Political risks still not understood across the world – Moody’s

Following the resignation of the CEO of one of the UK’s biggest banking groups over the cancellation of a high profile politician’s bank accounts new research released today has highlighted a huge lack of awareness around the risks connected to Politically Exposed Persons (PEPs).

IN the UK financial services regulator, the Financial Conduct Authority has asked financial institutions to examine their approach to PEPs, however the study by Moody’s Analytics found globally that only 45% of respondents know what a PEP is.

A politically exposed person is an individual who holds a prominent public position. PEPs can include government officials, military officers, senior judges, high-ranking sporting officials, and high-ranking executives of state-owned enterprises. Family members or close associates of PEPs are also considered exposed to risk as ‘PEPs by Association’.

The issue hit the headlines in the UK after political figure Nigel Farage claimed Coutts Bank, part of the Nat West Group, had cancelled his accounts due to his political views, particularly as one of the leaders of the Brexit campaign.

The row was further fuelled by information given to the BBC over why the accounts had been cancelled which it transpired had been from CEO of the Nat West Group, Alison Rose. When it was later found that the bank had been building a dossier on Farage, Rose resigned.

Moody’s found awareness of connections to PEPs was low. After being provided with definitions of a PEP, fewer than 50% of respondents correctly answered that a person can be a PEP by association and nearly a third (33%) incorrectly believed having a public friendship would not qualify someone as a PEP by association.

Similar trends highlighted a lack of awareness when respondents were presented with a list of relationships that could legitimately qualify someone as a PEP by association. This included family members of prominent public officials, political friends, and other valid examples. 11% of respondents selected “none of the above” when asked which relationships would designate a PEP by association.

Despite the publicity in the UK awareness of what constitutes someone being considered a PEP and the implications for this across society remains low. Within the UK, 53% of respondents answered that once you are a PEP, you’re always a PEP, even after leaving the politically exposed role. The survey also revealed that very few respondents (17%) correctly identified the sports sector as an industry where politically exposed persons could be found. Instead, the private sector and media were incorrectly perceived as more likely sectors, 28% and 31% respectively, to find a politically exposed individual.

Worldwide, PEP regulations and definitions can vary by jurisdiction. The research reveals differences around the world in what individuals consider a PEP. For example, respondents who considered individuals in the military to be PEPs varied widely from 46% in Singapore to 58% in the UK, 61% in the US, and 75% in Australia.

Keith Berry, general manager of Know Your Customer Solutions at Moody’s Analytics said, “Our research illustrates that globally there is no clear understanding of what a PEP is, who might be considered politically exposed persons in a compliance process, and crucially whether someone connected to a PEP could also be considered a PEP by association.

“It’s true that definitions and regulation relating to PEPs differs worldwide, so it’s important for organisations to consider this when structuring a risk-based approach to combatting financial crime. PEPs pose an elevated risk when it comes to bribery, corruption, and money laundering. This is due to the power, influence, and access to finances inherent in their positions.

“However, FATF advice is clear that the heightened risk from PEPs should not lead to bias or denial of service. It means that working with a PEP or PEP by association requires enhanced due diligence and risk mitigation measures to lessen any potential associated risk and ensure compliance teams can make informed decisions as part of onboarding clients and monitoring ongoing risk.”