Will PEP watchdog distinguish themselves?

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On 9 May 2022, Sri Lanka experienced a different kind of riot, with angry mobs torching and damaging homes, offices, and vehicles of 76 MPs, as well as homes and vehicles of hundreds of regional politicians who openly supported politicians and political parties accused of routing the country and its people through economic mismanagement that could have been avoided. While no one condones these heinous acts such as torching and damaging palatial houses and hotels, it is also time to examine the checks and balances in place to ensure that these politicians will at large claim their insurance in the coming months in the backdrop of corruption claims by the masses. It is also possible that some of the corrupt politicians who lost their property will seek compensation from insurance.

Since the attacks, we have seen affected politicians frantically trying to explain away their losses. One such individual made a claim that he obtained loans from three banks. Irrespective of the obvious doubt on the claim, it is important to remember that banks engage in such group lending only in the case of consortium loans, which is generally for the large-scale institutions and that also only when the size of the loan is of such magnitude that the risk becomes unsupportable for any one banking institution. This politician, like most others, will lack credibility unless he can explain exactly how he managed to obtain loans from three banks for his personal residence, when most of us ordinary persons would not be able to do so. Not that lacking credibility is likely to affect his standing in a vastly corrupt political circus which anyway exists at tremendous cost and suffering to the general populace.

Finally, what matters is whether the financial system which is regulated at such high cost will perform its duty even at this sad end. Going by its history, it is hard to believe that the regulatory apparatus will distinguish itself even at this point by holding those accountable.

Insuring homes, is it followed by all?

According to an insurance expert, most educated city dwellers who have invested in large homes may have insured their homes, and he estimates that around 15 per cent of Sri Lankans may have insured their homes. When a house is built with bank loans, the bank makes it compulsory that the newly built house is insured. The occupant of a house worth Rs 25 million will have to pay a premium of Rs 35,000 per year. This is for a basic insurance policy.

There is also an optional Riot and Civil Commotion cover that can be taken. It is under this cover ordinary people including politicians whose houses were charred on 9 May could claim. The Civil and Commotion cover was introduced in Sri Lanka after the 1983 Riots. The funds for Riot and Civil Commotion are mostly obtained through the State-owned National Insurance Trust Fund (NITF) that comes under the Ministry of Finance.  So, there may be funds released for the politicians and others under this scheme.

Violence, torching of houses

On 9 May, a goon squad from Temple Trees unleashed violence on two large gatherings of young and peaceful protesters who had been expressing their displeasure with how the country is run and, in particular, the dire economic plight it has fallen into. The mobs became enraged and began attacking politicians’ homes islandwide. Whether or not it was politically motivated, it was a colossal damage.

The properties burned were undoubtedly opulent homes, and some even owned multiple properties countrywide that were set on flames. At a time when the country is experiencing a severe economic downturn, insurance claims on these lost properties could be excessive, burden the public, and also serve the ulterior purpose of laundering inexplicable, ill-gotten gains through political corruption for which the ruling party is widely presumed guilty.

Insurance claims is anyway a tedious process and would take some years or even closer to a decade to process. On these grounds, the Government has decided to offer ‘temporary housing’ for those victimised politicians at a new condominium location in Thalawathugoda. Ownership of the house will not be transferred to the MPs and will remain with the State for these premises provided as a ‘temporary’ solution.

Present Sri Lankan and global laws recognise political corruption as a major financial scourge and have laws and regulations enacted to require financial institutions and other to report on any such activity. Voluntary or involuntary involvement in political corruption and laundering of stolen public assets carry severe penalties including monetary fines and criminal liability leading to terms of imprisonment with heavy labour.

The newly appointed Minister of Housing Prasanna Ranatunga is alleged to have said he would repair and restore all damaged properties of his own burnt house as well as of his colleagues using public funds, though he does not have any authority to do so. It is also important to check how many houses of politicians were in fact insured.

The FIU

The Financial Intelligence Unit (FIU) of Sri Lanka is the primary regulatory watchdog for the respective regulations which came into being in 2005 and 2006. Regulations, in particular the Financial Transactions Reporting Act (FTRA) of 2006 and the subsequently gazetted regulations such as the Gazette 1951/13 issued by the FIU require all financial institutions including banks, (non-bank) finance companies and others such as insurance companies, real estate dealers etc., to exercise due diligence on their clientele and report any activities that are disproportionate or not in line with the known profile of any customer.

Failure to do so can result in fines and penalties against the institution including cancellation of licence to operate, while individual penalties include financial costs plus the aforesaid prison terms on being convicted in a Court of Law. However, the conviction rate in Sri Lanka so far has been pathetically low, as per the FIU’s published annual report data accessible on the official Internet site (FIU Annual Report).

These regulations have specific requirements for how financial transactions and activities of politically exposed persons should be risk rated, monitored, and reported as needed. These requirements are stringently audited by the FIU and the Central Bank of Sri Lanka on a regular basis during periodic on-site examinations. Violations and control shortfalls are often highlighted in audit reports as high risk events.

Given all this drama, one should naturally expect an environment in which political corruption related money laundering stays at a low level, if at all. However, the reality facing us today says a different story and one would be naive to believe that these checks and controls serve any useful purpose other than being an additional financial burden on the reporting financial institution, since we are yet to see any politician or related party being successfully convicted in a Court of Law.

Similarly, it is without a doubt that the discrepancies in honest income versus insured values of the properties that were gutted in the recent arson attacks should raise eyebrows of the insurance carriers. Does this even happen, or are they simply happy to grab a high premium for high valued properties irrespective of not knowing how they were acquired, thinking only of their bonuses? If the intentions of the respective regulations are respected by a party, the regulator and the regulated, these shortfalls need to be looked into and those who failed to adhere to the regulations dealt with as per the applicable Penal Code. 

Some have grouped up in social media calling for Court action urgently to deal with building homes with State funds or claiming insurance against their monthly income. Can that be checked? Yes.  

The FIU-Sri Lanka was set up in March 2006, in terms of the provisions of the Financial Transactions Reporting Act No. 6 of 2006 (FTRA) under the Ministry of Finance and Planning and the overall objective of the FIU is to combat money laundering, terrorist financing and related crimes in Sri Lanka in line with international standards and best practices.

Show the socioeconomic profile of politicians

Current Anti-Money Laundering regulations require insurers and other financial services providers to clearly understand the socioeconomic profile of each of their clients and ensure that the activities they engage in conform within reasonable boundaries close to the known profile. If and when any activity exceeds the known profile, financial institutions are required to inquire into these activities and report any that are not reasonably explained, or are cause for suspicion of money laundering.

In the present case, the insurers should be required to check the original valuations conducted for the insurance cover, to determine whether the policy was issued on a property which is valued far in excess of the politician’s declared income. If the values of the insured properties are disproportionate in value to the politician’s income and other means, they are legally required to report their findings to the regulator. 

Ceylon Today spoke to officials at the FIU in terms of how the FIU would engage when politicians claim insurance and the execution of the FTRA of 2006. However, the Act has clauses that any insurance company has to work in accordance within as well. As requested, several questions were emailed to the FIU, but they responded it would take some time to respond to the queries.

There are plenty of laws that guide Sri Lankans, however, some are not practiced and are unnoticed. When the FIU was inquired (before the email went to the FIU Director) on whether they would play a role in investigating the insurance claims of politicians, mainly those who lost their properties on 9 May, one of the officials said there should be some engagement with the CID over some complaints and the need for suspicions of money laundering or bogus claims. This is not just only for the politicians, but under the regulations there are some special clauses that the insurance companies have to comply with.

Ceylon Today contacted officials at the IRCSL and the information was that under the 2006 Act Section 23 , IRCSL acts as a sub agent and insurance companies should check  whether their clients’ claims comply with the FIU and the IRCSL can also conduct on-site inspection on the request of the FIU. The insurance companies also required to ‘Know Your Client’ (KYC) whether they are paying their regular premium, their income, and evidence.

Central Bank’s guidelines on Politically Exposed Persons

The Central Bank’s guidelines on identification of Politically Exposed Persons No. 3 of 2019 was brought into force on October 2019 and it is read together with the financial transactions reporting Act No. 6 of 2006 Financial Institutions (Customer Due Diligence) Rule No. 1 of 2016 and designation to non-finance business (CDD-Customer Due Diligence ) Rules No. 1 of 2018.

Guidance was issued to the CBSL Supervision Department, Non-Bank Financial Institutions of Central Bank of Sri Lanka, the Securities and Exchange Commission of Sri Lanka, the National Gem and Jewellery Authority of Sri Lanka and compliance officers of all financial institutions and designated to non-finance business.

The CBSL, in its guidelines, explains who the Politically Exposed Persons (PEPs) are and it says that rule 99 of the FIs Customer Due Diligence (CDD) Rules and Rule 43 of the DNFBs CDD rules define PEPs, their immediate family members, and close associates.

As per these CDD Rules, ”Politically Exposed Persons” means an individual who is entrusted with prominent public functions either domestically or by a foreign country or in an international organisation and includes a Head of State or Government, a politician, a senior government officer, judicial officer or military officer, a senior executive of a State-Owned Corporation/ Government or Autonomous body but does not include middle ranking or junior ranking individuals. The CDD rule is also applicable to family members and close associates of PEPs as well. They can be either PEP members or socially or even professionally connected persons. These could include spouse present and past, siblings including half siblings and their spouses, children including stepchildren and adopted children and their spouses, parents including stepparents and grandchildren and their spouses.

Identification of PEPs

Every FI/ DNFB (Financial Institutions/ Designated Non-Financial Businesses) is required to implement appropriate internal policies, procedures and controls to determine if the customer or the beneficial owner is a politically exposed person. This is applicable for all new and ongoing business relationships with customers.

The ability to determine if customers or beneficial owner is PEP fully depends on the effective implementation of CDD measures, including the identification, verification, and ongoing due diligence requirements as set out in the CDD rules. The CDD measures are the indispensable starting point, as these should be applied to any type of customer.

Key factors in the CDD process such as principal occupation or employment would be a good starting point in such determination. PEPs and related parties are considered high risk for laundering of stolen public property. Financial institutions are required to have mechanisms to tag them on their core banking systems, so that effective ongoing monitoring can be maintained on all their transactions, in particular those of higher value.

Financial Action Task Force on Money Laundering

The Financial Action Task Force on Money Laundering (FATF), defines the term “Money Laundering” briefly as “the processing of criminal proceeds to disguise their illegal origin to legitimise the ill-gotten gains of crime.” Although there are many more comprehensive definitions of “Money Laundering” used by different countries, the FATF definition adequately captures the essence of the process.

Criminals involved need to find ways to use illegal money without attracting attention to the underlying activity or people involved. This dictates the need for a process to disguise the criminal origin of such money.

One other way to look at the insurance claims by the politicians is to check whether they declared their assets before they contested. Let’s hope for the best when the State looks at each of the insurance claims, even if reality seems headed in the direction of pessimism.

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By Sulochana Ramiah Mohan