Every kleptocrat needs a buddy. Someone to serve as an intermediary between the corrupt official and the bankers, real estate agents, and others in London, New York, and elsewhere happy to profit from handling dirty money. A kleptocrat can’t just walk into a bank or real estate office in the United Kingdom, the United States, or other preferred offshore haven with a pile of money to invest. As a public official, the antimoney laundering (AML) laws would oblige the banker or real estate agent to ask searching questions about how the kleptocrat came into the money and the law would likely also require them to report the transaction or proposed transaction to the authorities. A buddy, particularly one who has remained out of the public limelight, is the perfect solution. So long as they don’t know a potential customer is close to a senior public official, the banker or real estate agent meets their obligation to ascertain the source of the would-be customer’s funds by asking a few pro forma questions.
To plug the buddy loophole, the AML laws require banks and real estate agents to determine if anyone wanting to do business with them is a “close associate” of a senior official — a “politically exposed person” in the inelegant term coined by AML specialists. If a potential customer is a PEP, the bank or real estate agent must ask the same searching questions about the origins of the individual’s funds that they must ask of a senior official. Recognizing that bankers and real estate agents can’t be expected to know whether a foreign national wanting to do business with them is a close associate of a senior official in 190 plus countries, AML regulators allow them to rely on one of the several PEP lists peddled by commercial firms. So long as the potential customer doesn’t appear on whatever PEP list they use, the banker or real estate agent need not conduct a detailed inquiry (“enhanced due diligence” in AML-speak) into where their money came from.
So how well do these commercial PEP lists do at identifying kleptocrats’ buddies?
The short answer: poorly. In its 2010 report Keeping Foreign Corruption Out, the U.S. Senate’s Permanent Subcommittee on Investigations found that several lists failed to include even the wife of Gabon’s president or the spouse of Nigeria’s recent vice president — let alone close associates of these two suspected kleptocrats. In 2011 the U.K. Financial Services Authority reported that an individual “with close links” to the political and military elite of a highly corrupt oil-rich state was not on any of the PEP lists used by the bank holding his money. Research presented to a World Bank meeting in 2011 identified notable omissions in two leading PEP lists, finding for example that none of the senior advisers to the leaders of the Philippines armed forces appeared on either list.
It is no secret why the commercial PEP lists come up so short. As a major list-vendor acknowledged in a 2008 paper, “there are no magical sources or websites that list [all PEPs].” Instead, each seller pieces together its list of who is whose buddy by scouring national newspapers, web sites, and other widely available public sources using sophisticated computer search engines. But there are obvious limitations to this method; not every close associate of a senior political leaders is named in a newspaper story or identified in a web post. As the Financial Action Task Force, the body that sets international AML standards, explained in a 2013 report, the result is that commercial lists are neither “comprehensive” nor “reliable.”
The obvious solution is to supplement the commercial providers’ web searches with the knowledge that local observers of a country’s political scene possess. But until the work of the Anticorruption Action Center, a Ukrainian NGO, neither the FATF nor national AML regulators nor commercial providers had made any effort to do so. Representatives of the Center will present their solution to the “kleptocrat-buddy” problem on October 12 at the Civil Society Forum Policy Forum organized in conjunction with the annual meeting of the World Bank and the International Monetary Fund in Washington, D.C.
Those wanting to attend the session or dial-in should contact the organizers on firstname.lastname@example.org by October 8. For those unable to attend or dial in, the presentation will appear on this space October 18.