Corrupt politicians are a common trope in society, but what's more uncommon is how to spot the red flags of shady dealings. In "Targeting the Proceeds of Political Corruption," Michael Schidlow, CFE, CAMS-Audit, head of financial crime risk training and emerging risk advisory at HSBC Bank, took attendees on a ride through the world of political corruption combining pop culture references with infamous real-world examples involving names like Gaddafi and Putin.
Schidlow clearly conveyed the message that political corruption is a massive problem with a wide range of consequences that affect everyone in the world. “The International Monetary Fund estimates that as much as $2 trillion is paid in bribes worldwide on an annual basis,” Schidlow said.
According to Schidlow, this corruption results in adverse distributional effects of resources, or wealth inequality, which impacts the impoverished much more than the wealthy, which can lead to lower literacy rates, higher mortality rates and overall worse human development outcomes. In order to fight against corruption, as well as comply with regulatory requirements, financial institutions need to develop effective screening procedures for people more vulnerable to corruption — like politicians, their family members or their close associates.
In his presentation, Schidlow describes these people as Politically Exposed Persons (PEPs), and discussed the red flags fraud examiners can use to identify potentially corrupt transactions involving PEPs. One example is a PEP spending more on luxury watches than their official annual salary. Other red flags covered by Schidlow included:
Payments of a PEP’s expenses, such as a mortgage or other bills, by a third party
Transactions with no logical business purposes
Regular wire transfer payments of round or even amounts
Sovereign wealth fund transfers into an account linked to a PEP, which is extremely uncommon in the normal course of business
Transactions involving jurisdictions known to be tax havens or secrecy jurisdictions, such as the British Virgin Islands
PEPs paying their credit card bills multiple times a month, using cash
While he mainly focused on financial institutions’ responsibilities related to PEPs, Schidlow also touched on topics ranging from the difference between grease payments and facilitation payments, to the definition of a kakistocracy (a system of government run by the worst, least-qualified or most unscrupulous citizens) and distinctions between shell and shelf companies.
“There is nothing inherently illegal about a shell company. I have a shell company, my wife has a shell company," said Schidlow. "But if you go looking into the companies you will see clearly our involvement because we aren’t using them to hide anything,”
Typically, when a fraud examiner is trying to track the ownership of a PEP's assets and they are led down a rabbit hole of companies — potentially owned by other companies registered in tax shelters that don’t require the disclosure of the company’s ownership or beneficiaries — there’s probably something problematic involved.
Schidlow also described the four main forms of corruption as extortion, fraud, waste and abuse. He gave examples of each and highlighted the waste related to the 2014 Winter Olympics in Sochi, Russia which cost more than $50 billion despite the original budget being $12 billion. When many of the facilities constructed for the Olympics experienced major functionality issues, it was clear that much of the $51 billion spent was wasted.
Using his extensive experience in investigating international corruption, Schidlow dove into numerous infamous cases and shared details about some of the corrupt actors’ more egregious practices or purchases. One outrageous example of corrupted PEPs involved embezzlement charges against Teodorin Obiang, the son of Equatorial Guinea’s president which strangely enough led to a suit from the U.S. Department of Justice against the literal glove from Michael Jackson’s "Bad" tour.
By determining how they will screen for PEPs and assigning the PEPs a risk rating that helps inform the decision of whether to maintain a relationship with them, financial institutions can not only protect themselves, but help fight the kinds of extreme corruption cited by Schidlow in his colorful examples that have devastating consequences worldwide.