India will soon witness one of the most costliest elections. Spending on the elections is likely to be more than Rs.500 billion during the two months. Lot of this money flows through the parallel economy, it also passes through the financial institutions. Though the financial institutions will have reason to cherish as the fee based income is likely to see the boost during the election period, they need to worry about the compliance failures.
Politically Exposed Persons
Politically Exposed Persons (PEP)s are high risk customers for financial institutions. PEPs have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking and thus are more likely to launder money. However, being a PEP does not in itself equate to being a criminal or suggest a link to abuse of the financial system.
There is no unique definition of a PEP, in fact the criteria varies from country to country. Theoretically any person who is entrusted with prominent public position is Politically Exposed Person. A PEP does not always mean someone who is involved in politics, it could include immediate family members, close business associates or even senior executives.
Reserve Bank of India (RBI) guidelines require banks to take greater precaution if the borrower has political influence. In such situations, the senior officials of the banks has to be involved in the decision-making. RBI’s definition of Politically Exposed Persons is based on the guidelines provided by Financial Action Task Force.
There is no recommended PEP List, however the research conducted by Riskpro is the first step in collecting the statistical information about the Politically Exposed Persons.
Globally, when the countries are tightening the regulations to combat money laundering, study by Indian Regtech firm reveals that Indian politicians having business relationships with companies have borrowed atleast Rs.48 trillion from the Indian financial institutions.
Using public domain information available about the politicians, a Regtech firm in Pune specialising in intelligence as service, has compiled the research on business interests of top 1,000 politicians and their 1,000 relatives. There is no PEP database available to the financial institutions to carry out PEP Screening.
The database has revealed that there are 5,625 legal entities where the 1,000 politicians from different political parties have interests. Additionally there are 9,900 companies where their relatives have interests. The number of unique companies where both politicians and their relatives have such interests stood at 10,147. This research is helpful to understand the PEP status of the borrowers.
Globally the regulators have recommended PEP Lists to banks for their due diligence process while handling sensitive loan proposals. Bankers need this information specifically for the purpose of accurate and confident decision-making in determining strategy to deal with the borrowers if they cannot completely avoid lending them.
The data revealed that apart from a large number of unlisted companies, politicians and their relatives had interests in 329 listed companies. Some of the politicians are found to be associated with 154 state public sector companies and 12 central public sector companies.