Overexposure to politically-exposed persons (PEPs) in Greater China
May 16th, 2017
Doing business in Greater China requires many companies to have more complex relationships with the government than they probably have in other regions. For financial institutions (FIs), the complexity creates a material compliance risk, as the global anti-money laundering (AML) rules on providing services to politically-exposed persons (PEPs) are complicated by an abundance of state-owned entity executives, a high-risk of corruption and multiple competing regulatory regimes. With recent or upcoming amendments to many of relevant regulations and the increasing sophistication and attention of enforcement agencies, financial institutions in Greater China need to ensure that their processes and systems for handling PEPs are up to snuff.
What is a PEP?
Most countries have legislation that requires FIs to perform enhanced due diligence (EDD) for foreign PEPs. PEPs are considered to be in a position which is more likely to be abused for committing money laundering and the predicate offences which generate the illicit funds, such as corruption and bribery. FIs that handle illicit funds face reputational and legal risks, including the possibility of criminal charges for having assisted in laundering the proceeds of crime.
current or former foreign personnel who perform important public functions, such as heads of state, heads of government, senior politician, senior government, judicial or military senior officers, senior management of state-owned enterprises, important political party officials, or family members and other close associates of the said person.
Hong Kong’s definition is almost identical to the Mainland definition.
Taiwan has generally spoken only of the need to use a risk-based approach for “high-profile political figures” (高知名度政治人物 ), and has acknowledged the need to improve its approach prior to the 2018 third mutual evaluation of the Asia/Pacific Group on Money Laundering (APG). Taiwan also plans to publish a list of PEPs as part of a series of AML reforms. While some banks encourage the publication of government-published lists, lists of individual names (as opposed to positions) are discouraged by the FATF and few other jurisdictions deem the investment worthwhile.
Unlike the US Foreign Corrupt Practices Act (FCPA), PEPs are not just “foreign officials.” The definition of PEPs is generally limited to senior officials and many jurisdictions, such as Hong Kong, explicitly exclude middle-ranking or more junior officials. PEPs also include family members and “close associates” of the public functionaries, and the PEP designation does not automatically expire once the incumbent leaves office.
Foreign vs Domestic PEPs
Many jurisdictions, including the US, focus primarily on risks associated with foreign PEPs. It is assumed that there is nothing out of the ordinary about a domestic PEP opening an account in their home country. Domestic PEPs are generally only considered for heightened scrutiny if they are determined to be high-risk under a more general risk-based analysis.
Macau, which as the sole PRC jurisdiction with legal gambling faces particular difficulties in assisting China’s anti-corruption campaign, has recently modified its AML laws for FIs and gaming operators. Their Monetary Authority’s new AML directive and the Gaming Inspection & Coordination Bureau’s Instruction 1/2016, each published in May 2016, include domestic PEPs as part of a broader definition of PEPs.
While they are both treated similarly, it is interesting to note that foreign PEPs in Macau are defined as public functionaries from outside of Macau (not from outside of the PRC). Hong Kong’s definition of foreign for these purposes is “a place outside the People’s Republic of China,” and the HKMA has clarified that “domestic PEPs include those from Mainland China, Hong Kong, Macau and Taiwan.”
While Hong Kong’s domestic PEP definition complies with the One Country, Two Systems and One China policies, it makes for confusing AML policy. Hong Kong compliance officers should not generally expect for Mainland, Macanese or Taiwanese PEPs to open accounts in Hong Kong, and local compliance teams will generally not be as familiar with risk-factors such as the other jurisdictions’ supervisory regimes, a reasonable income for such role or access to control over such funds.
Furthermore, the HKMA has stated FIs may use publicly available information, such as Transparency International’s Corruption Perceptions Index, to determine whether a PEP requires enhanced due diligence because they operate in a country which has an elevated risk of corruption. The PRC ranks a low 79 out of 176 on the Corruption Perceptions Index (tied with Brazil and India). Hong Kong ranks 15/176 and Taiwan is 31/176. Hong Kong FIs therefore may reasonably determine that all PEPs from the Mainland should be subject to enhanced due diligence.
Expect PEP regulations to be enforced
Greater China PEP regulations are relatively new, and therefore may be less appreciated by regulators than in some Western jurisdictions, and the relevant agencies are also just cutting their teeth on more general AML enforcement actions. But there should be no doubt that upcoming enforcement actions will begin to reflect the greater risk of PEPs in Greater China.
In fact, earlier this month (April 2017) the HKMA issued a fine of almost US$1 million against a private bank for deficiencies in regard to just a handful of PEP clients. Taiwan has been stung by a recent New York Department of Financial Services AML action against a Taiwanese bank and will be eager to flex its muscles in preparation for the 2018 APG mutual evaluation. And similar to the pressure brought upon Macau’s gaming sector, China will likely continue to bolster its anti-corruption campaign and clamp down on illicit capital outflows by further enforcement of its developing AML regime.
No legal or accounting advice is provided hereunder and any discussion of regulatory compliance is purely illustrative. The views expressed herein are the author’s and do not reflect the views of NICE Actimize.