India’s 2019 Lok Sabha elections threw the spotlight on issues such as black money, electoral bonds and corporate donations to political parties. What was not brought to light was the role of thousands of ‘Politically Exposed Persons’ (PEPs) who have been systematically manipulating financial institutions in India.

The tainted businessmen Anil Ambani and Rajkumar Dhoot, whose companies stand accused of defaulting in repayment of loans worth thousands of crores of rupees, are just two of the thousands of such ‘politically exposed persons’ (PEPs) manipulating financial institutions in India.

Our research at Riskpro Management Consulting Pvt Ltd, a forensic accounting and financial risk management firm, has shown that during the last three decades, Indian banks sanctioned loans worth a whopping INR 48 trillion (USD 690 Billion) to the businesses associated with ‘politically exposed persons’.

Analysis of India’s biggest stressed assets and bad loans reveal that many of these borrowers are politically exposed persons. One of the biggest stressed assets in the country in power sector is owned by a Vijaywada MP from Indian National Congress. His political influence helped him to get the power projects from the various state governments.

Another asset which is causing the stress in banking sector in India is owned by a Rajya Sabha MP from Maharashtra. His company has donated the highest ever amount to any political party in the history of Independent India. His political influence helped him get the loans, and a very powerful banker lost the job in the process.

Riskpro research reveals that IDBI Bank was the second largest bank to lend money to businesses controlled by politicians. Out of 10,147 unique companies, IDBI bank was the lender to more than 1200 companies. Out of the total INR 48 trillion, IDBI bank has lent more than INR 7.2 trillion i.e. 15% of the total money. This bank faced financial crisis and was finally bailed out by Life Insurance Corporation. The story of IL&FS is no different; IL&FS too was aggressive in lending in the politico-business sector, and finally faced a crisis.

Who are PEPs?

Politically Exposed Persons are high risk customers for financial institutions. PEPs have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking, and thus are more likely to launder money. However, being a PEP does not in itself equate to being a criminal or suggest a link to abuse of the financial system.

There is no unique definition of a PEP, in fact, the criteria vary from country to country. Theoretically, any person who is entrusted with a prominent public position is a Politically Exposed Person. PEP does not always mean someone who is involved in politics; it could also include immediate family members, close business associates or even senior executives.

The Reserve Bank of India (RBI) guidelines require banks to take greater precautions if the borrower has political influence. In such situations, the senior officials of the banks have to be involved in the decision-making. The RBI’s definition of Politically Exposed Persons is based on guidelines provided by the Financial Action Task Force (FATF). According to the RBI definition, PEPs are individuals who are or have been entrusted with prominent public functions, e.g. heads of states/ governments, senior politicians, senior government/ judicial/ military officers, senior executives of state-owned corporations, important political party officials etc.

Globally, while a number of countries are tightening regulations to combat money laundering, the Indian scenario reveals the dismally magnanimous figure of at least INR 48 lakhs crores as borrowed by companies associated with Indian politicians from Indian financial institutions.

There is no recommended PEP Database for India. However, the research conducted by Riskpro is the first step in collecting the statistical information about Indian Politically Exposed Persons. Using public domain information on politicians, we have compiled research on business interests of top 1,000 politicians and their 1,000 relatives. 

The database has revealed that there are 5,625 legal entities in which about 1,000 politicians from different political parties have interests. Additionally, there are 9,900 companies in which their relatives have interests. The number of unique companies where both politicians and their relatives have such interests stood at 10,147. This research is helpful to understand the PEP status of borrowers. The data also reveals that apart from a large number of unlisted companies, politicians and their relatives had interests in 329 listed companies. Some of the politicians are found to be associated with 154 State Public Sector Companies and 12 Central Public Sector Companies.

However, no such PEP database is available to financial institutions for carrying out PEP Screening.

Globally, regulators have recommended PEP Lists to banks for their due diligence process while handling sensitive loan proposals. Bankers need this information specifically for the purpose of accurate and confident decision making and in determining strategies to deal with borrowers if they cannot completely avoid lending to them.

In India, PSU banks are partly owned and controlled by the Government. The asymmetric information between lending banks and outsiders about the quality of a specific loan makes it easy to disguise the political motivation behind a loan. This makes knowing Politically Exposed Persons increasingly crucial. Indian financial institutions need a strong database which will throw light on the financial interests and associations of politicians, their friends, relatives and business associates. This will help them to hedge the credit risk better.

Dr Apurva Joshi

Dr Apurva Joshi is a featured Entrepreneur in the book "Arise, Awake". She is currently on the boards of Quick Heal Technologies Limited, Minda Rinder Private Limited and Riskpro Management Consulting Private Limited (handling the Due Diligence and Digital Forensic Practice of Riskpro). Riskpro acquired her company- Fraudexpress.

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The views and opinions expressed in the article are those of the authors and do not necessarily reflect the official policy or position of The Tilak Chronicle and TTC Media Pvt Ltd.

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