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Politically exposed persons (PEPs): risks and mitigation

Politically exposed persons

Kim-Kwang Raymond Choo Australian Institute of Criminology, Canberra, Australia

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Abstract Purpose – The purpose of this paper is to consider the risks posed by politically exposed persons (PEPs) and explain the money laundering risk when entering into financial transactions and business relationships with PEPs. Risk mitigation by regulated entities and corruption prevention strategies are also outlined. To minimise money-laundering risks associated with PEPs, legislation will need to adapt to deal with threats that organized criminals and terrorists seek to exploit. Future directions for research in relation to PEPs are also identified. Design/methodology/approach – An analysis of how regulated entities can reduce their risk of money laundering when entering into financial transactions and business relationships with PEPs is presented. Findings – It was found that there is a need to harmonise legally enforceable obligations targeting PEPs. PEP monitoring, arguably, should be extended to individuals holding prominent public functions in their own jurisdictions, individuals exercising functions not normally considered prominent but who have political exposure comparable to that of similar positions at a prominent level, and individuals holding important positions in private sectors such as CEOs of listed companies. Regulated entities in the private sector need to play their part to mitigate their risks such as conducting ongoing environmental scans of risks of money laundering and the financing of terrorism. Originality/value – This paper improves awareness of the potential money laundering risks when entering into financial transactions and business relationships with PEPs and makes several recommendations to mitigate the risk posed by PEPs. Keywords Money laundering, Due diligence, Corruption, Risk management, Australia Paper type Research paper

Although the amount of money laundered will never be known with accuracy, money laundering transactions in Australia are estimated to involve between A$2 billion (Institute of Chartered Accountants, 2006) and A$4.5 billion per year (AGD n/a). Money laundering could, potentially, lead to a shift of economic power to organized crime groups, eroding political and social systems. To disguise the origins of illicit proceeds, criminals can perform a series of business transactions such as transferring electronic currency through a series of offshore companies and purchasing goods for resale, prior to integrating the “cleaned” proceeds into the legitimate financial system. The money laundering process is typically segmented into three stages: (1) Placement: in which illegal funds or assets are introduced into the financial system or converted into monetary instruments. The views expressed in this article are those of the author alone and not the Australian Government or the Australian Institute of Criminology (AIC). Research was carried out in the author’s personal capacity. Thanks also to Janet Smith (AIC) for her help in editing an earlier version of this article although the author accepts responsibility for this final version.

Journal of Money Laundering Control Vol. 11 No. 4, 2008 pp. 371-387 q Emerald Group Publishing Limited 1368-5201 DOI 10.1108/13685200810910439

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(2) Layering: in which the illegal origins of placed funds are disguised. This stage, typically involves cross border movement of money by exploiting offshore financial institutions, legitimate and illegitimate money transfer systems, professional facilitators and legitimate business enterprises and other means to conceal funds and obscure the connection between the money and the predicate offence. (3) Integration: in which disguised funds are made available for investment in legitimate or illegitimate businesses. Money laundering itself may create corruption. In recent years, there has been an increasing concern about money laundering cases involving high net-worth individuals who are or have been entrusted with prominent public functions and whose wealth is obtained by illegal means (e.g. corruption). In a recent case, for example, two former commissioners of the US Virgin Islands Department of Planning and Natural Resources were convicted in a US$1.4 million bribery and kickback scheme (US DoJ, 2008a). Politically exposed persons Definitions It is important to note that there is no single and universally agreed definition of politically exposed persons (PEPs). The European Union (EU) Third Money Laundering Directive, for example, defines PEPs as ‘natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, of such persons. This definition of PEPs, similar to that set out in the 2006 Joint Money Laundering Steering Group (JMLSG) guidance, includes “heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of publicly owned enterprises and important political party officials” (JMLSG, 2006, pp. 89-90). The Financial Action Task Force (FATF) 40 Recommendations (updated October 2004) and the nine Special Recommendations on Terrorist Financing (updated February 2006) (referred to jointly as the FATF Recommendations) with a similar definition comprises the following five layers: (1) current or former senior official in the executive, legislative, administrative, military or judicial branch of a foreign government (elected or not); (2) a senior official of a major foreign political party; (3) a senior executive of a foreign government owned commercial enterprise, being a corporation, business, or other entity formed by or for the benefit of any such individual; (4) an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse’s parents or siblings; and (5) any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate. The Wolfsberg Group definition, on the other hand, has a broader definition for PEPs including: . members of the ruling royal family; . senior and/or influential representatives of the religious organisations (if these functions are connected with judicial, military or administrative responsibilities);

senior judges; senior party functionaries; and senior and/or influential officials, functionaries, and military leaders and people with similar functions in international or supranational organisations (Wolfsberg Group, 2008).

Politically exposed persons

The above definitions of PEPs are not intended to cover middle ranking or more junior individuals in the foregoing categories. It is important to acknowledge that the above PEP guidelines and the complementary list of PEP categories designed to assist in the interpretation of the PEP definitions are non-exclusive and vague about certain definitions for various possible reasons. First, if a global and all-inclusive list of PEPs exists, criminals and terrorists will know who to and not to corrupt to avoid the additional scrutiny of enhanced due diligence. Second, a one size fits all PEP definition is unlikely to be successful. Rather than simply creating a checklist-based PEP definition and seeking to apply it, regulated entities and regulators should undertake a risk-based evaluation of the types of PEP monitoring and related strategy (e.g. corruption prevention strategy) that are likely to be most effective in the respective jurisdiction and organisation in both the short and long-terms. As an example, regulated entities should exercise their judgement when refining their risk criteria in their business dealings with PEPs and issues to consider should include: . The level of seniority necessary to be classified as PEPs? . Who constitutes an “immediate family member” or “close business associate” of PEPs? . Whether PEP monitoring should be extended to domestic PEPs and individuals exercising functions not normally considered prominent but having political exposure comparable to that of similar positions at a prominent level? . When PEP monitoring should cease for a “former” PEP (e.g. one year after leaving public office or longer for individuals deemed to have a higher risk)?

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The geographies in which the regulated entities conduct their business and the nature of their products and services will also determine the geographic location and screening for PEP accounts or sanctions list proscription. Corruption in the public sector Although public officials and bureaucrats are not by definition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny large-scale projects for illicit enrichment. Example 1. A recent high profile case involved the arrest of a lawmaker and a deputy governor by the Corruption Eradication Commission of the Republic of Indonesia. Both individuals were detained for their alleged involvement in the misappropriation of about Rp 100 billion (approximately US$10.81 million) of central bank funds (Lawmaker and Riau’s deputy governor arrested in $15 million case, 2008, PPATK, 2008). Example 2. Another widely publicised example includes the case involving the former director of China’s State Food and Drug Administration. In May 2007, he was reportedly convicted of taking bribes of approximately 6.5 million yuan and dereliction of duty and sentenced to death on charges of corruption and negligence (Former SFDA chief executed for corruption, 2007).

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Members of the immediate families and close associates of public officials can also benefit from their relationship with these individuals (e.g. PEPs financing their children’s tertiary education overseas) or be entrusted to execute transactions on their behalf as illustrated in the following example. Example 3. In April 2008, the former Newark, NJ, Mayor was convicted on corruption charges “in connection with a scheme that enabled his girlfriend to fraudulently obtain steeply discounted city-owned land and resell it for hundreds of thousands of dollars in profits” (US DoJ, 2008b). Embezzlement of public funds Corruption can also take the form of embezzlement of public funds meant for the procurement of public goods, to the detriment of the public administration. Recent examples include the following cases. Example 4. In May 2008, the former Fairbanks mayor and his wife were sentenced to 66 and 36 months, respectively, on their convictions of illegally diverting government funds awarded to a Fairbanks charitable organization, created to aid disadvantaged residents of Fairbanks and money laundering for trying to conceal the diversion of funds (US DoJ, 2008c). Example 5. In May 2008, the former Director of Internal Audit for the District of Columbia Public Schools was sentenced to six months imprisonment to be followed by four months of home confinement for embezzling approximately US$46,742.94 of federal funds. In addition, he was placed on two years of supervised release and ordered to pay restitution of US$46,742.94 (US DoJ, 2008d). Foreign bribery To obtain or retain an advantage in the course of business, individuals and corporations may bribe foreign government officials, politicians, and political parties to influence their actions in awarding business, contracts, and concessions. The bribes can also be channelled through a third party as illustrated in the following example. Example 6. In October 2007, a former Russian diplomat who once chaired the United Nation (UN) Advisory Committee on Administrative and Budgetary Questions was sentenced to four years and three months imprisonment and ordered to pay a US$73,000 fine after being convicted of conspiring with a UN procurement officer to launder over US$300,000 from foreign companies seeking UN contracts (US DoJ, 2007). Financial intermediaries such as banks can be used to launder corruption proceeds. Such financial intermediaries are often located in stable economies as these bribes typically originate from multinational corporations in developed countries (Working Group on Bribery in International Business Transactions, 2008). A recent example includes the Papua New Guinea diplomatic fund incident, which allegedly involved several senior public officials in the Republic of China (Taiwan). Example 7. In May 2008, Taiwan’s Foreign Minister, Deputy Premier and Deputy Minister of National Defense resigned from their posts reportedly over their alleged involvement in a US$30 m diplomatic fund incident. It was alleged that the US$30 million remitted to a joint account held in a Singapore bank was meant to facilitate the negotiation of the establishment of diplomatic ties with Papua New Guinea (Document reveals scandal funds still in bank as of July 07, 2008, Shih et al., 2008). In July 2008, a media article reported that “Taiwan prosecutors . . . are indicting five former ministers on corruption charges relating to the handling of special discretionary funds” (Straits Times, 2008).

Risk mitigation by regulated entities There are special challenges in entering into financial transactions and business relationships with PEPs. Typical customer due diligence (CDD) measures may prove insufficient for PEPs as financial transactions and business relationships with these individuals present a higher money laundering risk and, hence, require greater scrutiny than “normal” financial transactions and business accounts.

Politically exposed persons

375 Account opening: enhanced customer due diligence To reduce the money laundering risk associated with PEPs, international conventions such as the EU Third Money Laundering Directive and FATF Recommendations recommend specific provisions to be in place when establishing business relationships with PEPs. FATF recommendation 6 In addition to performing normal due diligence measures, financial institutions should, in relation to PEPs: . have appropriate risk management systems to determine whether the customer is a PEP; . obtain senior management approval for establishing business relationships with such customers; and . take reasonable measures to establish the source of wealth and source of funds. The Interpretative Note to Recommendation 6 encourages jurisdictions to extend the requirements of Recommendation 6 to individuals who hold prominent public functions within their own jurisdictions – domestic PEPs. Bank secrecy act (BSA)/anti-money laundering (AML) examination manual Banks, financial institutions and other regulated entities are required to apply enhanced due diligence measures before establishing a business relationship with PEPs. The following factors should also be taken into consideration when deciding if an individual is a PEP: . official responsibilities of the individual’s office; . the nature of the title (e.g. honorary or salaried); . level of authority over government activities or other officials; and . access to significant government assets or funds (United States Federal Financial Institutions Examination Council (US FFIEC), 2007). As not all PEPs present the same level of risk, a risk-based “know your customer” (KYC) approach for PEPs should be adopted. The risk-based KYC approach should include the following CDD procedures: . identify the accountholder and beneficial owner; . seek information directly from the individual regarding possible PEP status; . identify the accountholder’s country of residence; . obtain information regarding employment or other sources of funds;

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check references, as appropriate, to determine whether the individual is or has been a PEP; identify the source of wealth; obtain information on immediate family members or close associates having transaction authority over the account; determine the purpose of the account and the expected volume and nature of account activity; and make reasonable efforts to review public sources of information. These sources will vary depending upon each situation; however, banks should check the accountholder against reasonably accessible public databases (United States Department of Justice (US DoJ), 2007).

During account opening, regulated entities may choose not to make a distinction between foreign and domestic PEPs and vary the enhanced due diligence and ongoing monitoring according to the perceived risk. Depending on the risk-based assessment, regulated entities may also need to extend enhanced CDD to embassy and foreign consulate account relationships based in their jurisdictions. Ongoing monitoring Individual accounts: political affiliations and exposure To effectively identify and monitor clients, regulated entities should check new accounts and existing customer databases against watch lists and databases established by major international bodies, credible commercial PEP databases (e.g. Factiva’s Public Figures & Associates database and World-Check) and other publicly available resources such as the Transparency International Corruption Perceptions Index, which ranks approximately 180 countries according to their perceived level of corruption (www.transparency.org/policy_research/surveys_indices/cpi/2007). Regulated entities should, as far as practicable, be alert to publicly available information relating to possible changes in the status of its clients (including non-PEP clients) with regard to political exposure as one or more existing clients may be: . elected to public office in recent times (e.g. several individuals were elected to public office for the first time in the Malaysia 2008 election); . involved in recent criminal or corruption cases; and . named in recently issued watch lists or sanctions (e.g. the watch list issued by US Department of the Treasury’s Office of Foreign Assets Control against Liberia’s former president on 23 May 2007). There is also a need to look beyond the political affiliations and exposure. Corporate affiliations and accounts Although trusts and company service providers play important and legitimate roles in a wide variety of commercial activities, there are concerns about the potential abuse of these commercial entities for criminal activities such as money laundering and terrorism financing activities (Williams et al., 2005):

Of particular concern is the ease with which corporate vehicles can be created and dissolved in some jurisdictions, which allows these vehicles to be used not only for legitimate purposes (such as business finance, mergers and acquisitions, or estate and tax planning) but also to be misused by those involved in financial crime to conceal the sources of funds and their ownership of the corporate vehicles. Shell companies can be set up in onshore as well as offshore locations and their ownership structures can take several forms. Shares can be issued to a natural or legal person or in registered or bearer form. Some companies can be created for a single purpose or to hold a single asset. Others can be established as multipurpose entities. Trusts are pervasive throughout common law jurisdictions. (FATF, 2006, p. 1).

Corporate affiliations and accounts should be closely and regularly monitored and the beneficial ownership determined: . Shell companies, particularly non-listed shell companies, for example, have been known to be exploited by corrupted PEPs to launder their corruption proceeds under the guise of legitimate business transactions and to hide their involvement in the transactions. For example, multi-jurisdictional structures of corporate entities and trusts can be established to hide the true identity of the beneficial owner. . Corporate accounts involved in potentially high-risk activities particularly activities that may be subject to export and/or import restrictions such as exporting equipment for foreign military entities, classified defence articles and sensitive technical data. Establishing business relationships with these potentially high-risk corporate accounts involves varying degrees of risk. Regulated entities should understand the nature of the business, the source of funds of the corporate account, the source of wealth of the account owner and beneficial owner, the “typical” volume and value of transactions in the particular industry of that size and the financial profile of the corporate. Red flag indicators[1] . Living standards of public officials (and employees handling PEP accounts) exceed their known lawful income or if they control or possess pecuniary resources or property that are disproportionate to their present or past known sources of income, and when they are unable or unwilling to account for the discrepancy. . Financial transactions incompatible with the client’s normal activity, beyond the client’s apparent financial means, or beyond the client’s estimated liquid net worth (assets that can readily be turned into cash) are causes for concern. . Unduly complex ownership structures particularly in the case of shell companies where the beneficial ownership of a corporate or account cannot be established, are causes for concern. Differences in anti-money laundering legislation Anti-money laundering (AML) legislation is designed to make it more difficult for criminals and others (including corrupted PEPs) to launder criminal and corruption proceeds without being caught by creating a number of gatekeepers keeping watch over the entrances to the financial system (Sproat, 2007).

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Although AML legislation in some jurisdictions includes specific legislative or other enforceable obligations regarding the identification and verification of PEPs, PEP definitions may differ between jurisdictions (Table I). In Taiwan, for example, banks and financial institutions are required to exercise “extraordinary diligence toward non-resident clients to understand why they open accounts in a foreign country” (Bankers Association of the Republic of China, 2007, p. 6). There is, however, no specific mention of exercising enhanced due diligence to determine whether the customer is a PEP or to establish the source of wealth and source of funds. Bearing in mind that CDD is not a straight forward process, the conflicting definitions of PEPs compound the difficulties for regulated entities with overseas branches and subsidiaries in complying with laws in both jurisdictions (e.g. conflicting disclosure laws between Australia and Vanuatu highlighted by Klan and Moran, 2008). Regulated entities should also seek to apply the higher standard to the extent permitted by the law of the host jurisdiction. The UK Money Laundering Regulations 2007, for example, extend PEP definition to an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function by: . a state other than the United Kingdom; . a Community institution; or . an international body. Overseas branches and subsidiaries of UK-based regulated entities may decide to continue to apply enhanced due diligence measures to former PEPs, particularly in jurisdictions with a high risk of money laundering risk and corruption, even in jurisdictions with no such legal obligations. In the event that overseas branches and subsidiaries are unable to comply with certain AML/CTF measures mandated by the AML regulator in their home jurisdiction due to conflicting legislation in the host jurisdiction, legal advice should be obtained from the home jurisdiction AML regulator. Additional measures to effectively handle the risk of money laundering and terrorist financing should also be undertaken by the regulated entities. Corruption prevention initiatives Corruption and bribery can affect political and economic performance by undermining the effectiveness of public policy. Investors, for example, view corruption as an unnecessary extra cost of doing business and may avoid investing in corruption-prone countries. In addition, foreign aid might also be discouraged due to the high risk of embezzlement of aid money. Corruption and bribery are ongoing issues. In China, for example, more than 90,000 public officials were reportedly disciplined for corruption-related offences in 2006 (Sun, 2007). International Bank for Reconstruction and Development (2007, p. 1) further estimated that bribes received by public officials from developing and transition countries is approximately US$20 billion to US$40 billion per year. Schools of thought on corruption prevention mechanisms include the penal-administrative approach (via the strengthening of national law and administrative structure), the economy-based approach (via economic reforms) and the national integrity system involving political will, administrative reforms, independent anti-corruption

Anti-Money Laundering/Counter Terrorism Financing Act 2006 (Cth) Corruption, drug trafficking and other serious crimes (confiscation of benefits) act (Cap 65A) Drug trafficking (recovery of proceeds) ordinance (Cap 405) – DTROP – and the organized and serious crimes ordinance (Cap 455) – OSCO Anti-money-laundering law Money laundering control act

Principal AML/CTF legislation

FATF definition

Yesc

No No

FATF definition

Yesb

Noa

N/A N/A

Yes (as stated in the accompanying interpretative note to FATF recommendation 6)

No

N/A

Definition of PEPs Definition Includes individuals in their own used? jurisdiction?

Notes: aAlthough there is no definition of a PEP in the Anti-Money Laundering/Counter Terrorism Financing Act 2006 (Cth), the FATF definition of a PEP is used in the guidance issued by AUSTRAC (www.austrac.gov.au/files/risk_man_and_amlctf_programs.pdf). b Notices and guidelines issued by the Monetary Authority of Singapore (e.g. MAS Notice 626: paragraph 6.1). In the recent mutual evaluation of Singapore, the jurisdiction was found to be largely compliant with FATF Recommendation 6 (Financial Action Task Force (FATF), 2008a). c Hong Kong Monetary Authority (HKMA) (2004, 2007), Securities and Futures Commission (SFC) (2006, 2008). In the recent mutual evaluation of Hong Kong, the jurisdiction was found to be partially compliant with FATF Recommendation 6 as “[t]he banking and insurance guidelines do not specify explicitly that senior management approval is required to continue a business relationship with a customer subsequently discovered to be a PEP [and t]here are no enforceable provisions regarding the identification and verification of PEPs for remittance agents and money changers” (FATF, 2008b, p. 213)

People’s Republic of China (PRC) Republic of China (ROC), Taiwan

Hong Kong, Special Administrative Region of the People’s Republic of China

Singapore

Australia

Jurisdiction

Enhanced customer due diligence for PEPs?

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Table I. Anti-money laundering legislation in selected jurisdictions within the Asia Pacific region

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agencies, parliaments, public awareness/involvement, the judiciary, the media, and the private sector (Kayrak, 2008; McCusker, 2006). There is no one size fits all solution and any corruption prevention strategies should be designed with longevity in mind. McCusker (2006, p. 28) noted that in designing corruption prevention instruments: [. . .] it is important to recognise the fundamental role that political will and support for reforms at the highest levels of government can play in bringing about practical results and in raising the credibility of, and public support for, anti-corruption progress.

Anti-corruption legislation There is an ongoing call for greater control to criminalize corruption and the associated economic crimes at both international levels (e.g. UN Convention against Corruption – the first legally binding international instrument against corruption, which has been ratified by over 100 member jurisdictions) and regional levels (e.g. OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions – the OECD Convention). These frameworks require member jurisdictions to implement relevant legal instruments and administrative measures to cover a wide range of acts of corruption[2], if these are not already criminalized under existing legislation. At least 37 jurisdictions have criminalized foreign bribery and disallowed tax deductions for bribe payments, as well as taking further steps required by the Convention and other OECD anti-bribery instruments. In the US, individuals and legal entities found guilty of paying or promising to pay bribes (i.e. money or anything of value) to foreign officials will be liable to criminal and civil penalties ranging from large fines to suspension and debarment from federal procurement contracting, to jail sentences (Foreign Corrupt Practices Act of 1977). Example 8. A recent example includes a case involving a publicly-traded company that provides construction, engineering and other services in the oil and gas industry. The company reportedly agreed to pay a US$22 million criminal penalty in connection with alleged corrupt payments to Nigerian and Ecuadoran government officials in violation of the Foreign Corrupt Practices Act of 1977 (US DoJ, 2008e). Private entities should also implement integrity management systems including detailed compliance programs (e.g. know your employee) intended to prevent and to detect any improper payments by their employees. Presumption statutory obligation In several countries within the South East Asia region, there is a presumption statutory obligation in their anti-corruption legislation to explain unexplained wealth for public civil servants – illicit enrichment (Table II). The defendant would need to provide a satisfactory explanation to the court as to how he/she was able to maintain such a standard of living or how such pecuniary resources or property came under his control, and this effectively shifts the burden to the defendant to prove to the Court that the unexplained wealth is not given or received corruptly as an inducement or reward. Such a provision criminalizes illicit enrichment – when the living standards of public officials exceed their known lawful income or if they control or possess pecuniary resources or property, that are disproportionate to their present or past

Jurisdiction Singapore Hong Kong, Special Administrative Region of the People’s Republic of China Indonesiaa

Presumption statutory obligation?/anti-corruption legislation

Politically exposed persons

Yes/Prevention of Corruption Act (Cap 241), Section 8 Yes/Prevention of Bribery Ordinance, Section 10 No such provision under the Law on the Commission to Eradicate Criminal Acts of Corruption (unless the individual is a defendant named in an ongoing investigation)

Note: aArticle 37A(2): In the event that the defendant cannot prove that his/her wealth is proportional to the amount of his/her income or any additional income from his/her wealth, the information referred to as in paragraph (1) shall be used to strengthen the existing evidentiary material that the defendant has committed a corruption offense

known sources of income, and when they are unable or unwilling to account for the discrepancy. The provision, as noted in the report by FATF (2007), can be an effective tool against the money laundering risk posed by PEPs and also money laundering offences in general. Asset and interest disclosure As part of the corruption prevention measures in detecting unjustified wealth for public officials, some jurisdictions require their public office holders “to declare their outside activities, employment, investments, assets, and substantial gifts or benefits from which a conflict of interest might result with respect to their functions” (UNODC, 2008, p. 3). As in the case of specific legislative or other enforceable obligations regarding the identification and verification of PEPs, the scope of disclosure requirements can vary considerably across jurisdictions. In some jurisdictions, asset and interest disclosure are compulsory for public officials at all levels while for others, asset and interest disclosure are only compulsory for senior public officials holders and/or those in sensitive positions. In several jurisdictions that mandate compulsory asset and interest disclosure, it remains unclear whether these declarations are scrutinised, how the information is used, and whether failure to report or wrongful reporting does, in practice, entail sanctions (ABD/OECD, 2006). One might also question if there is a potential for political interference and consideration in some of the jurisdictions. Asset recovery Confiscation of corruption proceeds and assets is one of the most effective, if not the most effective, means for deterring and sanctioning corruption. In addition, confiscation may compensate for the moderate monetary sanctions for the offence of bribing a foreign public official (Working Group on Bribery in International Business Transactions, 2008). Several jurisdictions have undertaken initiatives to strengthen their institutional and legal frameworks and established mechanisms for the return of assets derived from corrupt activities, by criminalizing and listing corruption as a predicate offence for money laundering offences.

381 Table II. Anti-corruption legislation in selected jurisdiction within the Asia Pacific region

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In Hong Kong, for example, Section 14C of the Prevention of Bribery Ordinance allows the Independent Commission Against Corruption (ICAC) to obtain ex parte restraining orders against all properties associated with the defendant. The defendant, if convicted of corruption, shall be ordered to pay to such person or public body and in such manner as the court directs, the amount or value of any advantage received by him, or such part thereof as the court may specify (Prevention of Bribery Ordinance, ss12(1)). Young (forthcoming) further pointed out that: [. . .] restitution of property ordered pursuant to section 84 of the Criminal Procedure Ordinance [. . .] or section 30 of the Theft Ordinance [. . .] (in respect of stolen goods) is another way to ensure that offenders do not continue to enjoy their ill-gotten gains [as t]he orders allow the court to [. . .] directly [. . .] [order] the return of property [and i]n cases involving public corruption or bribery, the government is a recognized victim for purposes of ordering restitution.

In the case of bribing foreign officials and embezzlement of public funds in developing jurisdictions, however, there may be difficulties in the confiscation and repatriation of corruption proceeds. The proceeds are typically hidden abroad or involve overseas intermediary services provided by entities such as lawyers, accountants and company formation agents to launder the corruption proceeds (International Bank for Reconstruction and Development, 2007). Investigation of foreign bribery is also likely to involve three or more jurisdictions: (1) source jurisdiction of the bribe payer; (2) destination jurisdiction of the bribe taker; and (3) intermediary jurisdiction(s) used to launder the proceeds. Repatriating corruption proceeds from overseas will, accordingly, require complex financial analysis and involve mutual legal assistance requests from foreign jurisdictions (e.g. offshore centres where relevant accounting and banking records are kept). This can be an expensive, resource intensive and time consuming exercise. A global partnership between jurisdictions is critical in facilitating the return of corruption proceeds and embezzled public funds to the jurisdictions of origin. Recent international capacity building initiatives include the following: . The joint UN Office on Drugs and Crime (UNODC) and World Bank Group (WBG)’s Stolen Asset Recovery (StAR) initiative. The StAR initiative is designed to offer assistance to victim countries especially developing countries, in repatriating stolen money from overseas jurisdictions. Assistance rendered includes assistance in filing a request for mutual legal assistance and advice on experts needed. . The UNODC project proposal for short-term legal assistance in asset recovery cases where legal experts in asset recovery from various systems are also made available to requesting jurisdictions. Although it may be too early to gauge the effectiveness of the above initiatives, it is likely that these initiatives and the partnerships forged between jurisdictions and international and regional bodies can help to minimise the many procedural and jurisdictional obstacles that can delay or endanger international corruption and asset seizure investigations in the long run.

Conclusion On an international front, there may be a continuing need to address issues such as the lack of clarity in the definition of PEPs and the conflicting PEP definitions. The EU Third Money Laundering Directive and the JMLSG guidance, for example, may give the impression that domestic PEPs are less of a risk than their international counterparts and hence, not automatically subject to enhanced due diligence. The lack of clarity in definitions and conflicting PEP definitions have left regulated entities, with their comparative disadvantage of not having the experience of operating in difficult international environments, floundering (Coates, 2008). Consequently, regulated entities could risk customer alienation and loss of business from legitimate PEP clients and increased compliance costs. Corrupted PEPs may also seek out jurisdictions from which to base their activities that have the least severe punishments or which have no extradition treaties (Choo et al., 2007). Anti-money laundering regulations and technologies can be subverted by suitably motivated criminals and corrupted PEPs. As pointed out by Sohn (2008, p. 5): [. . .] if a launderer is willing to work with smaller sums or use larger numbers of smurfs or utilise people who are well under the financial system’s radar, will it be worth the effort to catch them.

It is, therefore, important that the cost of money laundering is more prohibitive than the compliance cost[3]. Achieving some measure of uniformity will help to minimise the risk of so-called “jurisdiction shopping” or regulatory arbitrage: Recommendation 1. There is a need to harmonise legally enforceable obligations targeting PEPs. PEP monitoring should, arguably, be extended to individuals holding prominent public functions in their own jurisdictions and individuals exercising functions not normally considered prominent but with political exposure comparable to that of similar positions at a prominent level. Another issue worth exploring is the question of when and how to remove a PEP. For example, the UK Money Laundering Regulations 2007, based on EU Third Money Laundering Directive, state that an individual should no longer be considered a PEP after leaving office for 12 months. Sohn (2008) questions how quickly the influence of a former politician wanes and suggests that “former heads of state, at a minimum, cast a shadow significantly longer than 12 months”. Should PEP monitoring be extended beyond 12 months for individuals deemed to have a higher money laundering risk? Recommendation 2. PEP monitoring should be extended to individuals holding important positions in private sectors such as CEOs of listed companies, as these individuals are no less vulnerable to being corrupted[4]. Similar concerns were raised by Sohn (2008):3) who highlighted that “a chief financial officer (CFO) of a sizeable corporation presents a similar financial risk”: Recommendation 3. Regulated entities need to play their part to mitigate their risks, such as by conducting ongoing environmental scan of risks of money laundering and the financing of terrorism.

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Examples include: . What developments in world politics and the global economy are likely to give rise to risks of money laundering and financing of terrorism? . What changes are taking place in the regulatory environment that may make money laundering and the financing of terrorism more or less likely to occur? . What developments in business will lead to the creation of funds that will be laundered or used to finance terrorism? Natural disasters also need to be closely monitored as part of the environmental scan, as large amounts of emergency relief funds are typically raised by the international community (e.g. governments and charities) to assist the victims. As noted by Kasper (2006 cited in McCusker, 2006, p. 40), “simply disbursing aid to kleptocratic regimes has debased the institutions essential for economic growth and has entrenched corrupt elites”. Banks and financial sectors, as pointed out by Rijock (2008), should bear in mind that despite the urgency of such natural disasters, they should also “screen and examine the senders of these payments, for they may mask money laundering or terrorist financing”. Future research Issues worth further exploration include: . whether AML asset recovery has significantly impacted upon the pockets of acquisitive criminals generally; and . whether jurisdictions should impose temporary or permanent disqualification from contracting opportunities with the government as a deterrent for corporations involved in bribery and corruption cases.

Notes 1. This list of red flag indicators is not a comprehensive list of risk factors. The list should be updated regularly or as often as necessary and should be consistent with policies and procedures issued under the respective jurisdictional AML/CTF legislation. 2. Corruption activities include bribery, embezzlement of public funds, trading in influence and the concealment and laundering of the corruption proceeds. 3. In a recent online survey undertaken by the UK Law Society, all 5 percent of the 197 respondents who reported having not updated their policies and procedures within six months of the new Money Laundering Regulations 2007 coming into force were in firms with fewer than four partners (Law Society, 2008). This may result in the unintended consequence of driving small players underground or providers of designated services to less restrictive and less costly jurisdictions. There may be a need for further studies on how AML/CTF regulators can provide technical assistance that fosters the competitiveness of small- to medium-sized regulated entities and allow these entities to fully comply with their obligations under the AML/CTF regime. 4. In addition, these individuals may have access to inside information that can affect the share prices of these companies, which may lead to dishonest share/insider trading.

References ABD/OECD (2006), “Anti-corruption policies in Asia-Pacific: Reform progress in 25 countries”, Asian Development Bank/Organisation for Economic Co-operation and Development, available at: www.oecd.org/dataoecd/32/31/36832820.pdf Bankers Association of the Republic of China (2007), Specimen of “Points of Attention by Banks on Money Laundering Prevention”, updated, Bankers Association of the Republic of China, Taiwan. Chinadaily (2007), “Former SFDA Chief executed for corruption”, Chinadaily, 10 July, available at: www.chinadaily.com.cn/china/2007-07/10/content_5424937.htm Choo, K.K.R., Smith, R.G. and McCusker, R. (2007), Future Directions in Technology-enabled Crime, Research and Public Policy Series No. 78, Australian Institute of Criminology, Canberra, available at: www.aic.gov.au/publications/rpp/78/ Coates, D. (2008), “The AML, CTF and sanctions jigsaw: do the pieces fit together?”, Money Laundering Bulletin, April, pp. 1-4. FATF (2006), Third Mutual Evaluation Report on Anti-money Laundering and Combating the Financing of Terrorism: United States of America, Financial Action Task Force, available at: www.fatf-gafi.org/dataoecd/44/9/37101772.pdf FATF (2007), Methodology for Assessing Compliance with the FATF 40 Recommendations and the FATF 9 Special Recommendations, Financial Action Task Force, available at: www. fatf-gafi.org/document/51/0,2340,en_32250379_32236920_34297139_1_1_1_1,00.html FATF (2008a), Third Mutual Evaluation Report Anti-money Laundering and Combating the Financing of Terrorism: Singapore, Financial Action Task Force, available at: www. fatf-gafi.org/dataoecd/36/42/40453164.pdf FATF (2008b), Third Mutual Evaluation Report Anti-money Laundering and Combating the Financing of Terrorism, Hong Kong, China, Financial Action Task Force, available at: www.fatf-gafi.org/dataoecd/19/38/41032809.pdf HKMA (2004), A Guideline Issued by the Monetary Authority under Section 7(3) of the Banking Ordinance, Hong Kong Monetary Authority, available at: www.info.gov.hk/hkma/eng/ press/2004/20040608e4.htm HKMA (2007), “Anti-money laundering and terrorist financing – guidance paper on politically exposed persons”, Hong Kong Monetary Authority, available at: www.info.gov.hk/hkma/ eng/guide/circu_date/20071113e1.htm Institute of Chartered Accountants (2006), “Money laundering worth up to 5% of global GDP, News Release 26 May, available at: www.charteredaccountants.com.au/ news_releases_2006/may_2006/A116954038 International Bank for Reconstruction and Development (2007), Stolen Asset Recovery (StAR) Initiative: Challenges, Opportunities, and Action Plan, World Bank, Washington, DC. JMLSG (2006), “Prevention of money laundering combating the financing of terrorism: part 1”, Joint Money Laundering Steering Group, available at: www.jmlsg.org.uk/ Kayrak, M. (2008), “Evolving challenges for supreme audit institutions in struggling with corruption”, Journal of Financial Crime, Vol. 15 No. 1, pp. 60-70. Klan, A. and Moran, S. (2008), “Banks’ link to tax haven”, available at: www.theaustralian.news. com.au/story/0,23625764-2702,00.html?from ¼ public_rss Law Society (2008), “Putting anti-money laundering into practice”, media release 10 July, available at: www.lawsociety.org.uk/newsandevents/news/view ¼ newsarticle. law?NEWSID ¼ 411862

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McCusker, R. (2006), Review of Anti-corruption Strategies, Technical and Background Paper Series 23, Australian Institute of Criminology, Canberra. PPATK (2008), “KPK questions lawmakers, BI officials”, Pusat Pelaporan Dan Analisis Transaksi Keuangan, available at: www.ppatk.go.id/berita.php?nid ¼ 3070 Rijock, K. (2008), “Watch Myanmar disaster charities carefully”, available at: www.world-check. com/articles/2008/05/05/watch-myanmar-disaster-charities-carefully/ SFC (2006), “Prevention of money laundering and terrorist financing guidance note”, Securities and Futures Commission, available at: www.sfc.hk/sfcRegulatoryHandbook/EN/ displayFileServlet?docno ¼ H419 SFC (2008), “Circular to licensed corporations and associated entities–anti-money laundering/combating terrorist financing – questions and answers on identification and handling of high risk customers and politically exposed persons (‘FAQs’)”, Securities and Futures Commission, Circular reference SFO/IS/008/2008. Shih, H.C., Hsu, J.W., Chang, R. and Chuang, J. (2008), “Huang, Chiou, Ko resign as offices searched”, Taipei Times, 7 May, available at: www.taipeitimes.com/News/front/archives/ 2008/05/07/2003411284 Sohn, E.A. (2008), “Fighting dysPEPsia”, Money Laundering Bulletin, March, pp. 3-5. Sproat, P.A. (2007), “An evaluation of the UK’s anti-money laundering and asset recovery regime”, Crime, Law and Social Change, Vol. 47 No. 3, pp. 169-84. Sun, Y. (2007), “Senior CPC official warns on staying vigilant against corruption”, Xinhua, 28 December, available at: www.china-embassy.org/eng/gyzg/t394051.htm (The) Straits Times (2008) “Taiwan prosecutors indict 5 former ministers on corruption charges”, Straits Times, 15 July, available at: www.straitstimes.com/Latest%2BNews/Asia/ STIStory_257909.html Todayonline (2008), “Lawmaker and Riau’s deputy governor arrested in $15million case”, Todayonline, 19 April, available at: www.todayonline.com/articles/249230.asp UNODC (2008), “Best practices in fighting corruption”, UN Office on Drugs and Crime, available at: www.unodc.org/pdf/crime/convention_corruption/cosp/session2/V0788874e.pdf US DoJ (2007), “US judge sends former high-ranking United Nations official to prison for money laundering”, United States Department of Justice, media release, 12 October, available at: www.usdoj.gov/usao/nys/pressreleases/October07/kuznetsovsentencingpr.pdf US DoJ (2008a), “Two Virgin Islands commissioners convicted in $1.4 million bribery and kickback scheme”, United States Department of Justice, media release, 28 February, available at: www.usdoj.gov/opa/pr/2008/February/08_crm_153.html US DoJ (2008b), “Ex-newark mayor Sharpe James guilty on all counts; mistress convicted with him”, United States Department of Justice, media release, 9 April, available at: newark.fbi. gov/dojpressrel/2008/nk041608.htm US DoJ (2008c), “Former Fairbanks mayor and wife sentenced to federal prison for conspiracy, misapplication of government grant funds, money laundering”, United States Department of Justice, media release, 2 May, available at: www.anchorage.fbi.gov/doj/pressrel/2008/ moneylaundering050208.htm US DoJ (2008d), “Former director of internal audit for the District of Columbia public schools sentenced to prison for theft of federal funds”, United States Department of Justice, media release, 7 May, available at: washingtondc.fbi.gov/dojpressrel/pressrel08/wfo050708b.htm US DoJ (2008e), “Willbros Group, Inc. enters deferred prosecution agreement and agrees to pay $22 million penalty for FCPA violations”, United States Department of Justice, media release, 14 May, available at: www.usdoj.gov/opa/pr/2008/May/08-crm-417.html

US FFIEC (2007), “Bank Secrecy Act/Anti-Money Laundering examination manual”, United States Federal Financial Institutions Examination Council, available at: www.fdic.gov/ regulations/examinations/bsa/index.html Williams, O.H., Suss, E.C. and Mendis, C. (2005), “Offshore financial centres in the Caribbean: prospects in a new environment”, World Economy, Vol. 28 No. 8, pp. 1173-88. Wolfsberg Group (2008), “Wolfsberg frequently asked questions (‘faqs’) on politically exposed persons (‘peps’)”, available at: www.wolfsberg-principles.com/pdf/PEP-FAQ-052008.pdf Working Group on Bribery in International Business Transactions (2008), Review of the OECD Instruments on Combating Bribery of Foreign Public Officials in International Business Transactions Ten Years after Adoption, OECD, Paris. Young S.N.M (n.d.), “Civil forfeiture for Hong Kong: issues and prospects”, in Young, S.N.M (Ed.), Civil Forfeiture of Criminal Property: Legal Measures for Targeting the Proceeds of Crime (forthcoming). Further reading AGD (n.d.), “Why are anti-money laundering and counter-terrorism financing reforms required? Fact sheet”, Australia Attorney-General’s Department, available at: www.ag.gov.au/www/ agd/agd.nsf/Page/Anti-moneylaundering_Factsheets The China Post (2008), “Document Reveals Scandal Funds Still in Bank as of July 07”, The China Post 8, May, available at: www.chinapost.com.tw/taiwan/national/national%20news/ 2008/05/08/155421/Document-reveals.htm About the author Kim-Kwang Raymond Choo, a former police officer in the Singapore Police Force, is currently working as a high tech crime and anti-money laundering analyst at the Australian Institute of Criminology. He is also the recipient of several awards and scholarships including the “2008 Australia Day Achievement Medallion”, “Wilkes Award for the best paper published in the 2007 volume of The Computer Journal (Oxford University Press)”, “2006 Queensland University of Technology Faculty of IT Executive Dean’s outstanding PhD thesis commendation”, and “Best Paper Award at the 10th Australasian Conference on Information Security and Privacy 2005”. He has presented at several international and local conferences including the “Organized Crime in Asia: Governance and Accountability” colloquium at the National University of Singapore and to the “Proceeds of Crime Working Group” at Australian Federal Police Sydney Headquarters in November 2007. He has also served on the program committee for several international conferences and as a reviewer for several international conferences and journals including ACM Computing Reviews, Asian Journal of Criminology, IEEE Communication Letters and IET Information Security. Kim-Kwang Raymond Choo can be contacted at: raymond.choo. [email protected]

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