Accountable institutions face crippling penalties if their KYC screening fails to flag a client as a politically exposed person (PEP). As the nation fights to escape its greylisting, technology can identify PEPs without hoping they’ll be kindly forthcoming in disclosing their status.
By Hawken McEwan, director of risk and compliance at nCino KYC Africa
Doing business with politically exposed persons (PEPs) carries significant financial crime risks, particularly in the area of money laundering. This issue is especially relevant in South Africa, where, historically, the intersection of politics and business has been characterised by troublesome complexity, which further adds to the weight of the greylisting 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.
PEPs (or their use by others for) engaging in illicit financial activity through political ties like this, can have devastating consequences.
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 has emerged in the evidence before the Commission is that in order to divert public funds for private benefit, it was necessary to populate key institutions with people who were going to comply with orders,” Justice Raymond Zondo stated in his final report on the Commission’s findings.
The VBS Mutual Bank scandal, where several politically exposed persons were implicated in a scheme to defraud the bank and launder billions, is another such 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.
SA is a money-launderer’s dream
There are several factors that make South Africa 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. 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 country was greylisted by the Financial Action Task Force (FATF) in February of 2023 – 8 months after the Zondo Report was published. The FATF highlighted many deficiencies in South Africa’s anti-money laundering and counter-terrorism financing measures. The country’s greylisting served as a wake-up call that prompted intensified efforts to combat financial crime and improvements to regulatory frameworks.
PEPs are silver bullets in criminals’ arsenals
PEPs are defined by the Financial Intelligence Centre Act (FICA) as individuals who hold prominent public positions, such as government officials, senior executives of state-owned enterprises, high-ranking members of political parties, the military or judiciary. But 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 those 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 that engage in 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 must adopt a proactive risk-based approach to compliance by implementing robust anti-money laundering policies and procedures that align to their business, conducting thorough due diligence on clients – including identifying any political exposure, understanding the sources of their funds and wider wealth, and then continuously monitoring transactions for suspicious activity.
Should a potential client with political exposure be identified, a senior manager at the accountable institution doing business with them, 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.
A significant challenge in this process, though, is identifying PEPs in the first place and uncovering any untoward information that might help identify potential risk.
PEPs are rarely forthcoming
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.
Technology has become essential in combating money laundering – especially when 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.
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.
By making use of these tools, companies can enhance their ability to detect and prevent money laundering, thereby safeguarding their own operations while also contributing to the overall integrity of the financial system as a whole.
nCino KYC currently tracks approximately 15,000 PEPs relevant to South African accountable institutions.
The technology behind nCino’s solution automates and streamlines PEP screening, reducing manual errors that could cost accountable institutions dearly. The unique adverse media monitoring service nCino has embedded in its solutions adds a further layer of risk management by enabling near real-time signalling of emerging risks a PEP might expose institutions to.
In the fight against financial crime, the right technology for PEP screening has become more than necessary; it has become indispensable. In addition to reduced operational costs and improved efficiency, this technology can strengthen firms’ compliance posture and reduce the risk of penalties.