Politically exposed persons represent a risk factor for any financial intermediary. They may be considered as more affected by corruption topics. Wrongdoings cause higher reputational damage due to media interest. The reputational damage may not be limited to individual financial intermediaries but can affect the entire financial market.
To prevent damage to the market place, legislators and supervisory authorities regulate business relationships with PEPs. In Liechtenstein, the Due Diligence Act (DDA), the Due Diligence Ordinance (DDO) and some guidelines by the Financial Market Authority (FMA) provide guidance how PEPs are to be identified and how financial intermediaries' shall behave towards them as clients. The DDA and DDO are national adaptations of the European Union's pertinent directives 2005/60/EC and 2006/70/EC.
According to DDA 11 (4) (a), the financial intermediary must take "adequate, risk-based [measures] to determine whether the contracting party or the beneficial owner is a PEP or not". The act however does not include any explanation as to what measures are deemed adequate or appropriate for any given level of risk.
It is however interesting to see that the measures taken to determine if the contracting party or the beneficial owner is a PEP are themselves subject to a risk-based approach: on one side it means that business relationships involving large sums are to be very carefully screened, on the other side it could also be interpreted in such a way that small clients can be checked in a superficial way.
Even though the Liechtenstein company law (PGR) does not give any minimum amount for trusts, practicability and cost efficiency reasons have led to a practice of refusing trusts that amount to less than approximately CHF 10'000.-. The lowest possible degree of effort to identify PEPs therefore has to be based on and adequate to the risks linked with this amount.
In DDO 21 (1), the government specifies that it expects financial intermediaries to use "computerised systems" to monitor business relationships. Normally, this system has to be suitable and "state-of-the-art". However, the same paragraph also states that computerised systems only have to be used as far as the costs are in suitable proportion to the anticipated benefit. This means that the use of computerised, state-of-the-art systems cannot unconditionally be demanded by the FMA. The cost argument does however not mean that checks for PEPs can be altogether omitted: DDO 21 (2) clearly states that in such cases, "another appropriate risk management system" shall be used.
The FMA has duly taken these facts into account. For example, the model of the due diligence auditor's report to the FMA, under point 3.7.2, contains the questions if a computerised system is in use and, as a follow-up question, what other means are used if computers are not.
Besides the question what tools should be used for the identification of PEPs, infringements to other legal requirements must also be considered. The act on trustees (trust law), in its article 11, obliges trustees to maintain secrecy on matters entrusted to them as well as on facts whose "confidentiality is in the best interest of [the] client". This includes the prohibition of disclosing the fact that a certain person is a client. The unprotected use of online search engines such as Google, through the logging of the IP address, may leave a trail from that person's name back to Liechtenstein. As of yet, no case has become public, thus no case law exists, but liability issues due to a violation of the professional secrecy are thinkable.
A very widespread way of checking the clientele for PEPs is the use of WorldCheck. This computerised tool has become so common among financial intermediaries in the principality that the Liechtenstein Association of Professional Trustees (THV) negotiated a kind of quantity discount. Due to the presumably high percentage of intermediaries who use World Check, the FMA has obviously already encountered such cases. As far as the THV members know, there hasn't been any intermediary reprimanded for using WorldCheck, so it is obviously considered as an adequate system. Also, the risk of disclosure can be deemed as very low, as the THV wouldn't cooperate inconsiderately. To the author's best knowledge, no other database service has yet reached this degree of acceptance. Still there is some uncertainty as to how this data base is generated, who are the people who generate it and whether it really is such a reliable instrument as most of the users think. Such a database can also be abused and persons who are mentioned there by mistake face serious problems afterwards. In our opinion world check is a very good instrument to deliver an idea about a possible client. Anyhow if information is found about him there, this information has to be double-checked very carefully. Nothing can replace the personal contact and the personal relationship to a client which is the best guarantee for due diligence we can think of.
Due Diligence Act
Due Diligence Ordinance
Model due diligence audit report to the FMA (German version
Act on Trustees
Hypo Investment Bank (Liechtenstein) AG. (2006). Verdacht auf Geldwäsche. Wien: Neuer Wissenschaftlicher Verlag. German version only, ISBN 3-7083-0363-6.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.