A person with a public job or political position who is more likely to be involved in money laundering or terrorist funding is known as a politically exposed person (PEP). According to Article 52 of the UN Convention against Corruption (UNCAC), they are people entrusted with important public tasks, as well as their relatives and close friends.
Assistance for PEPs from foreign, domestic, and international organizations, as well as their family and close associates, has been recommended by the Financial Action Task Force (FATF). FATF Guidance: Politically Exposed Persons.
According to AUSTRAC, a PEP is a person who holds important public roles in a national or international organization. PEPs frequently have the authority to decide on grants, budgets, expenditures, procurement, and development clearances. Heads of state, ministers, high-ranking government officials, judges, generals, governors of central banks, and board members are a few examples.
PEPs can be targets for money laundering, bribery, corruption and the financing of terrorism. Because of this, it’s critical to identify, reduce, and manage any such possible threats using AML/CTF security measures through proper PEP screening tools.
However, it is important to keep in mind that having a PEP does not imply that a person is necessarily a criminal; rather, it is just that a PEP is considered a high-risk person.
How Does the PEP Screening Process Work?
Financial institutions have implemented a risk-based procedure called the Politically Exposed Person (PEP) screening process. To screen PEPs through a due diligence process, AML Watcher provides a solution that involves obtaining customer ID information, carrying out software PEP screening, identifying false positives, allocating risk scores, and putting Enhanced Due Diligence into practice.
Steps Involved in the PEP Screening Process
The customer’s full name, birthdate, nationality, residence address, employment, and tax identification number are collected. After that, the program looks up the input parameters against a large database of individuals who are politically vulnerable and sends out notifications if it finds a likely match. After that, the algorithm looks through these hits to see if they are genuine hits or false positives.Â
Risk scores are determined by a number of criteria, including hits in negative media, residency in a high-risk third nation, and eligibility as a PEP, family member, or associate. Further, to fight potential risks and ensure compliance, EDD is implemented to look further into the actions of PEPs or high-risk customers.
To record their actions, reservations, and remarks at every screening stage, MLROs must keep thorough case management records and audit trails. Constant monitoring is set up to evaluate frequent changes in a client’s risk profile and to send out alerts if a client abruptly upgrades or adopts a PEP status or receives unfavorable press coverage.
Example of Failure in the PEP Screening Process
An example of this involves the FIFA Corruption Scandal in 2015. To wrap up this lesson on customer onboarding and PEP checks, consider this interesting case.
In 2019, the US Department of Justice (DOJ) charged Bank Julius Baer in Switzerland with money laundering, over $79 million, in connection with the infamous FIFA corruption case. Why? for planning to pay FIFA football officials more than $36 million in bribery via the United States.
The bottom line is that a company can only be shielded from enormous financial fines and serious reputational harm by identifying PEPs during the client onboarding process if there is a true compliance culture in place, something the Swiss bank that was penalized by the DOJ lacked.
Examples like these highlight the importance of effective PEP screening processes to avoid such consequences and failures.Â
Best Practices for PEP Screening
Practices such as reliable data sources, ongoing monitoring, data prioritization, and supplementary screening must be followed to ensure an effective PEP screening process. Using data from the most reliable sources is crucial to obtaining the correct and up-to-date information regarding PEPs.
Keeping an eye on the interactions and actions of the PEPs that are in place. This detects any modifications in PEP status or risk level and aids in maintaining continuous compliance with anti-money laundering (AML) requirements.
Furthermore, it is really critical to concentrate on the completeness and accuracy of the data utilized for screening. False positives and false negatives are less likely as a result.
Lastly, by adding other data sources or measurements, the Enhanced Due Diligence (EDD) and Customer Due Diligence (CDD) measures supplement basic PEP screening techniques and provide a chance to improve the effectiveness of your screening process.
Which Organizations Should Adopt PEP Screening Services?
All kinds of financial institutions, including banks, credit unions, insurance companies, and investment companies, need proper and effective PEP screening measures to meet Anti Money Laundering (AML) and Know Your Customer (KYC) compliance and regulations.
