Introduction
On a recent visit to the bank, I was told my banking information needed updating. During that process, I was asked, “are you a politically exposed person (PEP)?” Without knowing the meaning of the term, instinctively, I replied with a firm “NO.” In my mind, a politically exposed person (PEP) is either a politician, or a member of a political party, or one who works with the Government, or whose livelihood is in some way, shape or form dependent on political favours and/or outcomes. I figured none of those descriptors applied to me. Frankly, I felt insulted by the idea.
Upon researching the meaning of the term, I was intrigued to learn that I was right and wrong. A PEP refers to “an individual who is or has been entrusted with a prominent function that can be abused to launder illicit funds or other predicate offenses such as corruption or bribery.” The term has its origins in Recommendation 12 of the Financial Action Task Force (FATF).
The FATF
Before getting to the meat of that matter, it’s useful to know what FATF is about. It’s the brainchild of a mix of powerful OECD members and international financial institutions (IFIs) including the World Bank and the IMF. On its website, www.fatf-gafi.org the FATF claims that it leads global research and action to tackle money laundering, which can be used to finance terrorist activity and the production and/or acquisition of weapons of mass destruction (WMDs). It says it promotes global standards to mitigate the risks, and to assess whether countries are taking effective action.
Recommendation 12
Through Recommendation 12, the FATF has advised national financial entities to increase scrutiny of their business relationships with PEPs. It insists these screening requirements are “preventive” and not “criminal” in nature and are meant to “…help financial institutions to know their customers better.” Further, it says the added measures should not be taken to mean all PEPs are involved in criminal activity. Yet, the annex to the guidance sets several triggers that can generate such suspicion and that can help financial institutions to detect if PEPs misuse financial systems. These red flags include: the use of corporate vehicles (dummy corporations etc.), to obscure ownership by PEPs; and information given by a PEP that does not gel with other publicly available information, such as asset declarations, and published official salaries.
Caribbean PEPs should have several problems with Recommendation 12. There is no way to interpret it, other than an attempt to isolate PEPs for the sole purpose of scrutinizing their financial transactions. And there is no other way to understand the ADDED scrutiny PEPs receive, other than that it is driven by an assumption that PEPs are likelier than others to engage in corrupt practices, simply because they are “politically exposed.” Indeed, Recommendation 12 encourages this conclusion, as it says that knowing if one is a PEP is but the first step to determining the degree of risk posed by that PEP. If the risk is found to be low, no further action is needed. However, frighteningly, there is no time limit to the scrutiny PEPs receive. A PEP who is initially regarded as low risk is not off the hook. At page 14, the Recommendation admits “once a PEP, always a PEP.” Consequently, as part of their customer due diligence (CDD), banks keep a close eye on the financial transactions of all PEPs and report any suspicious activity. It’s not only banks. Insurance companies must know if the beneficiary of a life insurance policy is a PEP.
As it turns out, it did not matter whether I admitted to being a PEP. My bank is required to take “reasonable measures” to know if I am a PEP and to assess the risks of doing business with me. Turns out too, that because of my prior employment as an international civil servant, I was long regarded as an “international organization PEP.” Unknown to me, even my family members were under scrutiny. Until reading Recommendation 12, I did not know this. This takes me back to my earlier commentary in this newspaper about the strong perception of corruption in the Caribbean. Consequently, we are unable to make a strong case to be exempted from these measures. Even so, our chances of success would be as low as the chances of Donald J. Trump becoming a Democrat.
Aside from the measures included in the Recommendation, I am clueless about how aggressively financial institutions assess the risk posed by a PEP. I imagine that to avoid being heavily penalized, these institutions will stop at nothing to get as much information as they can on a customer. The Recommendation calls for even non-PEP accounts to be monitored.
The Fallout
Even if we put the most attractive face on Recommendation 12, it’s hard to dismiss the complicated business environment it has engendered in our region. Suddenly, a customer who has done business with a bank for decades is treated like a total stranger. Recently, a friend who wished to buy shares on the East Caribbean Securities Exchange (ECSE) was asked by the same broker-who has handled his previous ECSE transactions-to provide a six-month bank statement. He noted that at the time, he did business with two banks but was asked for one statement, which led us to question the efficacy of the system. The situation has drifted into the realms of the absurd, where even a banker’s/manager’s cheque that was once beyond reproach, now has as much status as a bounced cheque. Nowadays, to get a banker’s cheque, a customer must indicate the intended use of the funds. For any deposit of more than $10,000, a customer must complete a declaration of source of funds (SOF) stating where the money came from. At times, I’ve been asked to complete an SOF for transactions involving less money.
PEP-tic Ulcers
Do the creators and managers of the FATF care about the dampening effect its procedures are having on business in poor countries? One fallout is the rapid decline in Correspondent Banking Relations (CBRs) between international banks and domestic banks in the Caribbean. In IMF Working Paper 17/209 released in 2017, the authors acknowledge that Caribbean banks have lost important CBRs but that, “…the macro-economic impact has been limited, in part because banks either have multiple relationships or have been able to replace lost CBRs.” Yet they go on to state that “…the cost of services has increased substantially; some services have been cut back and some sectors have experienced reduced access.” The Latin America and Caribbean (LAC) region suffered the largest declines in CBRs, with the trend being more apparent in the Caribbean. According to a 2016 survey by the Caribbean Association of Banks, at least 58% of banks in 12 countries had lost at least one CBR. Credit unions took a big hit as did offshore banks (OBs). In Saint Lucia some OBs had to close shop. Some others were unable to start and had to surrender their licenses.
The economic fallout was severe, especially in Belize which lost more than two-thirds of its CBRs. Declines in remittances and foreign direct investment (FDI) were recorded across the region. Where banks were able to retain their CBRs, they had to pay significantly higher fees, leaving them with little choice but to pass these additional operating costs to their customers. In Saint Lucia, several legacy foreign banks like Barclays, Royal Bank, Scotia, and CIBC have sold out and moved on. Cooperatives have ably filled the breech. However, my sense is that there are too many of them and that some amalgamation would help build their resilience to future shocks from the global financial system. But we will leave that for another commentary.
I imagine the situation has stabilized since then. Still, I find it ironic that the same global institutions that are behind the FATF recommendations are those who compile the “Ease of Doing Business Index.” They accept no responsibility for complicating business operations in the region. Most banks have moved staffing resources away from customer services and into risk management. I’ve been unable to see a customer relations officer at Republic Bank for the past four months, because invariably, there is a long line of customers waiting to do the same thing.
Conclusion
Personally, I’m not convinced that financial institutions in our region can’t do a better job of complying with FATF procedures while limiting the inconvenience suffered by customers. It seems to me they’ve adopted the strictest possible interpretation of the FATFs recommendations. Surely, it ought to be possible for them to identify trustworthy customers who launder nothing but their clothes, who don’t own a gun, and who have no business with weapons of mass destruction. Still, any way we look at it, it’s hard to dismiss the so-called “recommendations” of the FATF as anything but another example of powerful countries imposing their will on poorer, weaker countries, with little if any consideration given to their ability to cope.