The ongoing geopolitical tensions in 2022-2023 have starkly exposed rule of law deficiencies and other governance gaps across Southeast Europe (SEE-924). This in turn stalled the EU integration and consolidation process, the main driver of good governance reforms. SEE-EU member states Hunga- ry,25 Romania,26 Bulgaria,27 and Croatia28 have been among the countries with the most recommendations for action, stated in past EC reports. The criticism included but was not limited to the existence of anti-competitive practices in public procurement, the lack of ability and human resources to investigate and prosecute corruption offences, and the opaque recruitment to public-sector jobs leading to political dependence of the regulatory bodies.
The current report builds upon international and EU actions29 for strength- ening the rule of law, and highlights the critical areas for impact that could be achieved through a public-private partnership. While the first SEE Good Governance report30 aimed to uncover how illicit wealth is generated (e.g., through manipulating procurement procedures and mismanagement of state-owned-enterprises), the current report focuses on the necessary big data tools for identifying the existence of ill-gained assets, hidden by politically exposed persons (PEPs).
The current report aims to:
- Reveal and compare the governance gaps that allow politicians, senior officials, and those entrusted with prominent public functions and politically exposed (politically connected) companies to accumulate and hide illicit wealth, through corruption, state capture, and unfair competitive advantages.
- Showcase how big data analysis (combining company, procurement, and asset declarations’ data), as well as expert assessments, could lead to the creation of systems for real-time monitoring of risks and vulnerabilities in politically connected companies.
- Provide recommendations to the relevant bodies on how the process of checking, investigating, and sanctioning inconsistencies in the asset declarations, as well as the public procurement process, could be made more efficient and transparent in SEE-9.
The term “politically exposed persons (PEPs)” usually refers to individuals who are or have been entrusted with public functions, as well as their family members and close associates. PEPs are potentially in a position to misuse their influence for personal gain.31 While there is no internationally recognized list of the types of officials defined as PEPs, guidance in this respect can be found in the glossary of the Financial Action Task Force (FATF)32 and in European Union Commission Directive 2006/70/EC33,34. Still, researchers and international organizations such as the World Bank35 consider that the definitions used by Directive 2006/70/EC and FATF should be expanded to include other categories (e.g. mayors, judges and prosecutors).
Thus, for the purposes of the current report, the term “politically exposed persons” includes not only the types of officials listed in Article 2 of Commission Directive 2006/70/EC, but also all “persons with high political power” (prime ministers, ministers, mayors, municipal counsellors, district governors, rectors – including all their deputies – as well as Members of Parliament, members of governing boards of state-owned enterprises, commissioners, and the chief architects).
The use of big data for uncovering ill-gained wealth is not simply a tech- nical matter, limited to the creation of IT systems, electronic platforms and red-flag methodologies. It also necessitates political will and debate, as well as update of the national and EU-level legislation. For example, the 5th EU Anti-Money Laundering Directive36 from 2018 requires that EU member states establish publicly accessible registers of beneficial ownership. Howev- er, this provision was declared invalid on 22 November 2022 by the Court of Justice of the European Union,37 indicating that further clarifications are needed to justify the interference with the rights to privacy and personal data protection of the beneficial owners. Similar concerns are associated with the Open Data Directive38 from 2019, and its transposition involves anonymization of any personal information. The public company registers usually provide the address, activities, and tax number of a company, however access to any financial data at firm level could be obtained only from paid sources. The data transparency in the region could benefit from the set-up of open and searchable databases of sanctioned legal and physical persons. The risks of crypto assets being used for illicit flows, financial crime and market manipulation have also been acknowledged by the European Parliament, which suggested the adoption of a regulation requiring their tracing, as well as a better national-level coordination on taxing crypto assets.39
The current analysis was supported by the work of national contributors from the SELDI network and by inputs and feedback from the representatives of the public and civil society sector taking part in the R2G4P Platform.
In addition to “politically exposed persons” and “persons with high political power”, the current report uses the following terms:
- “Politically exposed company” is a private company or state-owned enterprise (SOE), whose decisions could be influenced by politically exposed persons (PEPs). For the purposes of the current research, the main indi- cator used to define politically exposed companies is the participation of a PEP or their immediate relatives in the company or state-owned enterprise.
- “Immediate relatives” are spouses, parents, siblings and children (excluding cousins, aunts, etc.).
- “Company participation” is participation in the management board/board of directors of a private company or SOE and/or ownership of over 50% of its shares or assets. Minority shareholders are not included in the current analysis.
- “Illicit finance” is defined as “dirty money”, illegally earned, moved, or used. Illicit finance harms the economy either directly (e.g., via lost tax revenue) or indirectly (e.g., by eroding institutions).40