Navigating the web of individuals linked to power is pivotal for any fintech firm. We often encounter the term Politically Exposed Persons (PEPs) – those who occupy substantial public roles and, due to their stature, are prone to being implicated in unauthorized financial dealings. However, the scope of vigilance also encompasses those closely linked to PEPs, commonly termed ‘PEPs by association’ or Relatives and Close Associates (RCA).
These RCAs are individuals who may not hold influential positions but are connected to those who do, for instance, PEPs. The Financial Action Task Force (FATF) outlines that these connections can be through direct family ties, marriages, or even social or professional associations. For fintech companies, understanding and identifying these associations is pivotal to mitigating risks and ensuring the integrity of their platforms and services.
In this blog, we will explore more about these close connections of PEPs, why it’s important to know about them, and how understanding these relationships can help mitigate illicit financial activities.
Relatives and close associates are individuals who may not have significant public roles but are closely connected to those who do, either through family, friendships, or professional relationships. Here’s a quick list of who might be considered as Relatives and Close Associates (RCAs):
RCAs might also have joint ownership in a business where a PEP has an interest, or they might be the sole owners of a business established to benefit a PEP. Understanding who RCAs are is vital for fintech companies. By identifying and monitoring Relatives and Close Associates (RCAs), fintechs can better manage risks, maintain the legality of transactions, and ensure the overall integrity of their platforms and services. In the following sections, we will explore how fintechs can effectively navigate the complexities of dealing with RCAs and implement strategies to mitigate associated risks.
Maintaining a secure and transparent environment in the Fintech sector is of utmost importance. This involves being vigilant about the people and entities using the services, especially when they are closely related to Politically Exposed Persons (PEPs). So, why is it crucial to screen for Relatives and Close Associates (RCAs)?
The recent leak from Credit Suisse, one of the world’s largest private banks, has brought to light the importance of scrutinizing the financial activities of individuals and their relatives and close associates (RCAs). This leak, as reported by The Guardian, has exposed the hidden wealth of clients involved in serious crimes such as torture, drug trafficking, money laundering, and corruption, revealing the bank’s association with high-risk clients across the world, including corrupt politicians and convicted criminals.
For instance, the leak reveals that Credit Suisse maintained an account for Stefan Sederholm, a Swedish computer technician convicted for human trafficking in the Philippines, for two-and-a-half years after his conviction. Another example includes the bank’s association with the corrupt Philippine dictator Ferdinand Marcos and his wife, Imelda, who is estimated to have siphoned as much as $10 billion from the Philippines during Ferdinand’s presidency. Credit Suisse reportedly helped them open Swiss accounts under fake names and deposit stolen funds.
The Credit Suisse leak underscores the need for scrutiny of financial activities, especially involving Relatives and Close Associates of high-risk individuals. This incident serves as a stark reminder of the potential repercussions of inadequate due diligence within financial institutions, emphasizing the importance of maintaining transparency and integrity to safeguard against illicit activities and uphold trust in the financial sector.
Financial institutions are obligated to establish robust policies and procedures to identify and verify the Relatives and Close Associates (RCAs) of their clients. This is not just a procedural necessity but a critical step to mitigate serious risks including reputational damage and legal repercussions.
RCAs can potentially act as proxies for individuals who might be involved in illicit activities, thereby posing a risk to the institutions they are associated with. By closely monitoring the activities of RCAs, financial institutions can preemptively identify and thwart potential criminal endeavors, safeguarding the integrity of their operations and ensuring the security of their clients’ assets.
Adherence to Anti-Money Laundering regulations is mandatory, and regulators worldwide necessitate the implementation of stringent measures, including the identification and monitoring of RCAs. Compliance is not just about avoiding hefty fines and legal actions; it’s about upholding the institution’s reputation and maintaining the trust of clients and stakeholders. Non-compliance could lead to severe consequences, including substantial financial penalties and irreversible damage to the institution’s standing.
The involvement of RCAs often leads to intricate ownership structures, obscuring the true beneficial owner of an account – the individual who ultimately controls or benefits from it and who might use it to launder illicit funds. By diligently identifying and monitoring RCAs, financial institutions can accurately ascertain the true owner of an account and assess the associated risks, ensuring that the funds are legitimate and the transactions are transparent.
In conclusion, the scrutiny of Relatives and Close Associates is not merely a regulatory requirement but a fundamental component in maintaining transparency and fostering a trustworthy financial environment. It enables financial institutions to detect and prevent illicit activities, uphold their reputation, and ensure the security and trust of their clients. By embracing rigorous RCA scrutiny as part of their AML compliance programs, financial institutions reinforce their commitment to ethical business practices and contribute to the global fight against financial crimes.
To uphold AML compliance, it’s important for financial institutions to identify and authenticate the Relatives and Close Associates (RCAs) of their clients. This is because RCAs can potentially be conduits for money laundering and other illicit financial activities, posing substantial risks to the organizations.
To identify RCAs, financial entities usually require clients to furnish detailed information about their close relatives and acquaintances. This information can include names, birthdates, addresses, and social security numbers. Additionally, clients may need to disclose details about their professional networks, revealing the identities and activities of their associates and business partners.
To authenticate the identities of RCAs, financial institutions employ a range of methods. They may conduct thorough background checks, cross-verify information against external databases, and compare the provided details with other available data sources. This process ensures that the information is accurate and helps in assessing the risk of illicit activities.
Sometimes, financial institutions might find it necessary to directly interact with clients and their RCAs to corroborate the provided information. These interactions, whether they occur face-to-face or via phone or video calls, aim not only to confirm the identities of the involved individuals but also to evaluate the potential risks of money laundering or terrorist financing associated with them. These meticulous steps are crucial in maintaining the integrity of financial systems and ensuring compliance with global AML standards.
When a firm identifies a customer as a Politically Exposed Person (PEP), or a close associate or family member of a PEP, it is crucial to implement enhanced due diligence measures to mitigate any associated risks. PEPs are individuals who are or have been entrusted with prominent public functions, and due to their position, they may pose a higher risk for potential involvement in bribery and corruption.
Firms must secure approval from senior management before establishing or continuing any business relationships with PEPs or their close associates and family members. This ensures that the decision to engage is well-considered and aligns with the firm’s risk appetite and compliance policies.
It is imperative for firms to undertake adequate measures to comprehend the source of wealth and the funds involved in any business relationships or transactions with such persons. This helps in assessing the legitimacy of the funds and wealth and in identifying any irregularities or suspicious activities.
Related Read: Source of Funds Vs Source of Wealth: Key Differences
Firms are required to conduct enhanced, continuous monitoring of business relationships with PEPs. This involves scrutinizing transactions and interactions to detect and report any suspicious activities promptly.
When determining whether a person is a close associate of a PEP, firms should consider information already in their possession or credible, publicly available information. Utilizing credible public information is also essential when establishing the source of wealth, and source of funds, and identifying the true beneficiaries of long-term insurance policies.
Public registers, such as beneficial ownership registers and those maintained by the Electoral Commission under the Political Parties, Elections, and Referendums Act 2000, are valuable resources in this regard. By leveraging information from these registers, firms can minimize the burden on customers and avoid unnecessary duplication with other regimes, ensuring a smoother and more efficient due diligence process.
In conclusion, managing relationships with PEPs necessitates a meticulous approach to due diligence and risk management. By implementing enhanced measures and making effective use of public information, firms can ensure compliance with regulations, protect their interests, and contribute to the broader fight against financial crime and corruption. Balancing vigilance and customer experience is key, and firms must strive to implement these measures in a manner that is respectful and minimally disruptive to clients.
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