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Mitigating Corruption Risk: The Role of PEP Identification in Mexico

A Politically Exposed Person (“PEP”) is someone who currently holds or has previously held a significant public role, making them vulnerable to risks such as corruption and money laundering. Recognizing and categorizing individuals as PEPs is crucial for financial institutions and other entities, as it necessitates implementing enhanced due diligence measures to prevent illegal activities. This involves identifying PEPs, understanding the specific risks they pose, and applying control measures to manage these risks effectively.¹

According to the Financial Action Task Force (“FATF”),² a PEP is defined by:³

Prominent Positions: Includes heads of state, ministers, parliament members, supreme court judges, central bank board members, ambassadors, senior military officers, and directors of state-owned enterprises.
Family and Associates: Includes immediate family members (spouse, children, parents) and close associates (friends and business partners) who might have access to influential networks.
Former Officeholders: Individuals who have left a prominent role may still be considered PEPs for a period (typically five years)⁴ due to lingering influence and connections.

Identifying both PEPs and their networks enables institutions to apply enhanced due diligence, monitor transactions closely, and help prevent corruption and money laundering.⁵

PEPs Inherent Risks

PEPs face extra scrutiny due to risks such as corruption, money laundering, and conflicts of interest. Their access to public funds and government contracts can enable bribery and embezzlement, particularly in countries with weak oversight systems.⁶ As an example, in 2017 the Vice President of Equatorial Guinea, Teodorin Nguema Obiang Mangue (2012 – 2016) was implicated in a case where Swiss authorities seized $8 million in assets linked to embezzlement and bribery of foreign officials, his position allowed him to misuse public funds for personal enrichment.⁷

PEPs, with access to substantial funds and assets, may attempt to launder money through banks and financial institutions. They often use complex ownership structures and tax havens to conceal the illicit origin of their funds.⁸ One of the most famous cases in this regard was the Panama Papers, a massive leak of 11.5 million documents from the Panamanian law firm Mossack Fonseca in 2016. These documents detailed how wealthy individuals, including public officials and political figures (“PEPs”), used offshore companies to hide assets, evade taxes, and engage in potentially illicit activities. The leak was one of the largest in history and exposed a global network of secretive financial dealings.⁹

One of the most notable cases regarding the Panama Papers involved Nawaz Sharif, the then-Prime Minister of Pakistan (2013 - 2017). The leak linked Sharif's family to numerous offshore companies and luxury real estate in London, leading to a Supreme Court investigation. The court eventually disqualified Sharif from holding public office due to corruption allegations, making this case one of the most publicized in Pakistan's history.¹⁰

Another example involves Viktor Yanukovych, who served as the President of Ukraine from 2010 until his ousting in 2014.¹¹ During his presidency, he exerted considerable control over crucial sectors, including energy, construction, and public procurement. The impact on public welfare was severe, with decisions that prioritized the interests of Yanukovych’s business associates over the public good. This resulted in inflated costs, substandard services, and substantial financial losses for the state. After his removal, investigations uncovered that Yanukovych had misappropriated large sums of public funds, diverting them into personal accounts and offshore entities.¹²

Due Diligence Measures

Companies and institutions must have robust systems to identify and verify if a client is a PEP, utilizing international databases and continuous monitoring systems.¹³ International databases aggregate data from various global sources to provide comprehensive profiles of PEPs, including their known associates and any adverse media reports.¹⁴

Once a PEP is identified, enhanced due diligence (“EDD”) measures must be applied, which include gathering additional information about the source of funds and wealth of the PEP, as well as ongoing monitoring of transactions to detect suspicious activities.¹⁵ If the PEP fails to provide a satisfactory explanation, the institution must file a Suspicious Activity Report (“SAR”) to comply with regulatory requirements and mitigate potential risks.¹⁶

Furthermore, the relationships and accounts of PEPs must be continuously and rigorously monitored, with any unusual or suspicious transactions reviewed and reported to the relevant authorities if necessary.¹⁷ One example of continuous and rigorous monitoring of PEPs that led to the detection and reporting of suspicious activities involves the case of Paul Manafort, a political consultant and lobbyist who served as the campaign chairman for Donald Trump during the 2016 U.S. presidential election. Manafort's financial activities came under intense scrutiny due to his status as a politically exposed person (“PEP”).¹⁸ Paul Manafort faced enhanced scrutiny from financial institutions. Banks detected large suspicious transfers from Manafort’s accounts to foreign and offshore accounts, which were inconsistent with his financial profile.¹⁹ Detailed investigations revealed that these funds were used for luxury goods and real estate, prompting the banks to file multiple Suspicious Activity Reports (“SARs”) with authorities.²⁰ These reports were crucial for the U.S. investigation into Manafort’s financial dealings, which uncovered extensive money laundering and financial crimes. In 2018, Manafort was convicted of bank fraud, tax fraud, and failing to report foreign bank accounts.

Finally, staff of financial institutions must receive regular training on how to identify and manage the risks associated with PEPs, including understanding risk indicators and best practices for due diligence.²¹ Following a $1.9 billion fine for failing to prevent money laundering and inadequate AML controls, HSBC overhauled its compliance programs, including implementing a comprehensive training program for its staff. This program, introduced in 2012, focused on anti-money laundering (“AML”) and counter-terrorism financing (“CTF”) practices, with particular emphasis on managing risks related to Politically Exposed Persons (“PEPs”).²²

Global Standards

Internationally, there are various standards and recommendations designed to manage the risks associated with PEPs, such as the Financial Action Task Force (“FATF”),²³ the Basel Committee on Banking Supervision,²⁴ The European Union (“EU”),²⁵ the United Nations Office on Drugs and Crime (“UNODC”),²⁶ the World Bank and International Monetary Fund (“IMF”),²⁷ the Egmont Group of Financial Intelligence Units and the Wolfsberg Group.^28,²⁹ These institutions play a crucial role in shaping global standards and practices for managing the risks associated with PEPs, helping financial institutions and countries implement effective measures to combat financial crimes.

At the national level, countries must translate these recommendations into specific laws and regulations. For example, in the United States, the Bank Secrecy Act (“BSA”)³⁰ and the USA Patriot Act establish specific requirements for the identification and monitoring of PEPs.³¹ In the European Union, the Fourth Anti-Money Laundering Directive imposes similar obligations on financial institutions and other relevant sectors.³²

The Mexican Case

In Mexico, the Ministry of Finance and Public Credit, through the Banking, Securities, and Savings Unit, based on Article 27, Section XXIV, Subsection (c) of the Internal Regulations of the Ministry of Finance and Public Credit, and in accordance with FATF Recommendation 12 and in compliance with FATF’s observations in the Mutual Evaluation Report of Mexico, published an indicative list of public positions considered as National Politically Exposed Persons (“PEP”).³³ By adhering to these PEP anti-corruption standards, financial institutions and governments can significantly mitigate the risks of corruption and improve accountability and transparency within public offices as there have been several high-profile cases of corruption involving politically exposed persons (“PEPs”) in Mexico.

Notable examples include Emilio Lozoya Austin, former CEO of Pemex (2012–2016), who was accused of accepting bribes from the Brazilian construction company Odebrecht and was involved in the purchase of a fertilizer plant at an inflated price, resulting in significant financial losses for Pemex. He was arrested in Spain in 2020 and extradited to Mexico to face charges of bribery, money laundering, and criminal association.³⁴

Javier Duarte de Ochoa, former Governor of Veracruz (2010–2016), was accused of embezzling billions of pesos from state funds, using shell companies to divert public money for personal gain, including purchasing luxury properties. After fleeing Mexico, Duarte was captured in Guatemala in 2017, extradited, and sentenced to nine years in prison after pleading guilty to money laundering and criminal association charges.³⁵

Tomás Yarrington Ruvalcaba, the former Governor of Tamaulipas (1999 – 2004), faced accusations of accepting bribes from drug cartels for protection and allowing them to operate with impunity, along with charges of money laundering, bank fraud, and corruption. Yarrington was arrested in Italy in 2017 and extradited to the United States, where he pleaded guilty to money laundering charges in 2021.³⁶

César Duarte Jáquez (2010 – 2016), the former Governor of Chihuahua, was accused of embezzling millions of pesos from public funds to finance personal projects and purchase properties, facing charges of corruption, money laundering, and illegal enrichment. Duarte fled to the United States, where he was arrested in 2020 and is currently undergoing extradition proceedings to face charges in Mexico.³⁷

By following PEP anti-corruption standards the risk of corruption can be reduced. These standards help by improving due diligence, ensuring transparency in procurement, and strengthening protections for whistleblowers and asset declarations. If these measures had been in place, they might have prevented or caught corruption cases like those involving Emilio Lozoya Austin, Javier Duarte de Ochoa, Tomás Yarrington Ruvalcaba, and César Duarte Jáquez in Mexico. Rigorous application of these standards by financial institutions and governments can significantly reduce corruption risks, enhance accountability, and promote transparency in public offices.

Managing the Risks Associated with PEPs

Managing risks associated with PEPs is challenging due to difficulties in identifying them, balancing compliance with business needs, staying updated on evolving regulations, and overcoming internal resistance to strict due diligence measures. Institutions need advanced technologies for accurate identification, must balance regulatory compliance with customer service, stay informed on regulatory changes, and ensure strong support from senior management to effectively implement compliance policies. A proactive and balanced approach is essential to managing PEP-related risks while maintaining a culture of compliance and integrity.³⁸

Due diligence helps manage PEP-related challenges by ensuring thorough identification, monitoring, and risk mitigation. Enhanced screening tools and background checks reveal hidden connections and complex ownership structures. A risk-based approach balances compliance with business needs, while continuous monitoring keeps institutions updated on regulations.

Regular staff training and strong senior management support foster a culture of compliance, overcoming internal resistance. Overall, due diligence offers a comprehensive framework that strengthens risk management, maintains compliance, and supports efficient business operations.

How Can We Help?

Being a Politically Exposed Person (“PEP”) involves significant risks and responsibilities, particularly concerning corruption and money laundering. To mitigate these risks, financial institutions and other sectors must adopt robust due diligence, continuous monitoring, and staff training. FTI Consulting’s Global Risk and Investigations Practice (“GRIP”) in Mexico provides specialized support in this area, offering a multidisciplinary team of experts, including lawyers, forensic accountants, and anti-corruption investigators. This team combines diverse skills and deep compliance knowledge to effectively manage PEP-related risks and conduct thorough investigations.

FTI Consulting can perform comprehensive searches to identify Politically Exposed Persons (“PEPs”) and other high-risk individuals by checking major national and international sanctions and watch lists, including OFAC, EU, UN, and other global and local lists. These searches target individuals involved in terrorism, fraud, money laundering, organized crime, and other illicit activities. Additionally, FTI Consulting conducts extensive online global media searches using specialized databases to uncover any red flags or adverse information related to the subjects, ensuring a thorough understanding of their public profile and potential risks.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates or its other professionals.

Footnotes:

1: “International Standards on combating money laundering and the financing of terrorism & proliferation”, FATF (2012)

2: The Financial Action Task Force (“FATF”) is an intergovernmental organization established in 1989 by the G-7 member countries. It sets international standards and promotes the effective implementation of legal, regulatory, and operational measures to prevent and combat Money Laundering, Terrorist Financing, and the Financing of the Proliferation of Weapons of Mass Destruction (“ML/TF/PF”), as well as other threats related to the integrity of the international financial system, global security, and peace.

3: “Politically Exposed Persons (recommendations 12 and 22)”, FATF (2013)

4: In Mexico, according to information from the National Banking and Securities Commission, an individual is considered a PEP for up to one year after leaving their position. “Lavado de Dinero y el Financiamiento al Terrorismo”, National Baking and Stock Commission (n.d.)

5: “A Guide to Effective PEP Screening”, Finscan.com. (2023, May 12)

6: “The Risks Associated with Politically Exposed Persons | Sanctions.io.”, Www.sanctions.io (n.d.)

7: “PEPs: Understanding the Heightened Risk of Money Laundering”, Www.sanctions.io (n.d.)

8: “The Risks Associated with Politically Exposed Persons | Sanctions.io.”, Www.sanctions.io. (n.d.)

9:“¿Qué son los Panama Papers?”, Infobae (2019)

10: “Former Pakistan PM Sharif Sentenced To 10 Years Over Panama Papers”, ICIJ; International Consortium of Investigative Journalists (2018, July 6)

11: “Ukraine MPs vote to oust president”, BBC News (2014, February 22)

12: “As Yanukovych Fell, Regime-connected Bank Sent Millions Offshore”, Www.occrp.org. (n.d.)

13: “Financial crime: How financial institutions can mitigate money laundering risk associated with politically exposed persons and improve their compliance program”, Lucrări Ştiinţifice, 63, 163–168 (2020)

14: “KYC for Politically Exposed Persons (“PEPs”)” Www.moodys.com (n.d.)

15: “Financial crime: How financial institutions can mitigate money laundering risk associated with politically exposed persons and improve their compliance program”, Lucrări Ştiinţifice, 63, 163–168 (2020)

16: “What is a suspicious activity report?”, Legal.thomsonreuters.com. (n.d.)