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The Securities and Exchange Commission of Pakistan (SECP) has directed Securities Brokers, Insurance Companies, Non-Banking Finance Companies and Modarabas to remain vigilant in relation to politically exposed persons (PEPs), who are seeking to establish business relationships.
As per SECP's guidelines on Anti-Money Laundering and Countering Financing of Terrorism Regulations-2018, business relationships with individuals holding important public positions and with persons or companies clearly related to them may expose regulated person (RP) to significant reputational and/or legal risk. The risk occurs when such persons abuse their public powers for either their own personal benefit and/or the benefit of others through illegal activities such as the receipt of bribes or fraud.
Such persons, commonly referred to as 'politically exposed persons' (PEPs) and defined in the Regulations, inter-alia, as heads of state, ministers, influential public officials, judges and military commanders and their family members and close associates.
The SECP said that family members of a PEP are individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership. The close associates to PEPs are individuals who are closely connected to PEP, either socially or professionally.
The provision of financial services to corrupt PEPs exposes an RP to reputational risk and costly information requests and seizure orders from law enforcement or judicial authorities. In addition, public confidence in the ethical standards of the whole financial system can be undermined.
The RPs are encouraged to be vigilant in relation to PEPs from all jurisdictions, who are seeking to establish business relationships. RPs should, in relation to PEPs, in addition to performing normal due diligence measures, have appropriate risk management systems to determine whether the customer is a politically exposed person; obtain senior management approval for establishing business relationships with such customers; take reasonable measures to establish the source of wealth and source of funds; and conduct enhanced ongoing monitoring of the business relationship.
The RPs should obtain senior management approval to continue a business relationship once a customer or beneficial owner is found to be, or subsequently becomes, a PEP. The RPs shall take a risk-based approach to determine the nature and extent of EDD where the ML/TF risks are high. In assessing the ML/TF risks of a PEP, the RP shall consider factors such as whether the customer who is a PEP is from a high risk country; has prominent public functions in sectors known to be exposed to corruption; has business interests that can cause conflict of interests (with the position held).
The other red flags that the RPs shall consider include (in addition to the above and the red flags that they consider for other applicants): The information that is provided by the PEP is inconsistent with other (publicly available) information, such as asset declarations and published official salaries. Funds are repeatedly moved to and from countries to which the PEP does not seem to have ties.
The PEP uses multiple bank accounts for no apparent commercial or other reason and PEP is from a country that prohibits or restricts certain citizens from holding accounts or owning certain property in a foreign country.
The RPs shall take a risk-based approach in determining whether to continue to consider a customer as a PEP who is no longer a PEP. The factors that they should consider include the level of (informal) influence that the individual could still exercise and whether the individual's previous and current function are linked in any way (eg formally by appointment of the PEPs successor, or informally by the fact that the PEP continues to deal with the same substantive matters).
In the case of insurance policies, RPs shall take steps to determine whether the beneficiary or beneficial owner of a beneficiary is a PEP. This determination should be done at least at the time of pay-out. Where high risks are identified, RPs shall inform the senior management before the pay-out of the policy and conduct Enhanced CDD Measures (EDD) on the whole business relationship. Additionally, where appropriate, RPs shall consider filing a STR, the SECP added.

Copyright Business Recorder, 2018

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