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Politically exposed persons: are they worth the risk?

Politically exposed persons: are they worth the risk?

Politically exposed persons (PEPs) are tricky to deal with, prompting many wealth managers to just avoid them, but if done right these clients can be a lucrative source of business.

Late last year the issues around having PEPs as clients came into focus when it was revealed that Coutts was providing offshore services to controversial clients.

The private bank found itself embroiled in fresh controversy over its dealings with the Sultan of Brunei’s younger brother Prince Jefri Bolkiah and investment banker Hassan Heikal, four years after it was fined £8.75 million for failing to establish effective anti-money laundering systems and controls.

So how can wealth managers cater to these lucrative clients without leaving themselves exposed?

 

Due diligence is key

‘You have to have very tight risk controls,’ explained Chris Payne, UK managing director of GWM Wealth Management, who has a number of PEP clients.

‘Obviously, you have to put them through a fairly unpleasant onboarding and account opening process because you need to ask so many more questions.

‘You really need to get a grip on the source of their wealth, you need some really solid evidence. You need to do all of these checks, you need to be checking Interpol registers, adverse media checks, all of that stuff.’

Tom Griffiths, managing consultant at Lysis Financial, a firm specialising in due diligence for banks, capital markets firms, custodians and insurance companies, agrees due diligence is key but highlights the fact that it does not end after the person becomes a client.

‘If a PEP relationship is approved then close ongoing monitoring will have to be undertaken. This will include daily ongoing monitoring and review of the PEP and related information on a minimum of an annual basis, if not a six-monthly basis.’

Payne also said that when dealing with PEPs the firm has to implement an ongoing monitoring process. He did admit that the constant monitoring can also become somewhat intrusive. 

‘It isn’t the best experience but most PEPs expect to be put through that,’ he added. 

The process may be an uncomfortable one for clients who have to answer quite personal questions but it is not a walk in the park for the firms who choose to offer their services to PEPs either.

The costs associated with maintaining a PEP relationship, including operational expenses, is another reason many UK financial institutions shy away from actually accepting these types of clients, Griffiths said.

He added that in cases where a client is the family member of a PEP or is associated with one in any way, they will also be classified as high risk which will increase the due diligence requirements adding to the costs of maintaining the relationship.

 

Managing client expectations 

Once the stringent initial checks are done and a monitoring process in place, the real work of actually investing the client’s money can begin.

Qunmber Ehsan, founder of Cavendish Family Office which largely caters to clients from high-risk jurisdictions like the Middle East, North Africa and the Far East, describes a great deal of his work with PEPs as managing their expectations.

He pointed out that although PEPs have fundamentally the same needs as anybody else in many ways, because of their status it can be difficult to meet some of their most basic requirements. 

‘I’m talking about even the mundane, such as opening a basic bank account, for example. We’ve had clients who are members of a royal family and can’t even get a current account to pay their gym membership.’

This issue stems from majority of PEPs having no real definable footprint. This is mainly because they tend to deal in cash rather than credit as ultra-high net worth individuals.

‘If you’re coming from the Middle East or North Africa you are effectively paying for everything in cash. If you are buying a flat for £10 million and paying £10 million in cash then there is no mortgage on the property.’

This lack of footprint means the manager has to manage the client’s expectations when dealing in the UK.

For example, a Saudi Arabian client he had in the past, with a net worth of over $500 million wanted to make a real estate investment of £20 million. He simply asked if Ehsan could call up a bank and ask for a £20 million loan. This shows that these types of clients will also require some education concerning what limitations there are in the UK and why such a request would not be possible when in Saudi Arabia it would be an easy task.

 ‘So we adapted to the client. We established a relationship with a bank in Switzerland, who are willing to lend on
the back of some assets he had in Saudi Arabia.’  

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