A politically exposed person (PEP) is an individual entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in bribery or corruption through their position and influence.
Close business partner or family member of such a person would also be considered a concern and added to the list of PEPs.
PEPs can be categorised, based on the risk they pose, into the following:
- Level 1: PEPs representing an international body.
- Level 2: PEPs holding a position at the national level.
- Level 3: PEPs holding a position at the state level.
- Level 4: PEPs holding a position at the local level.
Financial institutions continue to attribute the "once a PEP, always a PEP" ideology to their clients even though they have abandoned their governmental or civic positions. This approach implies that the PEP they may have maintained degrees of leverage and access or accrued illicit funds that need to be laundered now.
Why is it important to screen for PEPs?
All such individuals falling under PEP's definition must be classified according to their risk level and therefore screened. To reduce their risks and liabilities, financial institutions have to implement adequate PEP Anti-Money Laundry (AML) measures.
It has become essential for financial institutions to protect themselves from all kinds of fraud and financial crimes, with increased scrutiny from local and international financial regulatory authorities. For not complying with AML laws and regulations, bodies like the Financial Action Task Force (FATF) and Financial Crimes Enforcement Network (FinCEN) have imposed millions of dollars in sanctions and fines to financial institutions. These fines alone provide a strong motivation for businesses to screen for PEPs.
How to conduct PEP due diligence?
Conducting a thorough PEP due diligence should entail the following steps:
- Employ a Risk-Based Approach: The risk-based strategy provides you with a complete picture of a company's high-risk customers and those situations that warrant high-risk status.
- Obtain Additional Identifying Information: Provide the high-risk client with a questionnaire suited to the risk-based policies. This questionnaire can provide you with in-depth customer knowledge.
- Analyse the Source of Funds: Under the Fourth Money Laundering Directive (MLD4) of the EU, legal organisations are expected to hold up-to-date Ultimate Beneficial Owner (UBO) records in a register open to authorities and other persons of genuine interest.
- Ongoing Transactions Monitoring: Gain access to details of the transaction, such as its history, purpose, and nature. It is prudent to analyse information such as the duration of the transaction and the parties involved.
- Adverse Media Check: To build a complete profile of your client and their reputation, you need to thoroughly review related press articles and analyse all the relevant information. A strong indication that they are too risky for business is the overwhelmingly negative results. Businesses should take the next step of due diligence if the results are positive.
- Draft Your Report for Further Review: Make the onboarding decision while taking the previous due diligence steps' success into account. For internal and future regulatory reviews, compile your due diligence report.
- Develop an Ongoing Risk-Based Monitoring Strategy: Continuous high-risk client monitoring is time-consuming and requires a lot of effort, so it is optimal to use a risk-based monitoring strategy.