200810910439
JMLC (2) Layering: in which the illegal origins of placed funds are disguised. This stage,
typically involves cross bordermovement of money by exploiting offshore financial
11,4 institutions, legitimate and illegitimate money transfer systems, professional
facilitators and legitimate business enterprises and other means to conceal funds
and obscure the connection between the money and the predicate offence.
(3) Integration: in which disguised funds are made available for investment in
372 legitimate or illegitimate businesses.
Money laundering itself may create corruption. In recent years, there has been an
increasing concern about money laundering cases involving high net-worth individuals
who are or have been entrusted with prominent public functions and whose wealth is
obtained by illegal means (e.g. corruption). In a recent case, for example, two former
commissioners of the US Virgin Islands Department of Planning and Natural Resources
were convicted in a US$1.4 million bribery and kickback scheme (US DoJ, 2008a).
Politically exposed persons

Definitions
It is important to note that there is no single and universally agreed definition of
politically exposed persons (PEPs). The European Union (EU) Third Money
Laundering Directive, for example, defines PEPs as ‘natural persons who are or
have been entrusted with prominent public functions and immediate family members,
or persons known to be close associates, of such persons. This definition of PEPs,
similar to that set out in the 2006 Joint Money Laundering Steering Group (JMLSG)
guidance, includes “heads of state or of government, senior politicians, senior
government, judicial or military officials, senior executives of publicly owned
enterprises and important political party officials” (JMLSG, 2006, pp. 89-90).
The Financial Action Task Force (FATF) 40 Recommendations (updated October
2004) and the nine Special Recommendations on Terrorist Financing (updated
February 2006) (referred to jointly as the FATF Recommendations) with a similar
definition comprises the following five layers:
(1) current or former senior official in the executive, legislative, administrative,
military or judicial branch of a foreign government (elected or not);
(2) a senior official of a major foreign political party;
(3) a senior executive of a foreign government owned commercial enterprise, being
a corporation, business, or other entity formed by or for the benefit of any such
individual;
(4) an immediate family member of such individual; meaning spouse, parents,
siblings, children, and spouse’s parents or siblings; and
(5) any individual publicly known (or actually known by the relevant financial
institution) to be a close personal or professional associate.
The Wolfsberg Group definition, on the other hand, has a broader definition for PEPs
including:
. members of the ruling royal family;
. senior and/or influential representatives of the religious organisations (if these
functions are connected with judicial, military or administrative responsibilities);
. senior judges; Politically

. senior party functionaries; and exposed persons
. senior and/or influential officials, functionaries, and military leaders and people
with similar functions in international or supranational organisations
(Wolfsberg Group, 2008).
The above definitions of PEPs are not intended to cover middle ranking or more junior 373
individuals in the foregoing categories.
It is important to acknowledge that the above PEP guidelines and the complementary
list of PEP categories designed to assist in the interpretation of the PEP definitions are
non-exclusive and vague about certain definitions for various possible reasons. First, if a
global and all-inclusive list of PEPs exists, criminals and terrorists will know who to and
not to corrupt to avoid the additional scrutiny of enhanced due diligence. Second, a one
size fits all PEP definition is unlikely to be successful. Rather than simply creating a
checklist-based PEP definition and seeking to apply it, regulated entities and regulators
should undertake a risk-based evaluation of the types of PEP monitoring and related
strategy (e.g. corruption prevention strategy) that are likely to be most effective in the
respective jurisdiction and organisation in both the short and long-terms. As an
example, regulated entities should exercise their judgement when refining their risk
criteria in their business dealings with PEPs and issues to consider should include:
. The level of seniority necessary to be classified as PEPs?
. Who constitutes an “immediate family member” or “close business associate” of
PEPs?
. Whether PEP monitoring should be extended to domestic PEPs and individuals
exercising functions not normally considered prominent but having political
exposure comparable to that of similar positions at a prominent level?
. When PEP monitoring should cease for a “former” PEP (e.g. one year after
leaving public office or longer for individuals deemed to have a higher risk)?
The geographies in which the regulated entities conduct their business and the nature
of their products and services will also determine the geographic location and
screening for PEP accounts or sanctions list proscription.
Corruption in the public sector

Although public officials and bureaucrats are not by definition corrupted, they are
placed in a vulnerable position as they have the capacity to control or divert funds and
to award or deny large-scale projects for illicit enrichment.
Example 1. A recent high profile case involved the arrest of a lawmaker and a deputy
governor by the Corruption Eradication Commission of the Republic of Indonesia. Both
individuals were detained for their alleged involvement in the misappropriation of about
Rp 100 billion (approximately US$10.81 million) of central bank funds (Lawmaker and
Riau’s deputy governor arrested in $15 million case, 2008, PPATK, 2008).
Example 2. Another widely publicised example includes the case involving the
former director of China’s State Food and Drug Administration. In May 2007, he was
reportedly convicted of taking bribes of approximately 6.5 million yuan and dereliction
of duty and sentenced to death on charges of corruption and negligence (Former SFDA
chief executed for corruption, 2007).
JMLC Members of the immediate families and close associates of public officials can also
benefit from their relationship with these individuals (e.g. PEPs financing their
11,4 children’s tertiary education overseas) or be entrusted to execute transactions on their
behalf as illustrated in the following example.
Example 3. In April 2008, the former Newark, NJ, Mayor was convicted
on corruption charges “in connection with a scheme that enabled his girlfriend
374 to fraudulently obtain steeply discounted city-owned land and resell it for hundreds of
thousands of dollars in profits” (US DoJ, 2008b).
Embezzlement of public funds

Corruption can also take the form of embezzlement of public funds meant for the
procurement of public goods, to the detriment of the public administration. Recent
examples include the following cases.
Example 4. In May 2008, the former Fairbanks mayor and his wife were sentenced
to 66 and 36 months, respectively, on their convictions of illegally diverting
government funds awarded to a Fairbanks charitable organization, created to aid
disadvantaged residents of Fairbanks and money laundering for trying to conceal the
diversion of funds (US DoJ, 2008c).
Example 5. In May 2008, the former Director of Internal Audit for the District of
Columbia Public Schools was sentenced to six months imprisonment to be followed by
four months of home confinement for embezzling approximately US$46,742.94 of
federal funds. In addition, he was placed on two years of supervised release and
ordered to pay restitution of US$46,742.94 (US DoJ, 2008d).
Foreign bribery
To obtain or retain an advantage in the course of business, individuals and
corporations may bribe foreign government officials, politicians, and political parties
to influence their actions in awarding business, contracts, and concessions. The bribes
can also be channelled through a third party as illustrated in the following example.
Example 6. In October 2007, a former Russian diplomat who once chaired the
United Nation (UN) Advisory Committee on Administrative and Budgetary Questions
was sentenced to four years and three months imprisonment and ordered to pay a
US$73,000 fine after being convicted of conspiring with a UN procurement officer to
launder over US$300,000 from foreign companies seeking UN contracts (US DoJ, 2007).
Financial intermediaries such as banks can be used to launder corruption proceeds.
Such financial intermediaries are often located in stable economies as these bribes
typically originate from multinational corporations in developed countries (Working
Group on Bribery in International Business Transactions, 2008). A recent example
includes the Papua New Guinea diplomatic fund incident, which allegedly involved
several senior public officials in the Republic of China (Taiwan).
Example 7. In May 2008, Taiwan’s Foreign Minister, Deputy Premier and Deputy
Minister of National Defense resigned from their posts reportedly over their alleged
involvement in a US$30m diplomatic fund incident. Itwas alleged that the US$30 million
remitted to a joint account held in a Singapore bank was meant to facilitate the negotiation
of the establishment of diplomatic ties with Papua New Guinea (Document reveals
scandal funds still in bank as of July 07, 2008, Shih et al., 2008). In July 2008, a media article
reported that “Taiwan prosecutors . . . are indicting five former ministers on corruption
charges relating to the handling of special discretionary funds” (Straits Times, 2008).
Risk mitigation by regulated entities Politically

There are special challenges in entering into financial transactions and business
relationships with PEPs. Typical customer due diligence (CDD) measures may prove
exposed persons
insufficient for PEPs as financial transactions and business relationships with these
individuals present a higher money laundering risk and, hence, require greater
scrutiny than “normal” financial transactions and business accounts.
375
Account opening: enhanced customer due diligence
To reducethe money laundering risk associated with PEPs, international conventions such
as the EU Third Money LaunderingDirective and FATFRecommendations recommend
specific provisions to be in place when establishing business relationships with PEPs.
FATF recommendation 6
In addition to performing normal due diligence measures, financial institutions should,
in relation to PEPs:
. have appropriate risk management systems to determine whether the customer
is a PEP;
. obtain senior management approval for establishing business relationships with
such customers; and
. take reasonable measures to establish the source of wealth and source of funds.
The Interpretative Note to Recommendation 6 encourages jurisdictions to extend the
requirements of Recommendation 6 to individuals who hold prominent public
functions within their own jurisdictions–domestic PEPs.
Bank secrecy act (BSA)/anti-money laundering (AML) examination

manual
Banks, financial institutions and other regulated entities are required to apply
enhanced due diligence measures before establishing a business relationship with
PEPs. The following factors should also be taken into consideration when deciding if
an individual is a PEP:
. official responsibilities of the individual’s office;
. the nature of the title (e.g. honorary or salaried);
. level of authority over government activities or other officials; and
. access to significant government assets or funds (United States Federal Financial
Institutions Examination Council (US FFIEC), 2007).
As not all PEPs present the same level of risk, a risk-based “know your customer”
(KYC) approach for PEPs should be adopted. The risk-based KYC approach should
include the following CDD procedures:
. identify the accountholder and beneficial owner;
. seek information directly from the individual regarding possible PEP status;
. identify the accountholder’s country of residence;
. obtain information regarding employment or other sources of funds;
JMLC . check references, as appropriate, to determine whether the individual is or has

been a PEP;
11,4
. identify the source of wealth;
. obtain information on immediate family members or close associates having
transaction authority over the account;
376 . determine the purpose of the account and the expected volume and nature of
account activity; and
. make reasonable efforts to review public sources of information. These sources
will vary depending upon each situation; however, banks should check the
accountholder against reasonably accessible public databases (United States
Department of Justice (US DoJ), 2007).
During account opening, regulated entities may choose not to make a distinction
between foreign and domestic PEPs and vary the enhanced due diligence and ongoing
monitoring according to the perceived risk.
Depending on the risk-based assessment, regulated entities may also need to extend
enhanced CDD to embassy and foreign consulate account relationships based in their
jurisdictions.
Ongoing monitoring
Individual accounts: political affiliations and exposure
To effectively identify and monitor clients, regulated entities should check new
accounts and existing customer databases against watch lists and databases
established by major international bodies, credible commercial PEP databases (e.g.
Factiva’s Public Figures & Associates database and World-Check) and other publicly
available resources such as the Transparency International Corruption Perceptions
Index, which ranks approximately 180 countries according to their perceived level of
corruption (www.transparency.org/policy_research/surveys_indices/cpi/2007).
Regulated entities should, as far as practicable, be alert to publicly available
information relating to possible changes in the status of its clients (including non-PEP
clients) with regard to political exposure as one or more existing clients may be:
. elected to public office in recent times (e.g. several individuals were elected to
public office for the first time in the Malaysia 2008 election);
. involved in recent criminal or corruption cases; and
. named in recently issued watch lists or sanctions (e.g. the watch list issued by US
Department of the Treasury’s Office of Foreign Assets Control against Liberia’s
former president on 23 May 2007).
There is also a need to look beyond the political affiliations and exposure.
Corporate affiliations and accounts

Although trusts and company service providers play important and legitimate roles in
a wide variety of commercial activities, there are concerns about the potential abuse of
these commercial entities for criminal activities such as money laundering and
terrorism financing activities (Williams et al., 2005):
Of particular concern is the ease with which corporate vehicles can be created and dissolved in Politically
some jurisdictions, which allows these vehicles to be used not only for legitimate purposes
(such as business finance, mergers and acquisitions, or estate and tax planning) but also to be exposed persons
misused by those involved in financial crime to conceal the sources of funds and their
ownership of the corporate vehicles. Shell companies can be set up in onshore as well as
offshore locations and their ownership structures can take several forms. Shares can be issued
to a natural or legal person or in registered or bearer form. Some companies can be created for a
single purpose or to hold a single asset. Others can be established as multipurpose entities. 377
Trusts are pervasive throughout common law jurisdictions. (FATF, 2006, p. 1).
Corporate affiliations and accounts should be closely and regularly monitored and the
beneficial ownership determined:
. Shell companies, particularly non-listed shell companies, for example, have been
known to be exploited by corrupted PEPs to launder their corruption proceeds
under the guise of legitimate business transactions and to hide their involvement
in the transactions. For example, multi-jurisdictional structures of corporate
entities and trusts can be established to hide the true identity of the beneficial
owner.
. Corporate accounts involved in potentially high-risk activities particularly
activities that may be subject to export and/or import restrictions such as
exporting equipment for foreign military entities, classified defence articles and
sensitive technical data.
Establishing business relationships with these potentially high-risk corporate accounts
involves varying degrees of risk. Regulated entities should understand the nature of
the business, the source of funds of the corporate account, the source of wealth of the
account owner and beneficial owner, the “typical” volume and value of transactions in
the particular industry of that size and the financial profile of the corporate.
Red flag indicators[1]

. Living standards of public officials (and employees handling PEP accounts)
exceed their known lawful income or if they control or possess pecuniary
resources or property that are disproportionate to their present or past known
sources of income, and when they are unable or unwilling to account for the
discrepancy.
. Financial transactions incompatible with the client’s normal activity, beyond the
client’s apparent financial means, or beyond the client’s estimated liquid net
worth (assets that can readily be turned into cash) are causes for concern.
. Unduly complex ownership structures particularly in the case of shell companies
where the beneficial ownership of a corporate or account cannot be established,
are causes for concern.
Differences in anti-money laundering legislation

Anti-money laundering (AML) legislation is designed to make it more difficult for
criminals and others (including corrupted PEPs) to launder criminal and corruption
proceeds without being caught by creating a number of gatekeepers keeping watch
over the entrances to the financial system (Sproat, 2007).
JMLC Although AML legislation in some jurisdictions includes specific legislative or other
enforceable obligations regarding the identification and verification of PEPs, PEP
11,4 definitions may differ between jurisdictions (Table I).
In Taiwan, for example, banks and financial institutions are required to exercise
“extraordinary diligence toward non-resident clients to understand why they open
accounts in a foreign country” (Bankers Association of the Republic of China, 2007,
378 p. 6). There is, however, no specific mention of exercising enhanced due diligence to
determine whether the customer is a PEP or to establish the source of wealth and
source of funds.
Bearing in mind that CDD is not a straight forward process, the conflicting
definitions of PEPs compound the difficulties for regulated entities with overseas
branches and subsidiaries in complying with laws in both jurisdictions (e.g. conflicting
disclosure laws between Australia and Vanuatu highlighted by Klan and Moran, 2008).
Regulated entities should also seek to apply the higher standard to the extent
permitted by the law of the host jurisdiction. The UK Money Laundering Regulations
2007, for example, extend PEP definition to an individual who is or has, at any time in
the preceding year, been entrusted with a prominent public function by:
. a state other than the United Kingdom;
. a Community institution; or
. an international body.
Overseas branches and subsidiaries of UK-based regulated entities may decide to
continue to apply enhanced due diligence measures to former PEPs, particularly in
jurisdictions with a high risk of money laundering risk and corruption, even in
jurisdictions with no such legal obligations.
In the event that overseas branches and subsidiaries are unable to comply with
certain AML/CTF measures mandated by the AML regulator in their home jurisdiction
due to conflicting legislation in the host jurisdiction, legal advice should be obtained
from the home jurisdiction AML regulator. Additional measures to effectively handle
the risk of money laundering and terrorist financing should also be undertaken by the
regulated entities.
Corruption prevention initiatives

Corruption and bribery can affect political and economic performance by undermining
the effectiveness of public policy. Investors, for example, view corruption as an
unnecessary extra cost of doing business and may avoid investing in corruption-prone
countries. In addition, foreign aid might also be discouraged due to the high risk of
embezzlement of aid money.
Corruption and bribery are ongoing issues. In China, for example, more than 90,000
public officials were reportedly disciplined for corruption-related offences in 2006 (Sun,
2007). International Bank for Reconstruction and Development (2007, p. 1) further
estimated that bribes received by public officials from developing and transition
countries is approximately US$20 billion to US$40 billion per year.
Schools of thought on corruption prevention mechanisms include the
penal-administrative approach (via the strengthening of national law and administrative
structure), the economy-based approach (via economic reforms) and the national integrity
system involving political will, administrative reforms, independent anti-corruption
30/4/2018
Definition of PEPs
Enhanced customer due Definition Includes individuals in their own
Jurisdiction Principal AML/CTF legislation diligence for PEPs? used? jurisdiction?
Australia Anti-Money Laundering/Counter Noa N/A

Terrorism Financing Act 2006
(Cth)
Singapore Corruption, drug trafficking and Yesb FATF No
other serious crimes (confiscation definition
of benefits) act (Cap 65A)
Hong Kong, Special Drug trafficking (recovery of Yesc FATF Yes (as stated in the
Administrative Region of the proceeds) ordinance (Cap 405) – definition accompanying interpretative note
People’s Republic of China DTROP – and the organized and to FATF recommendation 6)
serious crimes ordinance (Cap 455)
– OSCO
People’s Republic of China (PRC) Anti-money-laundering law No N/A
Republic of China (ROC), Taiwan Money laundering control act No N/A
Notes: aAlthough there is no definition of a PEP in the Anti-Money Laundering/Counter Terrorism Financing Act 2006 (Cth), the FATF definition of a
PEP is used in the guidance issued by AUSTRAC (www.austrac.gov.au/files/risk_man_and_amlctf_programs.pdf). b Notices and guidelines issued by the
Monetary Authority of Singapore (e.g. MAS Notice 626: paragraph 6.1). In the recent mutual evaluation of Singapore, the jurisdiction was found to be
largely compliant with FATF Recommendation 6 (Financial Action Task Force (FATF), 2008a). c Hong Kong Monetary Authority (HKMA) (2004, 2007),
Securities and Futures Commission (SFC) (2006, 2008). In the recent mutual evaluation of Hong Kong, the jurisdiction was found to be partially compliant
with FATF Recommendation 6 as “[t]he banking and insurance guidelines do not specify explicitly that senior management approval is required to
continue a business relationship with a customer subsequently discovered to be a PEP [and t]here are no enforceable provisions regarding the
identification and verification of PEPs for remittance agents and money changers” (FATF, 2008b, p. 213)
https://www.researchgate.net/publication/235273549_Politically_exposed_persons_PEPs_risks_and_mitigation
Politically exposed persons (PEPs): risks... (PDF Download Available)
Table I.
legislation in selected
exposed persons
Asia Pacific region

Politically
379
jurisdictions within the

Anti-money laundering
10/22
JMLC agencies, parliaments, public awareness/involvement, the judiciary, the media, and the
private sector (Kayrak, 2008; McCusker, 2006).
11,4 There is no one size fits all solution and any corruption prevention strategies should
be designed with longevity in mind. McCusker (2006, p. 28) noted that in designing
corruption prevention instruments:
[. . .] it is important to recognise the fundamental role that political will and support for
380 reforms at the highest levels of government can play in bringing about practical results and
in raising the credibility of, and public support for, anti-corruption progress.
Anti-corruption legislation
There is an ongoing call for greater control to criminalize corruption and the associated
economic crimes at both international levels (e.g. UN Convention against Corruption –
the first legally binding international instrument against corruption, which has been
ratified by over 100 member jurisdictions) and regional levels (e.g. OECD Convention
on Combating Bribery of Foreign Public Officials in International Business
Transactions – the OECD Convention).
These frameworks require member jurisdictions to implement relevant legal
instruments and administrative measures to cover a wide range of acts of
corruption[2], if these are not already criminalized under existing legislation. At
least 37 jurisdictions have criminalized foreign bribery and disallowed tax deductions
for bribe payments, as well as taking further steps required by the Convention and
other OECD anti-bribery instruments. In the US, individuals and legal entities found
guilty of paying or promising to pay bribes (i.e. money or anything of value) to foreign
officials will be liable to criminal and civil penalties ranging from large fines to
suspension and debarment from federal procurement contracting, to jail sentences
(Foreign Corrupt Practices Act of 1977).
Example 8. A recent example includes a case involving a publicly-traded company
that provides construction, engineering and other services in the oil and gas industry.
The company reportedly agreed to pay a US$22 million criminal penalty in connection
with alleged corrupt payments to Nigerian and Ecuadoran government officials in
violation of the Foreign Corrupt Practices Act of 1977 (US DoJ, 2008e).
Private entities should also implement integrity management systems including
detailed compliance programs (e.g. know your employee) intended to prevent and to
detect any improper payments by their employees.
Presumption statutory obligation

In several countries within the South East Asia region, there is a presumption statutory
obligation in their anti-corruption legislation to explain unexplained wealth for public
civil servants – illicit enrichment (Table II).
The defendant would need to provide a satisfactory explanation to the court as to
how he/she was able to maintain such a standard of living or how such pecuniary
resources or property came under his control, and this effectively shifts the burden to
the defendant to prove to the Court that the unexplained wealth is not given or received
corruptly as an inducement or reward.
Such a provision criminalizes illicit enrichment – when the living standards of
public officials exceed their known lawful income or if they control or possess
pecuniary resources or property, that are disproportionate to their present or past
Politically
Presumption statutory
Jurisdiction obligation?/anti-corruption legislation exposed persons
Singapore Yes/Prevention of Corruption Act (Cap 241),
Section 8
Hong Kong, Special Administrative Region of Yes/Prevention of Bribery Ordinance, Section 10
the People’s Republic of China 381
Indonesiaa No such provision under the Law on the
Commission to Eradicate Criminal Acts of
Corruption (unless the individual is a defendant
named in an ongoing investigation) Table II.
Note: aArticle 37A(2): In the event that the defendant cannot prove that his/her wealth is proportional Anti-corruption
to the amount of his/her income or any additional income from his/her wealth, the information referred legislation in selected
to as in paragraph (1) shall be used to strengthen the existing evidentiary material that the defendant jurisdiction within the
has committed a corruption offense Asia Pacific region
known sources of income, and when they are unable or unwilling to account for the
discrepancy. The provision, as noted in the report by FATF (2007), can be an effective
tool against the money laundering risk posed by PEPs and also money laundering
offences in general.
Asset and interest disclosure

As part of the corruption prevention measures in detecting unjustified wealth for
public officials, some jurisdictions require their public office holders “to declare their
outside activities, employment, investments, assets, and substantial gifts or benefits
from which a conflict of interest might result with respect to their functions” (UNODC,
2008, p. 3). As in the case of specific legislative or other enforceable obligations
regarding the identification and verification of PEPs, the scope of disclosure
requirements can vary considerably across jurisdictions. In some jurisdictions, asset
and interest disclosure are compulsory for public officials at all levels while for others,
asset and interest disclosure are only compulsory for senior public officials holders
and/or those in sensitive positions.
In several jurisdictions that mandate compulsory asset and interest disclosure, it
remains unclear whether these declarations are scrutinised, how the information is
used, and whether failure to report or wrongful reporting does, in practice, entail
sanctions (ABD/OECD, 2006). One might also question if there is a potential for
political interference and consideration in some of the jurisdictions.
Asset recovery
Confiscation of corruption proceeds and assets is one of the most effective, if not the most
effective, means for deterring and sanctioning corruption. In addition, confiscation may
compensate for the moderate monetary sanctions for the offence of bribing a foreign public
official (Working Group on Bribery in International Business Transactions, 2008).
Several jurisdictions have undertaken initiatives to strengthen their institutional
and legal frameworks and established mechanisms for the return of assets derived
from corrupt activities, by criminalizing and listing corruption as a predicate offence
for money laundering offences.
JMLC In Hong Kong, for example, Section 14C of the Prevention of Bribery Ordinance
allows the Independent Commission Against Corruption (ICAC) to obtain ex parte
11,4 restraining orders against all properties associated with the defendant. The defendant,
if convicted of corruption, shall be ordered to pay to such person or public body and in
such manner as the court directs, the amount or value of any advantage received by
him, or such part thereof as the court may specify (Prevention of Bribery Ordinance,
382 ss12(1)). Young (forthcoming) further pointed out that:
[. . .] restitution of property ordered pursuant to section 84 of the Criminal Procedure
Ordinance [. . .] or section 30 of the Theft Ordinance [. . .] (in respect of stolen goods) is another
way to ensure that offenders do not continue to enjoy their ill-gotten gains [as t]he orders
allow the court to [. . .] directly [. . .] [order] the return of property [and i]n cases involving
public corruption or bribery, the government is a recognized victim for purposes of ordering
restitution.
In the case of bribing foreign officials and embezzlement of public funds in developing
jurisdictions, however, there may be difficulties in the confiscation and repatriation of
corruption proceeds. The proceeds are typically hidden abroad or involve overseas
intermediary services provided by entities such as lawyers, accountants and company
formation agents to launder the corruption proceeds (International Bank for
Reconstruction and Development, 2007).
Investigation of foreign bribery is also likely to involve three or more jurisdictions:
(1) source jurisdiction of the bribe payer;
(2) destination jurisdiction of the bribe taker; and
(3) intermediary jurisdiction(s) used to launder the proceeds.
Repatriating corruption proceeds from overseas will, accordingly, require complex
financial analysis and involve mutual legal assistance requests from foreign
jurisdictions (e.g. offshore centres where relevant accounting and banking records are
kept). This can be an expensive, resource intensive and time consuming exercise.
A global partnership between jurisdictions is critical in facilitating the return of
corruption proceeds and embezzled public funds to the jurisdictions of origin. Recent
international capacity building initiatives include the following:
. The joint UN Office on Drugs and Crime (UNODC) and World Bank Group
(WBG)’s Stolen Asset Recovery (StAR) initiative. The StAR initiative is designed
to offer assistance to victim countries especially developing countries, in
repatriating stolen money from overseas jurisdictions. Assistance rendered
includes assistance in filing a request for mutual legal assistance and advice on
experts needed.
. The UNODC project proposal for short-term legal assistance in asset recovery
cases where legal experts in asset recovery from various systems are also made
available to requesting jurisdictions.
Although it may be too early to gauge the effectiveness of the above initiatives, it is
likely that these initiatives and the partnerships forged between jurisdictions and
international and regional bodies can help to minimise the many procedural and
jurisdictional obstacles that can delay or endanger international corruption and asset
seizure investigations in the long run.
Conclusion Politically
On an international front, there may be a continuing need to address issues such as the
lack of clarity in the definition of PEPs and the conflicting PEP definitions. The EU
exposed persons
Third Money Laundering Directive and the JMLSG guidance, for example, may give
the impression that domestic PEPs are less of a risk than their international
counterparts and hence, not automatically subject to enhanced due diligence.
The lack of clarity in definitions and conflicting PEP definitions have left regulated 383
entities, with their comparative disadvantage of not having the experience of operating
in difficult international environments, floundering (Coates, 2008). Consequently,
regulated entities could risk customer alienation and loss of business from legitimate
PEP clients and increased compliance costs. Corrupted PEPs may also seek out
jurisdictions from which to base their activities that have the least severe punishments
or which have no extradition treaties (Choo et al., 2007).
Anti-money laundering regulations and technologies can be subverted by suitably
motivated criminals and corrupted PEPs. As pointed out by Sohn (2008, p. 5):
[. . .] if a launderer is willing to work with smaller sums or use larger numbers of smurfs or
utilise people who are well under the financial system’s radar, will it be worth the effort to
catch them.
It is, therefore, important that the cost of money laundering is more prohibitive than
the compliance cost[3]. Achieving some measure of uniformity will help to minimise
the risk of so-called “jurisdiction shopping” or regulatory arbitrage:
Recommendation 1. There is a need to harmonise legally enforceable obligations
targeting PEPs. PEP monitoring should, arguably, be
extended to individuals holding prominent public functions
in their own jurisdictions and individuals exercising functions
not normally considered prominent but with political exposure
comparable to that of similar positions at a prominent level.
Another issue worth exploring is the question of when and how to remove a PEP. For
example, the UK Money Laundering Regulations 2007, based on EU Third Money
Laundering Directive, state that an individual should no longer be considered a
PEP after leaving office for 12 months. Sohn (2008) questions how quickly the influence
of a former politician wanes and suggests that “former heads of state, at a minimum,
cast a shadow significantly longer than 12 months”. Should PEP monitoring be
extended beyond 12 months for individuals deemed to have a higher money
laundering risk?
Recommendation 2. PEP monitoring should be extended to individuals holding
important positions in private sectors such as CEOs of listed
companies, as these individuals are no less vulnerable to being
corrupted[4].
Similar concerns were raised by Sohn (2008):3) who highlighted that “a chief financial
officer (CFO) of a sizeable corporation presents a similar financial risk”:
Recommendation 3. Regulated entities need to play their part to mitigate their
risks, such as by conducting ongoing environmental scan of
risks of money laundering and the financing of terrorism.
JMLC Examples include:

11,4 . What developments in world politics and the global economy are likely to give
rise to risks of money laundering and financing of terrorism?
. What changes are taking place in the regulatory environment that may make
money laundering and the financing of terrorism more or less likely to occur?
384 . What developments in business will lead to the creation of funds that will be
laundered or used to finance terrorism?
Natural disasters also need to be closely monitored as part of the environmental scan, as
large amounts of emergency relief funds are typically raised by the international
community (e.g. governments and charities) to assist the victims. As noted by
Kasper (2006 cited in McCusker, 2006, p. 40), “simply disbursing aid to kleptocratic
regimes has debased the institutions essential for economic growth and has entrenched
corrupt elites”.
Banks and financial sectors, as pointed out by Rijock (2008), should bear in mind
that despite the urgency of such natural disasters, they should also “screen and examine
the senders of these payments, for they may mask money laundering or terrorist
financing”.
Future research
Issues worth further exploration include:
. whether AML asset recovery has significantly impacted upon the pockets of
acquisitive criminals generally; and
. whether jurisdictions should impose temporary or permanent disqualification
from contracting opportunities with the government as a deterrent for
corporations involved in bribery and corruption cases.
Notes
1. This list of red flag indicators is not a comprehensive list of risk factors. The list should be
updated regularly or as often as necessary and should be consistent with policies and
procedures issued under the respective jurisdictional AML/CTF legislation.
2. Corruption activities include bribery, embezzlement of public funds, trading in influence and
the concealment and laundering of the corruption proceeds.
3. In a recent online survey undertaken by the UK Law Society, all 5 percent of the 197
respondents who reported having not updated their policies and procedures within six
months of the new Money Laundering Regulations 2007 coming into force were in firms with
fewer than four partners (Law Society, 2008). This may result in the unintended consequence
of driving small players underground or providers of designated services to less restrictive
and less costly jurisdictions. There may be a need for further studies on how AML/CTF
regulators can provide technical assistance that fosters the competitiveness of small- to
medium-sized regulated entities and allow these entities to fully comply with their
obligations under the AML/CTF regime.
4. In addition, these individuals may have access to inside information that can affect the share
prices of these companies, which may lead to dishonest share/insider trading.
References Politically
ABD/OECD (2006), “Anti-corruption policies in Asia-Pacific: Reform progress in 25 countries”, exposed persons
Asian Development Bank/Organisation for Economic Co-operation and Development,
available at: www.oecd.org/dataoecd/32/31/36832820.pdf
Bankers Association of the Republic of China (2007), Specimen of “Points of Attention by Banks
on Money Laundering Prevention”, updated, Bankers Association of the Republic of
China, Taiwan. 385
Chinadaily (2007), “Former SFDA Chief executed for corruption”, Chinadaily, 10 July, available at:
www.chinadaily.com.cn/china/2007-07/10/content_5424937.htm
Choo, K.K.R., Smith, R.G. and McCusker, R. (2007), Future Directions in Technology-enabled
Crime, Research and Public Policy Series No. 78, Australian Institute of Criminology,
Canberra, available at: www.aic.gov.au/publications/rpp/78/
Coates, D. (2008), “The AML, CTF and sanctions jigsaw: do the pieces fit together?”, Money
Laundering Bulletin, April, pp. 1-4.
FATF (2006), Third Mutual Evaluation Report on Anti-money Laundering and Combating the
Financing of Terrorism: United States of America, Financial Action Task Force, available
at: www.fatf-gafi.org/dataoecd/44/9/37101772.pdf
FATF (2007), Methodology for Assessing Compliance with the FATF 40 Recommendations and
the FATF 9 Special Recommendations, Financial Action Task Force, available at: www.
fatf-gafi.org/document/51/0,2340,en_32250379_32236920_34297139_1_1_1_1,00.html
FATF (2008a), Third Mutual Evaluation Report Anti-money Laundering and Combating the
Financing of Terrorism: Singapore, Financial Action Task Force, available at: www.
fatf-gafi.org/dataoecd/36/42/40453164.pdf
FATF (2008b), Third Mutual Evaluation Report Anti-money Laundering and Combating the
Financing of Terrorism, Hong Kong, China, Financial Action Task Force, available at:
www.fatf-gafi.org/dataoecd/19/38/41032809.pdf
HKMA (2004), A Guideline Issued by the Monetary Authority under Section 7(3) of the Banking
Ordinance, Hong Kong Monetary Authority, available at: www.info.gov.hk/hkma/eng/
press/2004/20040608e4.htm
HKMA (2007), “Anti-money laundering and terrorist financing – guidance paper on politically
exposed persons”, Hong Kong Monetary Authority, available at: www.info.gov.hk/hkma/
eng/guide/circu_date/20071113e1.htm
Institute of Chartered Accountants (2006), “Money laundering worth up to 5% of global GDP,
News Release 26 May, available at: www.charteredaccountants.com.au/
news_releases_2006/may_2006/A116954038
International Bank for Reconstruction and Development (2007), Stolen Asset Recovery (StAR)
Initiative: Challenges, Opportunities, and Action Plan, World Bank, Washington, DC.
JMLSG (2006), “Prevention of money laundering combating the financing of terrorism: part 1”,
Joint Money Laundering Steering Group, available at: www.jmlsg.org.uk/
Kayrak, M. (2008), “Evolving challenges for supreme audit institutions in struggling with
corruption”, Journal of Financial Crime, Vol. 15 No. 1, pp. 60-70.
Klan, A. and Moran, S. (2008), “Banks’ link to tax haven”, available at: www.theaustralian.news.
com.au/story/0,23625764-2702,00.html?from ¼ public_rss
Law Society (2008), “Putting anti-money laundering into practice”, media release 10 July,
available at: www.lawsociety.org.uk/newsandevents/news/view ¼ newsarticle.
law?NEWSID ¼ 411862
JMLC McCusker, R. (2006), Review of Anti-corruption Strategies, Technical and Background Paper
Series 23, Australian Institute of Criminology, Canberra.
11,4 PPATK (2008), “KPK questions lawmakers, BI officials”, Pusat Pelaporan Dan Analisis
Transaksi Keuangan, available at: www.ppatk.go.id/berita.php?nid ¼ 3070
Rijock, K. (2008), “Watch Myanmar disaster charities carefully”, available at: www.world-check.
com/articles/2008/05/05/watch-myanmar-disaster-charities-carefully/
386 SFC (2006), “Prevention of money laundering and terrorist financing guidance note”, Securities
and Futures Commission, available at: www.sfc.hk/sfcRegulatoryHandbook/EN/
displayFileServlet?docno ¼ H419
SFC (2008), “Circular to licensed corporations and associated entities–anti-money
laundering/combating terrorist financing – questions and answers on identification and
handling of high risk customers and politically exposed persons (‘FAQs’)”, Securities and
Futures Commission, Circular reference SFO/IS/008/2008.
Shih, H.C., Hsu, J.W., Chang, R. and Chuang, J. (2008), “Huang, Chiou, Ko resign as offices
searched”, Taipei Times, 7 May, available at: www.taipeitimes.com/News/front/archives/
2008/05/07/2003411284
Sohn, E.A. (2008), “Fighting dysPEPsia”, Money Laundering Bulletin, March, pp. 3-5.
Sproat, P.A. (2007), “An evaluation of the UK’s anti-money laundering and asset recovery
regime”, Crime, Law and Social Change, Vol. 47 No. 3, pp. 169-84.
Sun, Y. (2007), “Senior CPC official warns on staying vigilant against corruption”, Xinhua, 28
December, available at: www.china-embassy.org/eng/gyzg/t394051.htm
(The) Straits Times (2008) “Taiwan prosecutors indict 5 former ministers on corruption charges”,
Straits Times, 15 July, available at: www.straitstimes.com/Latest%2BNews/Asia/
STIStory_257909.html
Todayonline (2008), “Lawmaker and Riau’s deputy governor arrested in $15million case”,
Todayonline, 19 April, available at: www.todayonline.com/articles/249230.asp
UNODC (2008), “Best practices in fighting corruption”, UN Office on Drugs and Crime, available
at: www.unodc.org/pdf/crime/convention_corruption/cosp/session2/V0788874e.pdf
US DoJ (2007), “US judge sends former high-ranking United Nations official to prison for money
laundering”, United States Department of Justice, media release, 12 October, available at:
www.usdoj.gov/usao/nys/pressreleases/October07/kuznetsovsentencingpr.pdf
US DoJ (2008a), “Two Virgin Islands commissioners convicted in $1.4 million bribery and
kickback scheme”, United States Department of Justice, media release, 28 February,
available at: www.usdoj.gov/opa/pr/2008/February/08_crm_153.html
US DoJ (2008b), “Ex-newark mayor Sharpe James guilty on all counts; mistress convicted with
him”, United States Department of Justice, media release, 9 April, available at: newark.fbi.
gov/dojpressrel/2008/nk041608.htm
US DoJ (2008c), “Former Fairbanks mayor and wife sentenced to federal prison for conspiracy,
misapplication of government grant funds, money laundering”, United States Department
of Justice, media release, 2 May, available at: www.anchorage.fbi.gov/doj/pressrel/2008/
moneylaundering050208.htm
US DoJ (2008d), “Former director of internal audit for the District of Columbia public schools
sentenced to prison for theft of federal funds”, United States Department of Justice, media
release, 7 May, available at: washingtondc.fbi.gov/dojpressrel/pressrel08/wfo050708b.htm
US DoJ (2008e), “Willbros Group, Inc. enters deferred prosecution agreement and agrees to pay
$22 million penalty for FCPA violations”, United States Department of Justice, media
release, 14 May, available at: www.usdoj.gov/opa/pr/2008/May/08-crm-417.html
US FFIEC (2007), “Bank Secrecy Act/Anti-Money Laundering examination manual”, United Politically
States Federal Financial Institutions Examination Council, available at: www.fdic.gov/
regulations/examinations/bsa/index.html exposed persons
Williams, O.H., Suss, E.C. and Mendis, C. (2005), “Offshore financial centres in the Caribbean:
prospects in a new environment”, World Economy, Vol. 28 No. 8, pp. 1173-88.
Wolfsberg Group (2008), “Wolfsberg frequently asked questions (‘faqs’) on politically exposed
persons (‘peps’)”, available at: www.wolfsberg-principles.com/pdf/PEP-FAQ-052008.pdf 387
Working Group on Bribery in International Business Transactions (2008), Review of the OECD
Instruments on Combating Bribery of Foreign Public Officials in International Business
Transactions Ten Years after Adoption, OECD, Paris.
Young S.N.M (n.d.), “Civil forfeiture for Hong Kong: issues and prospects”, in Young, S.N.M (Ed.),
Civil Forfeiture of Criminal Property: Legal Measures for Targeting the Proceeds of Crime
(forthcoming).
Further reading
AGD (n.d.), “Why are anti-money laundering and counter-terrorism financing reforms required?
Fact sheet”, Australia Attorney-General’s Department, available at: www.ag.gov.au/www/
agd/agd.nsf/Page/Anti-moneylaundering_Factsheets
The China Post (2008), “Document Reveals Scandal Funds Still in Bank as of July 07”, The China
Post 8, May, available at: www.chinapost.com.tw/taiwan/national/national%20news/
2008/05/08/155421/Document-reveals.htm
About the author

Kim-Kwang Raymond Choo, a former police officer in the Singapore Police Force, is currently
working as a high tech crime and anti-money laundering analyst at the Australian Institute of
Criminology. He is also the recipient of several awards and scholarships including the “2008
Australia Day Achievement Medallion”, “Wilkes Award for the best paper published in the 2007
volume of The Computer Journal (Oxford University Press)”, “2006 Queensland University of
Technology Faculty of IT Executive Dean’s outstanding PhD thesis commendation”, and “Best
Paper Award at the 10th Australasian Conference on Information Security and Privacy 2005”.
He has presented at several international and local conferences including the “Organized Crime
in Asia: Governance and Accountability” colloquium at the National University of Singapore and
to the “Proceeds of Crime Working Group” at Australian Federal Police Sydney Headquarters in
November 2007. He has also served on the program committee for several international
conferences and as a reviewer for several international conferences and journals including
ACM Computing Reviews, Asian Journal of Criminology, IEEE Communication Letters and
IET Information Security. Kim-Kwang Raymond Choo can be contacted at: raymond.choo.
au@gmail.com
To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints
Citations (3) References (45)
... ML involving wealthy persons who occupy prominent public positions, or have previously occupied such
positions, has gained much attention lately with these PEPs having acquired their riches through
corruption. This leads to the conclusion that ML may cause corruption ( Choo, 2008 There are certain
inherent risks in having a PEP as a client and, if these risks are not managed adequately, this may lead to
the demise of the FI in question. The fact that Riggs Bank had not only failed to manage the risks
associated with having PEPs as clients, but its senior management had assisted these PEPs to hide the
proceeds of their crimes, led ultimately to the bank's downfall (Johnston & Carrington, 2006Riggs of cially
declared their appreciation of Obiang's patronage (Oduor, 2010:7). ...
The South African anti-money laundering regulatory framework relevant to politically exposed persons.
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Politically exposed persons

. senior judges; Politically

Corruption in the public sector

Embezzlement of public funds

Risk mitigation by regulated entities Politically

Bank secrecy act (BSA)/anti-money laundering (AML) examination

JMLC . check references, as appropriate, to determine whether the individual is or has

Corporate afﬁliations and accounts

Red ﬂag indicators[1]

Differences in anti-money laundering legislation

Corruption prevention initiatives

Australia Anti-Money Laundering/Counter Noa N/A

Asia Paciﬁc region

jurisdictions within the

Presumption statutory obligation

Asset and interest disclosure

JMLC Examples include:

About the author

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

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An evidence-based, Interactive Constable on Patrol System (ICOPS): Improving the

Digital Forensic Investigation

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Money Laundering and Terrorism Financing Risks of Prepaid Cards Instruments?

High tech criminal threats to the national information infrastructure

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