News
Print Article

PEPs, SOEs, and HIOs require an RBA & CDD/EDD in the CIP and OM programme [there are other acronyms!!]

05/06/2022

In most [should be all] jurisdictions, “reporting entities (REs)” must identify and apply EDD on politically exposed persons (PEPs), heads of international organisations (HIOs) and senior executives of state-owned corporations [SOEs] along with any other person that may present a risk of bribery and or corruption.

PEPs

The definition of a Politically Exposed Person (PEP) is vital for those involved in financial crime compliance. PEPs are considered more vulnerable to corruption, so those who deal with them are often obliged to exercise a higher degree of caution. Under UK [and other jurisdictions!!]  money laundering laws, dealing with a PEP requires a higher level (enhanced) due diligence.

Sometimes it is obvious whether someone is a PEP or if a corporate customer is linked to a PEP. But it is not always that clear, particularly concerning those individuals who work at commercial enterprises which are owned or partially owned by a State [SOE] or are in a position in an organisation [HIO] to be exposed to “corruption” in politics, which Transparency International defines as

  • “Acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good.”

CDD /EDD

The risk of corruption, including corruption in the private sector, should be identified through the reporting person’s Client Identification Programme [CIP], Risk-Based Approach (RBA) by initial and enhanced customer due diligence (CDD/EDD) and ongoing monitoring [OM].

SOEs

A FEB 2020 UK Court of Appeal decision [HAJIKEVA CASE] has guided the meaning of ‘State-owned enterprise’ (there was a surprising lack of any previous authority) and PEPs.

Also, reference to the FCA Guidance https://www.fca.org.uk/publication/finalised-guidance/fg17-06.pdf on PEPs is essential as it states:-

  • State-owned enterprises are:
    • “For-profit enterprises where the State has ownership of greater than 50% or
    • Where information reasonably available points to the State are having control over the activities of such enterprises.”

The FCA guidance implies that there may be instances where a State has less than 50% ownership but still exercises control.

  • This was also contemplated in the first instance judgment in the HAJIKEVA CASE, but not considered by the Court of Appeal. A State could have control of an enterprise in which it holds a minority stake if, for example:
    • legal stipulations or corporate articles of association ensure the State effectively controls the enterprise or its board of directors.

The finding on the meaning of ‘person entrusted with a prominent public function’ is also helpful.

  • Although the finding was restricted to the meaning of this phrase under the UWO provisions in POCA, the court highlighted the close connection between the definition of a PEP in POCA and 4MLD.
  • The MLR definition mirrors 4MLD.
  • The Court of Appeal’s decision suggests that whether an individual has been entrusted with a prominent public function can be taken as a given for certain senior level individuals at a State-owned entity.
  • There is no need to analyse how the prominent public function is conferred.
  • This is pragmatic. It would be onerous in practice to find out exactly how an individual has been conferred with ‘public functions’ and the scope of them.

HIO

A HIO is the primary person who leads an international organisation. For example, the HIO could be a president or CEO. And the international organisation that they head or were head of :

  1. An international organisation established by the governments of states [SEE SEO];
  2. An institution of an organisation referred to in 1 above [SEE SEO]; or
  3. An international sports organisation.[Think:- FIFA/IOC/UEFA]

A sports [or any other] institution established by an international organisation does not have to operate internationally and it is possible that an institution only operates domestically, or in one jurisdiction.

Examples of international organisations and institutions established by international organisations:

  1. African Development Bank Group (Established by the Agreement Establishing the African Development Bank)
  2. Arctic Council (Established by the Declaration on the Establishment of the Arctic Council)
  3. Asian Development Bank (Established by the Agreement Establishing the Asian Development Bank—ADB Charter)
  4. Association of Southeast Asian Nations (ASEAN) (Established by the Asean Declaration)
  5. Bank for International Settlements (Established by the Constituent Charter of the Bank for International Settlements)
  6. Basel Committee on Banking Supervision (Established by the Basel Committee on Banking Supervision Charter)
  7. Caribbean Development Bank (Established by the Agreement Establishing the Caribbean Development Bank)
  8. Commonwealth (Established by the Balfour Declaration, Statute of Westminster and London Declaration)
  9. Community of Democracies (Warsaw Declaration)
  10. Council of Europe (Established by the European Convention on Human Rights)
  11. European Bank for Reconstruction and Development (Established by the Agreement Establishing the European Bank for Reconstruction and Development)
  12. European Free Trade Association Secretariat (Established by the European Free Trade Agreement Convention)
  13. European Space Agency (Established by the Convention for the establishment of a European Space Agency)
  14. Inter-American Development Bank (IDB) (Established by the Agreement Establishing the Inter-American Development Bank)
  15. International Criminal Court (Established by the Rome Statute of the International Criminal Court)
  16. International Commission of Missing Persons (Established by the Agreement on the status and functions of the International Commission on Missing Persons)
  17. International Criminal Police Organization (Established by the Constitution of the ICPO-INTERPOL)
  18. International Energy Agency (Established by the Agreement on an International Energy Program)
  19. International Energy Forum (Established by the International Energy Forum Charter)
  20. International Joint Commission (Established by the Boundary Waters Treaty)
  21. International Mobile Satellite Organization (Established by the Convention on the International Maritime Satellite Organization)
  22. International Organization for Migration (Established by the Constitution of the Intergovernmental Committee for European Migration)
  23. International Seabed Authority (Established by the United Nations Convention on the Law of the Sea)
  24. International Telecommunications Satellite Organization (Established by the Agreement relating to the International Telecommunications Satellite Organization)
  25. International Union for Conservation of Nature (Established by the formal act of 1948 constituting the International Union for Protection of Nature)
  26. La Francophonie (Established by l'Agence de Coopération Culturelle et Technique (ACCT) Convention)
  27. North Atlantic Treaty Organization (NATO) (Established by the North Atlantic Treaty)
  28. Organisation for Economic Co-operation and Development (Established by the Organization for Economic Co-operation and Development Convention)
  29. Organisation for Security and Co-operation in Europe (Established by the Helsinki Final Act)
  30. Organisation of American States (Established by the Charter of the Organization of American States)
  31. Permanent Court of Arbitration (Established under Article 20 of the 1899 Hague Convention for the Pacific Settlement of International Disputes)
  32. World Customs Organization (Established by the Convention establishing a Customs Co-operation Council)
  33. Examples of institutions established by international organisations:
  34. United Nations (Established by the Charter of the United Nations)
  35. Food and Agriculture Organization of the United Nations (Established by the Constitution of the Food and Agriculture Organization)
  36. International Civil Aviation Organization (Established by the Convention on International Civil Aviation)
  37. International Labour Organization (Established by International Labour Organization Constitution)
  38. International Maritime Organization (Established by the Convention on the International Maritime Organization)
  39. International Monetary Fund (Established by the Articles of Agreement of the International Monetary Fund)
  40. International Telecommunication Union (Established by the International Telegraph Convention. However, in 1934 the International Telegraph Convention of 1865 was then combined with the International Radiotelegraph Convention of 1906 to form the International Telecommunication Convention.)
  41. United Nations Educational, Scientific and Cultural Organization (UNESCO) (Established by the Constitution of UNESCO)
  42. World Bank Group (Established by the Bretton Woods agreements)
  43. World Health Organization (Established by the constitution of the World Health Organization)
  44. World Intellectual Property Organization (Established by the Convention Establishing the World Intellectual Property Organization)
  45. World Meteorological Organization (Established by the World Meteorological Convention)
  46. World Tourism Organization (Established by the Statutes of the World Tourism Organization)
  47. Preparatory Commission for the Comprehensive Nuclear-Test-Ban Treaty Organization (Established by the Comprehensive Nuclear-Test-Ban Treaty)
  48. International Atomic Energy Agency (Established by the Statute of the International Atomic Energy Agency)
  49. Organisation for the Prohibition of Chemical Weapons (Established by the Chemical Weapons Convention)
  50. World Trade Organization (Established by the Marrakesh Agreement)
  51. The Association of Southeast Asian Nations (ASEAN) established the:
  52. Economic Research Institute for ASEAN and East Asia (ERIA) established by the adoption of the formal statement agreed to at the 3rd East Asia Summit in Singapore
  53. The North Atlantic Treaty Organization (NATO) established the:
  54. NATO Communication and Information Agency (NCI Agency) established by the NCIO Charter, which transferred and amalgamated the functions of various agencies into the NCI Agency
  55. NATO Support and Procurement Organization (NSPO) established by the NSPO Charter, which merged the names and roles of two NATO agencies into NSPO

Source https://www.fintrac-canafe.gc.ca/guidance-directives/client-clientele/pep/pep-eng#annex1 = Published: May 2021

EU