The risks of doing business with politically exposed persons

It can be risky to do business with politically exposed persons as it carries significant financial crime risks such as money laundering, which is also one of the reasons why South Africa is still on the grey list.

Judge Raymond Zondo also flagged this as a risk in the State Capture Report after uncovering corruption involving politically exposed persons (PEPs), Hawken McEwan, director of risk and compliance at nCino KYC Africa, says.

He says money laundering is especially relevant in South Africa, where the intersection of politics and business has historically been characterised by troublesome complexity, which further adds to the weight of the grey listing hanging over our heads.

“The country has long-faced significant challenges in combating money laundering involving PEPs. One notable example is the case of the Gupta family, who allegedly leveraged their relationships with high-ranking government officials to secure lucrative contracts and funnel illicit funds through a network of shell companies and offshore accounts.”

ALSO READ: South Africa making more progress to get off FATF grey list

Doing business with politically exposed persons can have devastating consequences

PEPs (or their use by others for) engaging in illicit financial activity through political ties like this can have devastating consequences, McEwan says. A PEP can be a foothold for financial crime with massive reach, as was highlighted at the Zondo Commission.

“One of the defining features that emerged in the evidence before the State Capture Commission is that it was necessary to populate key institutions with people who were going to comply with orders to divert public funds for private benefit,” Zondo stated in his final report on the Commission’s findings.”

He says the VBS Mutual Bank scandal, where several politically exposed persons were implicated in a scheme to defraud the bank and launder billions, is another example out of a long list. “These types of scandals illustrate the huge risks associated with doing business with PEPs and the need for stringent oversight and compliance measures.”

McEwan points out that South Africa is a money-launderer’s dream because there are several factors that make it such a hotbed for financial crime and money laundering. For instance, South Africa’s position as a key financial hub in sub-Saharan Africa makes it particularly vulnerable to money laundering.

ALSO READ: Money laundering in SA: not only a street crime, also in the boardroom

SA fertile ground for politically exposed persons and criminal networks

“The country’s well-developed financial infrastructure and historical ties to organised crime also provide fertile ground for criminal networks to operate. These networks often infiltrate legitimate businesses, using them as fronts to launder money and funnel illicit funds.

“This infiltration not only undermines the integrity of the financial system but also erodes trust and hinders economic growth. The reality is that financial crime in South Africa remains a significant concern.”

The Financial Action Task Force (FATF) greylisted South Africa in February 2023, eight months after the Zondo Report was published. The FATF highlighted many deficiencies in South Africa’s anti-money laundering and counter-terrorism financing measures.

McEwan says the country’s greylisting served as a wake-up call that prompted intensified efforts to combat financial crime and improvements to regulatory frameworks. He says politically exposed persons are silver bullets in criminals’ arsenals.

ALSO READ: Ashburton Fund Managers fined R16 million for not complying with FICA

Who are defined as politically exposed persons?

The Financial Intelligence Centre Act (FICA) defines PEPs as individuals who hold prominent public positions, such as government officials, senior executives of state-owned enterprises or high-ranking members of political parties, the military or the judiciary.

However, McEwan points out that political exposure extends further than just a role holder of a prominent position. “PEPs include direct family members and known close associates of those in prominent public positions, because criminals up to no good often use the people around them to disguise their involvement or provide a level of cover for their illicit activities.”

Companies doing business with PEPs must bear this in mind while navigating the complex landscape of regulatory requirements, because PEPs are often at a higher risk of being involved in corruption and other illicit activities due to their influential status. 

FICA mandates that accountable institutions adopt a proactive risk-based approach to compliance by implementing robust anti-money laundering policies and procedures that align with their business, conducting thorough due diligence on clients, including identifying any political exposure, understanding the sources of their funds and wider wealth, and continuously monitoring transactions for suspicious activity.

ALSO READ: FSCA fines 3 financial services providers R1.2 million for Fica non-compliance

Challenge to identify politically exposed persons

McEwan says if an accountable institution identifies a potential client with political exposure, a senior manager is required by law to sign off on it before the PEP can be onboarded. Furthermore, enhanced monitoring is also required to be put in place.

However, it is a significant challenge to identify politically exposed persons in the first place and uncovering any untoward information that might help identify potential risk, as PEPs are rarely forthcoming with the information.

“There is no official list or database of PEPs, and they may also be less than willing to voluntarily or truthfully disclose their position, let alone divulge their personal or business interests. But this does not change the fact that identifying any political exposure of customers is a hard legal requirement under FICA and failure to do so can lead to massive issues of not only reputational risk, but potential regulatory fines.”

He says technology has become essential in combating money laundering, especially when it comes to identifying PEPs. Besides the absence of a central list of politically exposed role holders, the ‘list’ changes on a frequent basis. Just consider how many mayors Johannesburg has had over the past few years.

McEwan says leveraging advanced research, analytics, and artificial intelligence can help companies identify those in PEP positions themselves, as well as any potential adverse media that might indicate they are up to no good or subject to external pressure to commit crime before other red flags are raised.

nCino KYC currently tracks approximately 15 000 politically exposed persons relevant to South African accountable institutions.