Using election affidavit data since 2013, Riskpro Management Consulting, Pune Based Regtech firm has created the first curated database of Politically Exposed Persons, their family members, business associates of Politically exposed persons and their business interests.
The database has revealed that there are 5,625 companies where the 1,000 politicians have interests and 9,900 companies where their relatives have interests, which may not always be in the form of shares. The number of companies where both politicians and their relatives have such interests stood at 10,147.
What is Politically Exposed Person ?
There are two different types of politically exposed persons (PEP). Financial Action Task Force (FATF) guidelines defines the term PEP. International PEP is an individual, who has been entrusted with a prominent public function. FATF requires the financial institutions to classify the heads of state or individuals working in executive, legislative, administrative, military, or judicial branches, in elected and un-elected roles as PEP.
Every country defines the domestic politicians as per their nomenclature and the prevailing political system. However, there is no effort made by the regulators to define the politicians in India. Politically Exposed Persons are considered as higher risk individuals and FATF requires the financial institutions to take extra care while dealing with these high risk customers.
Indiaforensic, which is pioneer of forensic accounting in India, defined the politically exposed persons in its Business Politico Study. This definition of Politically Exposed Person is quite broad.
History of Term PEP
The term “politically exposed person” emerged in the late 1990s in the wake of the Abacha affair, a money laundering scandal in Nigeria which galvanised global efforts to prevent abuse of the financial system by political figures. The former Nigerian dictator San Abacha (1993–1998) transferred $321 from the Nigerian government to a secret bank account in Switzerland.
Loans to PEP
According to the reports in Hindustan Times, Using algorithms and specialized software, the firm Riskpro Management Consulting, has calculated that the total loan outstanding with banks that these 10,147 companies have, and it amounts to a staggering ₹48 lakh crore.
These loans pose a big risk before the banks in India. The loans to politically exposed persons are not always bad. Reserve Bank of India (RBI) guidelines require banks to take greater precaution if the borrower has political influence. “In such situations, the senior management of the banks has to be involved in the decision-making.
The reason for this extra care is simple. Just by virtue of acquiring the PEP Status, a politician can not be termed as corrupt. But since he occupies the prominent public function, he is in a better position to carry out corrupt activities. He is in the position to influence the government machinery to not take any penal actions. Politicians influence bankers to lend money to business where they have business relationships.
Similarly, Regtechtimes analysis reveals that some of the biggest nonperforming assets of Indian banking sector are associated with the politicians.
Add-on tools around PEP Database
In addition to the details mentioned in the election affidavits of politicians, the specialised software based on algorithms and predictive analytics developed in-house, utilizes parameters such as names of firms, email ids, common addresses, and other such identifiers information.
Furthermore, when the politicians have to exercise their political clout or power, they get associated with certain companies for a short period of time. Once the benefit is passed on to the company or when the event is completed then they prefer to resign. Riskpro PEP reports consider these associations in the Enhanced Due Diligence Reports.
This information would help the banks to understand the risks associated with the borrowers where the politicians are involved. This type of ‘Market Intelligence’ is unstructured information about borrowers from different sources. Every time information about the politicians is not available from the structured sources. Information is scattered across various public domain sources. Collecting and curating the information to connect the dots is the work of the regtech companies like Riskpro.