Posted by Yazad Bajina, director at Legal Futures Associate Checkboard [1]
Bajina: Greater level of awareness needed
The legal profession needs to step up its game when it comes to politically exposed persons (PEPs). As UK firms deal with more and more individuals linked to foreign governments, identifying high-risk PEPs is becoming more of a challenge – but they can’t afford to let monitoring fall by the wayside.
The main aim of PEP checks is to mitigate the risk of corruption and bribery, and to ensure individuals aren’t linked to sanctioned individuals, or personally sanctioned themselves.
It requires a high-level of ongoing monitoring to scope out red flags and identify potential high-risk relationships. This might include contracts with foreign governments, news stories about political relationships, or simply a familial link to a government official.
But law firms aren’t always so diligent. In a profession already focused on domestic and international checks for anti-money laundering (AML), ‘know your client’ (KYC), identity verification, and so on, it’s easy to forget about PEPs – particularly foreign ones.
In the UK, firms are facing tough fines for non-compliance, but a complex web of sanctions regimes makes it tougher for them to comply. Moreover, different international standards of AML checks and sanctions enforcement makes it increasingly hard to root out high-risk individuals linked to different foreign governments.
Serious fines
But failure to properly comply can result in serious fines. Just weeks ago [2], the Solicitors Regulation Authority (SRA) imposed one of its largest ever fines on a law firm for historical breaches – merely for failing to realise it was acting on behalf of a PEP.
The firm was found to have failed in its basic due diligence for acting for a company associated with a non-domestic PEP in a residential property purchase.
Management has a legal obligation under the Money Laundering Regulations 2007 to establish the source of wealth and source of funds of the PEP, and conduct ongoing monitoring. It failed to do this – or even realise it was acting on behalf of a PEP in the first place!
Even more recently [3], an individual solicitor was found guilty of failing to conduct proper PEP checks on the son of a former Azerbaijani government official. Despite qualifying in the 1970s, this solicitor still failed his basic due diligence – a clear sign that experience doesn’t necessarily translate into rigour.
That’s because PEPs, especially non-domestic ones, can easily fall by the wayside. This has implications not just for money laundering, bribery and corruption, but also for sanctions.
Foreign PEPs could easily have relationships with sanctioned countries and individuals, particularly in countries where sanctions enforcement is not as comprehensive as in the UK.
Greater awareness
That level of rigour changes from industry to industry. In financial services, for instance, the Financial Conduct Authority has recently issued new guidance instructing firms not to classify close friends and family members of PEPs as high-risk by default.
Nevertheless, regulated industries still need to maintain a greater level of awareness. Even where individuals aren’t listed as high-risk initially, their relationship with family members and government officials can easily change.
Obviously, by automating comprehensive ongoing monitoring, technology can be a big part of the solution. But firms need to get better at embedding due diligence at every stage of the client journey. They can’t let PEPs and their close associates slip under the radar.
Doing so risks heavy fines and heavy reputational damage.