In the modern climate of heavy financial regulation, public service as an elected member or through political appointment can have negative impacts on a person’s relationships with their bankers and other financial account holders.
This was just one of the many takeaways coming from the second annual STEP Cayman Conference held on Jan. 31 and Feb. 1 at Kimpton Seafire Resort + Spa. The two-day conference offered topical keynote addresses, panel discussions and breakout sessions for delegates working in the trusts and private client industries.
STEP, which stands for the Society of Trust and Estate Practitioners, is an international professional association for practitioners who specialise in family inheritance and succession planning. In choosing the presenters, the conference organisers drew from the considerable on-island expertise as well as from various countries abroad.
Discussions during the conference covered threats and opportunities for international financial centres; the dos and don’ts of litigating family disputes; the future of attorney-client confidentiality; the rise of digital assets; and a look at foundation companies a year after their introduction by legislation.
One of the breakout sessions on the second day dealt with the challenges of wealth structuring for people in prominent political positions, commonly referred to as “PEPs,” an acronym for “politically exposed person.” The panel discussing the topic included Robert Mack, an attorney with HSM Chambers on Grand Cayman, and two attorneys from the United Kingdom, Ceris Gardner and
PEPs, Gardner said, are people who need financial planning services, just like any other client who might come through the door.
“But they aren’t any other client, according to regulations,” she said, adding that although those regulations mandate that PEPs should be dealt with differently than other clients, there is no standard definition of what constitutes a person being a PEP. In simple terms, she said a PEP is a person who presents heightened risks of corruption because they are entrusted with a public function.
“The basic thought is that because of their positions, they are more able to get involved in corruption,” she said. “Because of this, there are more difficulties in trying to take these clients
Legal and financial service providers have to undertake heightened due diligence on PEPs, including more in-depth questioning of the source of their wealth, the source of their funds for any particular transaction and the nature of those transactions.
However, as Moorcroft pointed out, it isn’t the extra due diligence that sometimes scares off service providers; it’s the harsh penalties that can be imposed if they get it wrong.
“Some providers end up taking rigorously defensive positions,” he said, referring to the refusal of accepting clients.
Mack said the international guidance suggests that basically once a person is designated as a PEP, he or she should always be seen as a PEP, a designation that can drive people “underground” away from mainstream financial service providers to assets like cryptocurrencies.
Making matters more difficult is the fact that service providers are supposed to continually monitor their client PEPs, even their relatively mundane transactions like selling a car, Gardner said.
“How a service provider is to know these things is beyond me,” she said. What’s more, there’s an element of contagion in doing business with a PEP, Gardner said.
“Simply entering into a business agreement with a PEP can make you a PEP,” she said. “A mistress of a PEP is a PEP,” Mack added.
Moorcroft noted that guidance on due diligence on PEPs calls for their source of wealth to be investigated, but not how it is supposed to be investigated. Often, due diligence requires the provider to simply ask the client for their source of wealth.
“Do we just rely on what people say?” Moorcroft asked.
Because of the potential penalties and reputational harm that come from taking on a PEP client who later faces legal issues, some financial and legal service providers are actively “de-risking” PEPs and either turning them away from new business relationships or even ending existing ones, Moorcroft said.
“I think it’s a real problem,” he said, adding that PEPs are effectively being treated like criminals. “You need good people coming into politics, but if you lock them out of the banking system or make it incredibly difficult to get legal representation … how are you going to get good people?”