It is quite common for politically exposed persons to camouflage their financial interests using legal entities. There exists a real possibility that you may already be doing business with these people through a legal entity. The RBI needs to act swiftly on domestic PEP front to ensure better compliance on money laundering
Politically exposed persons (PEPs) have been identified as high risk customers for banks and financial institutions for money laundering activities. Because of the risk profile of these customers, the Financial Action Task Force (FATF) and other international bodies acting in the areas of prevention of money laundering and terrorism financing activities have asked banks and financial institutions to carry out enhanced due diligence (EDD) for these customers. Enhanced due diligence involves digging deep into a person’s history and relationships to verify the identity of persons carrying higher risks. The objective of EDD measures in the context of PEPs are that they are identified at the time of account opening and banks and financial institutions carry out an ongoing check for transactions performed by these clients so that they are able to launder money across world.
Till recently, definition of PEP only covered international PEPs. As per initial definition of PEPs by FATF, “‘Politically Exposed Persons’ (PEPs) are individuals who are or have been entrusted with prominent public functions in a foreign country, for example heads of state or of the government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior individuals in the foregoing categories”.
The Reserve Bank of India (RBI) issues master circular every year on AML/KYC detailing the steps that banks and financial institutions regulated by RBI are supposed to carry out in order to effectively implement AML/KYC measures. The last master circular of the RBI on AML.KYC issued on 2 July 2012 expects banks to monitor only foreign PEPs and there is no mention of domestic PEP in the circular. The circular also excludes foreign PEPs in India. It is important to note that India is a member of the FATF and as a member country; it is supposed to implement the FATF guidelines. More than a year has passed since the FATF came out its revised guidelines, but the RBI is yet to come out with a circular on domestic PEPs.
What is it that is preventing the RBI to issue guidelines to banks and financial institutions regulated by it from monitoring domestic PEPs? Are there regulatory hurdles? Or is it that the otherwise self-proclaimed independent body on repo and reverse repo rate determination i.e. RBI is scared to take an independent view on determination of domestic PEPs because of the fact that a big list of who is who is involved in the list. It is important to note here that the PEP list does not alone cover politicians and includes other prominent officials as mentioned in the definition above.
In order to ensure that we are able to effectively monitor PEPs across the country, we as a country will need to create an extensive framework for monitoring PEPs and ensure that money laundering by them gets substantially controlled. Let us look at some of the steps we need to follow to ensure that PEPs are indentified in India:
Define and widen the scope of PEPs: As of now, India only follows the definition of the FATF in identification of PEPs and that too partially as domestic PEPs are not covered. A major misconception regarding PEPs is that one should only be concerned about individuals when identifying PEP risk. A FATF consultation paper issued in 2002, however, indicates that “the proceeds of corruption are typically transferred to a number of foreign jurisdictions and concealed through private companies, trusts or foundations.” The World- Check on PEP identification says, “It is quite common for PEPs to camouflage their financial interests using legal entities and there exists a very real possibility that you are already most likely doing business with PEPs via a legal entity”. So what should be covered under PEP? Ideally PEP should not only cover the PEP definition that has been given by the FATF but it should also include, “private companies, trusts or foundations owned or co-owned by PEPs, whether directly or indirectly” as covered by World-Check. If we broaden the scope of PEP by including entities related to PEPs, an organization like the BCCI (Board for the Control of Cricket in India) will automatically get covered under enhanced due diligence for monitoring of PEP. The RBI may consider including senior private sector employees, certain category of journalists, etc under PEP as well.
Building a database of politically exposed persons (PEPs): The most challenging aspect of identifying politically exposed persons is a common database at the national level. The challenge gets further compounded by the fact that the database needs to be dynamic. Let us understand this with an example. In India so many elections are held at different levels. With new people getting elected, the database of PEP needs to be modified continuously and there is a need of an entity which will carry out this activity. While the Election Commission can provide data for newly-elected representatives and the government can provide details of other categories of PEPs, it is difficult to identify the details of political party officials which keep on changing. Some people may not be affiliated to a political party but still can classify as a PEP. The RBI needs to work on modalities related to these exceptions, as well.
Empowering of banks, freezing of assets and punitive action: The RBI along with the government needs to empower banks and financial institutions to empower banks to carry out a detailed check of financial transactions of PEPs and also bring necessary provisions for at least temporary freezing of assets till the time investigation is initiated by the government agencies. Also there is a need for strict punitive action if PEPs are found to be involved in money laundering.
While it is true that many of the PEPs carry out money transfers without using the route of banks and financial institutions, however, profiling of PEP accounts, wherever available can provide better control on money laundering activities originating and linked to these accounts. World over a need is being felt to have tighter control and enhanced due diligence on PEPs and that is the reason the FATF has included domestic PEP within the scope of PEPs. The RBI needs to act swiftly on domestic PEP front to ensure better compliance on money laundering front.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
It is not clear whether the market has discounted the possibility that there would be no rate cuts. Even if it has, gains will not last for more than a few days
The domestic market settled in the red this week, making it the third weekly close in the negative. The weakening rupee, which made fresh all-time lows in the early part of the week and concerns about the slowdown in growth, as highlighted by the economic indicators this week, was seen as the main reason for the decline. Investors will focus on announcements from the Reserve Bank of India (RBI), in its mid-quarter policy review on 17th June, for fresh direction.
The Sensex closed the week with a loss of 251 points (1.29%) at 19,178 and the Nifty settled 73 points (1.23%) at 5,808. It is not clear whether the market has discounted the possibility that there would be no rate cuts. Even if it has, gains will not last for more than a few days.
The market ended flat amid choppy trade on Monday on concerns of the rupee hitting its all-time low and political developments in Delhi. The weak rupee and a sell-off in metal stocks following CBI action saw the market declining over 1.5% on Tuesday. The benchmarks closed in the red on concerns about the economy as industrial growth declined to 2% in April and retail inflation eased less-than-expected.
The indices ended lower on Thursday on weak global cues and a weak rupee. The domestic market surged nearly 2% on Friday on hopes that the RBI will cut rates in its mid-quarter policy review on Monday.
BSE Oil & Gas (up 1%) was the lone gainer in the sectoral segment. BSE Consumer Durables (down 11%) and BSE Metal (down 5%) were the top losers.
The top Sensex gainers were Reliance Industries (up 4%), NTPC, Larsen & Toubro, Hindalco Industries (up 2% each) and Cipla (up 1%). The key losers in the week were Jindal Steel & Power (down 13%), Tata Power (down 9%), BHEL, Sterlite Industries (down 7% each) and Tata Steel (down 6%).
The top performers on the Nifty were RIL, Ambuja Cement (up 4% each), NTPC, Lupin and HCL Technologies (up 3%). JSPL (down 13%), Tata Power (down 9%), Sesa Goa (down 8%), BHEL (down 7%) and Tata Steel (down 6%) ended as the main losers for the week.
The wholesale price index (WPI) based inflation fell to 4.7% in May, down from stood at 4.89% in April. The fall was driven mainly by declining prices of manufactured items, even as prices of food articles inched up.
Retail inflation stood at 9.31% in May due to easing of prices of edible oil and protein-based items, even as vegetable prices inched up sharply. The consumer price index (CPI) based inflation stood at 9.39% in April.
The industrial production growth has slipped to 2.3% in April on account of dismal performance of manufacturing, mining and power sectors coupled with lower output of capital goods.
The Securities and Exchange Board of India (SEBI) will soon get powers to summon phone call records, emails and SMSes of persons it is probing for insider trading and other market manipulations. With these powers, SEBI aims to prevent black money coming into the market as well as to keep an eye on insider trading.
In international news, the US Federal Reserve will hold its two-day policy meeting next week, with Fed chairman Ben Bernanke scheduled to speak after the central bank’s decision on 19th June.