General Observations and Challenges
• Low numbers of PEP customers are not necessarily indicative of low numbers of corrupt PEPs. Instead—as the banks themselves suggested—corrupt PEPs are becoming more effective in hiding their identity through associates, legal and corporate entities, and intermediaries. Thus, greater attention and increased efforts in these areas will likely improve the identification and detection of corrupt PEPs. The most pressing issue is how to make sense of the following conundrum: If, as the World Bank report suggests, $1 trillion of corruption money is moving around the world each year, where is it? There is also a sharp disconnect between what is happening in practice, as evidenced by actual corruption investigations (the true beneficial owner is not always identified) and what banks say they are doing (always determining the beneficial owners). Given the estimated scale of the funds involved, as well as clear indications that corrupt PEPs are using more sophisticated avenues to launder the proceeds of corruption and that there is poor compliance with international PEP standards, the money must be moving undetected through the banks and intermediaries and the current systems are failing to detect it.
Why Is PEP Compliance Such a Problem? Many technical challenges have been discussed over recent years, with issues ranging from differences in the definition to difficulties associated with identifying a PEP who is the beneficial owner. Money laundering schemes are increasingly complex and opaque which makes the identification of a PEP increasingly difficult for everyone in the financial system. In addition, there is a practical difficulty in the international community identifying or demanding action, especially in countries with key natural resources or those who play important regional roles. Those who benefit from corruption create a powerful constituency that discourages identifying or monitoring of PEP accounts and may attempt to discredit or silence anticorruption organizations and leaders. However, political will is, and will remain, a prerequisite for any PEP regime to be successful. The current lack of mobilization is reflected in the low priority accorded to the PEP issue or, in some cases, the failure to enact legislation or promulgate and implement regulations. This extends to the international realm, where standard setters set different standards and do not provide clear guidance, and standards lag behind those used by some key players in the private sector. This lack of a coherent approach subsequently impacts the implementation of PEP measures: Regulatory authorities have little incentive to enact regulatory requirements and enforce them; and without risk of enforcement action, some banks will risk playing the system (that is, a “race to the bottom”). Parts 2, 3, and 4 of this paper further analyze these issues and provide Recommendations and Good Practices to help reverse this trend.
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