PEP’s a sort of “private insurance” but criminal.
At the request of the International Consortium of Investigative Journalists (ICIJ), I recently analyzed e-mails and other records documenting some of the communication between PwC auditors and representatives of Fidequity, a financial services company that managed several entities formed in Malta, British Virgin Islands (BVI) and the Netherlands. The communication in question related to the flow of funds and beneficial ownership of these firms, as well as their interrelationship with Sodiam, E.P., the state-owned company in Angola in charge of controlling and supervising the purchase, sale and export/import of diamonds in Angola. I identified many red flags within these documents. In my opinion, and pursuant to Financial Action Task Force (FATF) guidelines outlined in Politically Exposed Persons (PEPs) Recommendations 12 and 22 that were in place at the time of the transactions, these red flags should have resulted in an extensive enhanced due diligence review by both PwC and Fidequity. The red flags within the documentation included:
- The identification of a PEP, Sindika Dokolo, as a beneficial owner of one or more of the entities. At the time of the transactions, Dokolo was well known to be the son-in-law of Angolan President Jose Eduardo dos Santos.
- The records confirmed that nearly $60 million in loans between the entities were not formalized and were claimed to have been the result of informal agreements.
- A $5-million “Success Fee” was paid to a BVI shell company whose shareholders were unknown. This fee was allegedly earned for providing certain services (credit acquisition, consultancy, etc.) that are intangible and difficult to measure. Over the past decades, these types of payments have often been arranged as a cover for payments related to corruption and/or illegal activity. After the “Success Fee” was allegedly earned, the total amount of this informal and undocumented loan was said to be far greater than first described.
- Interest rates related to intercompany loans appear to be significantly above standard market prices.
- Communication between the auditors and representatives of the financial services company managing these matters state that the beneficial interest of Sindika Dokolo (the son-in-law of the Angolan President) and the beneficial interest of the State of Angola in these transactions “shouldn’t be mentioned”.
- Communication between the auditors and representatives of the financial services firm note that the parent companies of one of the key entities formed in Malta shouldn’t be disclosed.
Based on my review of the records, the “professionals” involved in managing these companies and transactions had facts that should have led to them asking a lot of questions, not just because of the information in the records, but because of their professional obligations as defined by FATF. At the time of the transactions, both the auditors and financial services providers were subject to FATF guidelines for “Designated Non-Financial Businesses and Professions” (DNFBPs), which includes AML (Anti-Money Laundering) and CTF (Counter-Terrorism Financing) guidelines. FATF defines a “Politically Exposed Person” as an individual who is or has been entrusted with a prominent public function, as would be the case with regard to Jose Eduardo dos Santos, the President of Angola. But FATF further mandates that family members and close associates of PEPs should also be determined to be PEPs because of the potential for abuse of the relationship for the purpose of moving the proceeds of crime, or facilitating their placement and disguise. Beginning in 2003, FATF issued mandatory requirements covering PEPs, their family members and their close associates. This was expanded in 2012 to both domestic PEPs and PEPs of international organizations. In this case, clearly, the son-in-law of the President of a country falls into this FATF category requiring enhanced due diligence by the auditors and financial services providers managing this matter. At the time of the transactions, the most basic research relative to Dokolo would have revealed that he was a primary family member of Angola’s President.
According to FATF guidelines, when considering whether to establish or continue a business relationship with a PEP, the focus should be on the level of the money-laundering or terrorist-financing risk associated with a particular PEP, and whether the DNFBP has adequate controls in place to mitigate that risk so as to avoid being abused for illicit purposes, should the PEP be involved in criminal activity. FATF notes that foreign PEPs, which is what applied in this investigation, are always considered high-risk and require the application of enhanced due diligence. This necessitates the matter not only be reviewed by those DNFBPs directly involved in managing and auditing the entities, but also by the DNFBP’s senior management.
The “Red Flags” of suspicion FATF has identified that suggest a PEP may be misusing the financial system are well defined. Many of these “Red Flags” are contained within the fact pattern and documents the ICIJ asked me to review. They appear to include:
- Use of corporate vehicles to obscure the beneficial owner.
- Use of corporate vehicles without valid business reason.
- Use of intermediaries when this does not match with normal business practices or when this seems to be used to shield identity of a PEP.
- Use of family members or close associates as a legal owner.
- Funds repeatedly moved to and from countries to which the PEPs do not seem to have ties.
- The PEP having a substantial authority over or access to state assets and funds, policies and operations.
- The PEP having the formal or informal ability to control mechanisms established to prevent and detect money laundering.
- The PEP having access to, or control or influence over, government or corporate accounts.
- The PEP being a director or beneficial owner of a legal entity that is a client of a DNFBP.
- The PEP being connected to a high-risk industry, such as mining and extraction.
- Personal and business-related money flows being difficult to distinguish from each other.
- The account showing substantial flow of cash or wire transfers into or out of the account.
- Payments received from unknown or unassociated third parties.
- The transactions involving industries, products, services, transaction or delivery channels that are vulnerable, including:
- Business that cater mainly to high-value foreign clients.
- Trust and company service providers.
- Dealers in precious metals and precious stones, or other luxurious goods.
- The transactions carry country specific red flags, such as:
- The foreign or domestic PEP is from a higher risk country.
- PEP is from a country identified by credible sources as having a high risk of corruption.
- PEP is from a country that is perceived to not have implemented relevant anti-corruption conventions.
- PEP is from a country with a mono-economy (economic dependency on one or a few export products).
- PEP is from a country with political systems that are based on a personal rule, autocratic regimes, or countries where a major objective is to enrich those in power, and countries with high level of patronage appointments.
- PEP is from a country with poor and/or opaque governance and accountability.
Before and during the course of the business activities reflected in the records shared by the ICIJ, significant amounts of media and agency reports painted an unfortunate picture of Angola under the many decades of its control at the hands of President Jose Eduardo dos Santos and many others of influence in Angola, including generals in the country’s army. Reports concerning Angola included references to crimes against humanity, human rights abuses, corruption and atrocities. Many of these claims related to the exportation of “blood diamonds” from Angola. Given that the records reviewed involved the movement of a significant value of funds from Angola’s National Diamond Trading Company to entities involved in the design, manufacture and marketing of diamonds and metal jewelry internationally, and that that movement of value involved transfers of funds to and through corporate entities that appear to have obscured the identity of beneficial owners, many of the FATF “Red Flags” appear to possibly be present in the matters in question.
Based on the partial records provided to me by the ICIJ, it appears that the auditors and financial services providers involved in this matter were involved in discussions about obscuring the involvement of a politically exposed person in transactions from which the PEP financially benefited. Worse yet, it appears that, at least in part, the funds flowing to the PEP may have been paid for from public funds. It is possible that the transactions could have been orchestrated to misappropriate state funds, which, if it occurred, would be a crime. If the entities and transactions were used to conceal or disguise the source of those funds that were paid to the PEP, that would constitute money laundering. The auditors and financial services providers involved in these transactions should have seriously considered FATF’s directive about Suspicious Transaction Reports, which states “If, during the establishment or course of the customer relationship with a PEP, or when conducting occasional transactions for a PEP, a financial institution or DNFBP suspects money laundering, then the DNFBP should file a Suspicious Transaction Report with the financial intelligence unit (FIU) in accordance with FATF Recommendation 20.”
As unfortunate as this situation is for the people of Angola, this is a problem faced by citizens of every nation on this planet. It is time to confront this type of conduct and say, “This is not acceptable anymore”. Please call it out every time you see it.
Robert Mazur is a court certified expert in the field of money laundering. During his 27-year federal law enforcement career, he specialized in international money laundering investigations. Mr. Mazur is the New York Times bestselling author of The Infiltrator, a memoir about his undercover life working as a money launderer within Pablo Escobar’s Medellin Cartel on whose behalf he was a conduit to corrupt bankers, businessmen and financial service providers.