Syed Rahman and Angelika Hellweger of Rahman Ravelli explain the concept of politically exposed persons and assess the issues involved in the corruption accusations being aimed at associates of Bangladesh’s former regime.
The end of the 16-year reign of Sheikh Hasina as Bangladeshi Prime Minister has prompted allegations of corruption on a huge scale and a focus on the purchase of millions of pounds’ worth of UK properties by those in her inner circle.
The new leadership of Bangladesh is looking to recover the funds that Hasina and her associates are accused of taking out of the country. Bangladeshi authorities have stated that families and businesses with strong links to Hasina’s Awami League party illegally drained the country of billions of pounds. Investigations have revealed a portfolio of UK real estate, worth approximately £400 million, which is said to have been acquired by those close to Hasina.
The full situation regarding alleged Bangladeshi corruption – and any resulting recovery of assets – is yet to fully unfold. But it is already clear that corruption in Bangladesh is closely associated with politically exposed persons (PEPs).
Defining PEPs
There is no globally-recognised definition of what constitutes a PEP. It is defined by the Financial Action Task Force (FATF) – the intergovernmental organisation to tackle money laundering – as an individual who is or has been entrusted with a prominent public function or role in a government body or international organisation.
In the UK, Regulation 35(12)(b) of the UK’s 2007 Money Laundering Regulations says a PEP is an individual who is entrusted with a prominent public function. This means heads of state, leaders of governments, ministers, members of parliament, senior figures in political parties, members of supreme courts or other high-level judicial bodies, those in senior positions at central banks, ambassadors, high-ranking officers in the armed forces and senior figures in state-owned enterprises or international organisations. Regulation 35(9)(a) and (b) states that a PEP should continue to be treated as one for at least 12 months after they leave their public function – or longer if there appears to be a risk of money laundering or terrorist financing relating to that person.
It should be emphasised that classing someone as a PEP does not necessarily mean that they are corrupt. But the authorities in the UK and many other nations regard PEPs as having a higher than average corruption risk. This is based on the possibility of them or their close associates, relatives or friends being involved in wrongdoing relating to assets and funds. They may be considered a lower risk if they are only active in a country associated with low corruption levels, political stability, free and fair elections, strong state institutions, transparency of ownership and an independent judiciary. If some, or all, of these factors are not present, that person is likely to be considered a higher risk.
In the case of Bangladesh, the term PEP is to be applied to those who worked with Hasina’s regime and / or had close connections to it. And if, as has been alleged, they have been involved in corrupt activity, they will have carried out three activities:
- Obtaining corrupt wealth - this could be done through, to name some examples, soliciting bribes, rigging procurement procedures, embezzling funds or unlawfully acquiring state assets.
- Distancing themselves from the proceeds of these crimes by moving these funds, either to alternative bank accounts and companies or by investing them in assets such as property (as has been claimed).
- Protecting their hold over the corrupt wealth, either via the UK legal system or through cleaning their reputations and integrating themselves into the UK’s elite.
PEPs and the real estate sector
The real estate market has certain characteristics that make it vulnerable to abuse by illicit actors, including corrupt foreign PEPs or their facilitators.
For example, many real estate transactions involve high-value assets, opaque entities and processes that can limit transparency because of their complexity and diversity. In addition, the real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which real estate appreciates in value, “cleans” large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations.
Real estate purchases can also be of use to corrupt PEPs in their attempts to secure residency and/or citizenship in the country where they have made the purchases. They can also help a PEP acquire social respectability, as well as any gains that may be achieved if the purchased properties increase in value.
Across various jurisdictions, PEPs have sought to launder ill-gotten funds through the residential and commercial real estate sectors. But PEPs that misuse their positions for personal enrichment present a high money laundering risk to the real estate sector, given their connections to governmental bodies and their abuse of funds.
PEPs, real estate and money laundering
UK real estate is considered to be attractive as a destination for proceeds of crime that have been laundered and for funds that are yet to be laundered.
PEPs and others involved in criminal activity will also be aware of the potential for tax evasion through the real estate sector. This is often done by manipulating the price of a property and through the use of nominees, false identities, corporations or trusts to hide the identity of the ultimate beneficial owners.
In multiple cases of tax evasion, the ultimate beneficiary of the property will attempt to conceal their identity through the use of straw buyers. Straw buyers serve as intermediaries to distance the funds from the ultimate beneficiary and conceal ownership. Multiple electronic funds transfers may also be used, which are structured to fall below a particular country’s currency restrictions and are sent to another country to then be invested in real estate. Electronic funds may even be sent by multiple seemingly unrelated individuals and/or entities to one common beneficiary, who uses these funds to purchase property.
Such activities present challenges for those in the real estate sector. There is, however, also the risk posed by those working in the real estate sector who have had disciplinary issues related to fraud, money laundering and/or tax evasion, and who may have the ability and willingness to help PEPs and others funnel their illegal gains into property.
Indicators of money laundering and tax evasion in the real estate sector
As has been explained, buying real estate is attractive to PEPs and others looking to disguise the illegal sources of their wealth.
But despite the stealth that is used by such people, there are signs that can indicate that real estate is being purchased to launder money and / or evade taxes.
These include:
- Large amounts of money coming from foreign individuals or entities, located in a country that imposes limits on international transfers.
- Investment vehicles or offshore accounts being used for the purchase of property.
- The value of the property purchased not being consistent with the reported or stated wealth and income of the purchaser.
- Financing for the purchase of the property being provided by a private lender or an unlicensed money services business, with no logical explanation being given for this.
- Transactions passing through a mortgage broker, immigration consultants, and/or tax haven trust accounts.
- Different members of the same family controlling the main services linked to the real estate industry, such as construction companies, real estate brokers and sales representatives, accountants, lawyers and/or notaries.
- Reports of one or more of the real estate professionals involved in a deal having been involved in criminal activity such as fraud, corruption or tax evasion.
- Real estate brokers or sales representatives acquiring properties with unknown sources of funds or third party funds – which could be cash – and then reselling them quickly.
- Cryptocurrencies being used as payment to property developers, investors and/or speculators.
A case study
In any situation where a PEP is suspected of having diverted funds, some of the techniques and indicators mentioned in this article may be present. Each case will be different, depending in the individuals and the circumstances involved.
Here, we outline as an example the case of a PEP associated with Equatorial Guinea. The case illustrates the money laundering risks in the real estate sector.
Teodoro Nguema Obiang Mangue has been the Vice President of Equatorial Guinea since 2016. The U.S. Department of Justice filed a forfeiture complaint seeking forfeiture of assets - including a $30 million Malibu estate - associated with funds allegedly misappropriated by him from the Equatorial Guinean government.
In laundering these funds in or through the United States during a period believed to be from 2006 through 2010, Obiang used several U.S. nominees to open shell accounts and bank accounts on his behalf and concealed from U.S. banks his ownership and control of these funds. The nominees identified included lawyers and other employees of his.
The Financial Crimes Enforcement Network (FinCEN), which is part of the U.S. Treasury, analysed data that financial institutions are obliged to submit under the Bank Secrecy Act 1970, which was passed to prevent money laundering. FinCEN also examined data gathered through the use of Geographic Targeting Orders, which require the collection of beneficial ownership information about companies purchasing real estate in a number of markets in the U.S.
In October 2011, the US Department of Justice (DoJ) went to court to seize $70 million of his US assets, which included a Gulfstream jet, yachts, cars and Michael Jackson memorabilia. The following year, the DoJ filed an amended complaint against him, which stated that he spent $315 million on properties and luxury goods between 2004 and 2011. He was accused of abusing his position when he was Guinea’s Minister of Forestry by levying personal "taxes" on timber companies, which included a $28.80 fee for every log exported, to pay for his lavish lifestyle.
In September 2016, he was referred to the Criminal Court of Paris and an arrest warrant was issued for him through Interpol. In October 2017, a French trial led to him receiving a suspended sentence of three years plus a suspended fine of €30 million. His properties in France and 17 luxury cars were seized, including a Parisian mansion. Since 2021, he has also been the subject of UK sanctions under its Global Anti-Corruption sanctions regime.
