Financial institutions should monitor transactions of any Politically Exposed Person (PEP) to see if they could be leveraging the proceeds of corruption, raising red flags for banks
In June of this year, Malaysian authorities raided the home of former Prime Minister Najib Razak, in a search linked to alleged grand corruption and embezzlement from the 1Malaysia Development Berhad (1MDB) state fund.
At the time when large sums went missing from 1MDB, Najib’s personal account received hundreds of millions of dollars in transfers from mysterious front companies overseas. In total, investigators seized USD $237 million-worth of luxury goods from Najib’s home, including more than 12,000 pieces of jewelry, hundreds of pairs of sunglasses, hundreds of handbags, and more than 400 wristwatches.
Najib has previously been seen wearing such famous watch brands as Panerai, Hublot, Jaeger LeCoultre, Breguet, and an Audemars Piguet model which, ironically, is named the Offshore. Any one of those watches alone would have represent a significant percentage of Najib’s then-annual income; all of the models referenced above combined would easily dwarf his salary.
Financial institutions constantly monitor transactions of Politically Exposed Persons (PEPs) to see if they are engaged in money laundering. PEPS who live beyond their documented means could be leveraging the proceeds of corruption to do so, and thus raise red flags for banks.
Here I will examine, based on my professional experience, three areas financial institutions could consider when dealing with PEPs and how they can better detect and report this behavior, including where appropriate:
- Identifying PEP spending patterns as vehicle to launder money;
- monitoring negative news; and
- using data analytics to reduce false positives.
PEPs and How They Figure into the AML Equation
PEPs are defined as senior government officials, their families, close associates, and related businesses. Corrupt PEPs quite commonly use the proceeds of their malfeasance to make luxury purchases of watches, vehicles, art, jewelry, and in one case, rare Michael Jackson memorabilia.
Covered financial entities are required to identify PEPs and monitor them for habits indicative of potential corruption. PEPs, by the nature of their position, have more opportunities to acquire assets through unlawful means such a bribery; in turn, this heightens their potential to launder money. While the purchase of a high-end good isn’t illegal itself, of course, corrupt PEPs spending patterns tend to yield salient points for investigation or data analysis and can provide a template for the targeted examination of a PEP’s profile.
At the outset of a PEP banking relationship, financial institutions are required to ensure Know Your Customer (KYC) due diligence requirements. The goal for financial institutions is to limit exposure to reputational, operational, legal, or corruption risks while providing a PEP with banking services.
During the opening of a PEP banking relationship, financial institutions could determine if there are legislative limits on salary, secondary income, and extraterritorial wealth, and embed those figures into the transaction monitoring processes.
For example, when Libyan dictator Muammar Ghaddafi’s son Mutassim was accused of stashing illicit wealth in a Maltese bank account, investigators noted he spent the equivalent of his annual salary in less than 48 hours. Libyan laws prohibit government employees from having secondary sources of employment income, so the spending patterns alone should have been a red flag for the bank when it ran its KYC compliance on the younger Ghaddafi.
Hence, spending patterns, particularly on luxury items, are a valuable source of analysis in identifying potential corruption. Financial institutions might, for example, monitor PEPs for purchases of more than $1,000, as well as large cash withdrawals that could be indicative of luxury purchases and, if the predicate conditions are met, could indicate potential corruption.
Identifying Corrupt Purchases
While it is impossible to categorize all merchant purchases, the majority of Visa merchant category classifications for high-end goods, for example, could in fact be coded into a transaction monitoring system for further clarity on the possible nature of the purchase. Those same codes have designations for transactions at boat dealers, car dealers, and watch stores. Similarly, transactions at those merchants could be leveraged as part of an analytics-driven review.
Banks could also consider instances where a PEP’s spending patterns is grossly mismatched to their income by ratio. Inexplicable luxury spending is an almost predictable habit for corrupt PEPs. The question then becomes how to leverage this behavior.
An example of this includes the 2015 scandal involving Vladimir Putin’s spokesman, Dmitry Peskov, who was seen wearing a watch then valued at £400,000 — a limited edition Richard Mille RM 52-01. As noted by opposition leader Alex Navalny, Peskov’s salary was listed as £93,000 at the time. Again, a transaction monitoring analysis matched against the bank’s KYC information as well as reliable information on that PEP’s stated wealth would likely yield potential indicators of corruption.
Financial institutions could use similar tracking for PEP purchases of car dealerships, nightclubs, and country clubs. When Donald Trump’s former attorney, Michael Cohen, received millions of dollars into his Essential Consultants LLC accounts, some of the first purchases he made were large payments to a Mercedes Benz dealership as well as membership dues to a New York social club.
The banks which subsequently filed suspicious activity reports on Cohen’s activity selected, among other reporting categories, bribery or gratuity. This highlights the spending patterns of a “close associate” PEP given Cohen’s then-proximity to the White House as a conduit for potential influence peddling.
Negative Media Reporting
Luxury purchases are not generally tracked by negative media reporting services unless there is a nexus to an underlying financial crime. The identification and validation of material negative media is one critical step, but it is also a largely judgmental step.
In general, a policy or procedure manual should note the distinction between any news article and one that is adverse or material in that the latter would have a nexus to financial crime (fraud, corruption, money laundering, terrorist finance, etc.). That judgment can be codified in an operational playbook and a managerial review for potential “false positive” correlations between a PEP and a media piece.
Further, it is possible to leverage investigative analytics to confirm or invalidate potential false positives. An investigator could cross-reference large dollar purchases (cars, casinos, etc.) with dismissed negative media matches to existing clients.
If a financial institution notices luxury transactions on the account of an existing or potential PEP, then they can move to the next step — reexamining whether that individual’s spending habits mimic those of previously identified corrupt PEPs, either from the bank’s experience or the above archetype.