Commercial Banks Required to Disclose and Monitor “Politically Active Persons” - საერთაშორისო გამჭვირვალობა - საქართველო

Commercial Banks Required to Disclose and Monitor “Politically Active Persons”

08 February, 2012

A new order issued by the National Bank’s Financial Monitoring Service (FMS) requires Georgian commercial banks to determine and report whether a foreign client is a ‘politically active person.’ The order of the Head of the FMS sets forth new rules for acquiring, systematizing, processing and transferring information to the FMS by commercial banks. (Order No 4, January 18, 2012.)

The new order caused some concerns, especially among the international business community in Georgia. After looking into relevant international experience, we would like to provide some background on this new rule:

In most large-scale corruption schemes, corrupt politicians and bureaucrats who plundered state assets or accepted bribes bring the money they have stolen out of their country and use domestic as well as foreign banks to launder these assets. Large-scale corruption and international flows of the laundered money destabilize financial systems, decrease trust towards public institutions, damage the investment climate of the country, and have a negative impact on development, economic growth and poverty reduction efforts.

Implementing international recommendations

The international community has taken some steps to fight the laundering of assets obtained by corrupt political leaders -- although many countries, especially tax havens, remain reluctant to implement these measures. In particular, Article 52 of the United Nations Convention Against Corruption (UNCAC), Recommendation 6 of the Financial Action Task Force (FATF), Directive 2005/60/EC of the European Parliament and the European Council of 26 October 2005, and the Regulation of the Basel Committee on Banking Supervision (para. 41 of “Customer Due Diligence for Banks”) cover so-called Politically Exposed Persons (PEPs). These international or multi-lateral agreements have set standards, which have to be implemented in financial institutions in order prevent that money being laundered by corrupt officials and politicians.

A 2009 survey by the World Bank found that only 3 out of 124 countries were fully compliant with FATF recommendation 6, while 75 were not complying at all.

Article 7 of the new order from the Georgian FMS in fact incorporates the provisions of the FATF Recommendation 6 into Georgian legislation: If a client and/or a beneficiary represents a politically active person, the bank (or its authorized employee) should carry out the following additional measures:

  • Senior management has to approve that the bank does business with the client;
  • The bank has to take reasonable measures to establish the source of the funds it handles;
  • The bank has to do an enhanced ongoing monitoring of the business relationship with the client.
If a client (or the beneficiary) becomes politically active after establishing a relationship with the bank, the bank is obliged to carry out relevant monitoring measures as soon as it becomes aware of this fact.
The FMS’s order defines a “Politically Active Person” as a citizen of a foreign country, who is a state (public) political official according to the legislation of the relevant country and/or is engaged in important public and political activities. The original FATF definition, specifically referrs to "individuals who are or have been entrusted with prominent 
public functions in a foreign country". 
The same order includes a list of politically active persons. These include: heads of state, heads and members of the government, their deputies, heads of government institutions, members of Parliament, members of the Supreme Court, members of the Constitutional Court, heads of armed forces, members of National Banks’ councils, ambassadors, executives of state-owned companies, heads of political parties (unions), members of executive boards of political parties (unions), other important political actors, their family members, and people having business relationships with them.
“Other important political actors”
It is worth noting that the FATF recommendation only refers to individuals who are or have been entrusted with prominent public functions in a foreign country, and not to “other important political actors”. Moreover, the recommendation considers the category of “middle- and lower-ranking officials” as an exception.
The new Georgian regulation, however, also applies to “political actors”, which makes it stricter compared to what has been recommended by international organizations. TI Georgia generally welcomes that Georgia is taking an important step to fight money laundering.
However, we TI Georgia recommend that the words “other important political actors” should be removed from the order, while the term  “Politically Active Person” should be clarified further.
Author: Natia Kutivadze