Are you concerned about the risk of working with a Politically Exposed Person (PEP)?
Although conducting business with a PEP can increase your risk profile, it can also lead to a beneficial business relationship. To better identify your level of risk and avoid criminal liabilities, it is essential to undertake Anti Money Laundering (AML) legislation. Often, this takes the form of PEP screening and PEP monitoring.
In this post, we will identify what a PEP is, how money laundering regulation affects those doing business with PEP's, and how MemberCheck can help you reduce your risk and increase AML compliance.
A Politically Exposed Person (PEP) is someone who holds a prominent public position or oversees a prominent public function.
The Financial Action Task Force (FATF) defines four broad categories of politically exposed persons: domestic, foreign, international, and family members and close associates.
Domestic PEPs work within your own country. They include:
Foreign PEPs work in a foreign country, outside your domestic territory. They include:
International PEPs work for international multinational organisations. They include:
Family Members and Close Associates
Family members and close associates of a PEP may also be considered as PEPs or Relatives and Close Associates (RCAs) even if they do not hold a prominent public position.
Family members may include spouses, children, siblings, and in some cases, in-laws.
Close associates include those who share joint ownership with a PEP, those with close business ties to a PEP, and those who own legal entities set up for the PEP.
Due to their position and influence, a PEP is more susceptible to corruption, bribery, and money laundering activities.
Although higher susceptibility does not mean a PEP is necessarily involved in criminal activity, it does mean they pose an added risk that must be clearly identified and monitored. That is why AML efforts pay special attention to PEPs.
This "special attention" comes in the form of enhanced customer due diligence. This can include PEP screening before establishing a business relationship and ongoing PEP monitoring during the business relationship.
Failure to perform enhanced customer due diligence and comply with AML regulations may lead to penalties for non-compliance. To avoid penalties, it is recommended to stay compliant with FATF guidelines as a reporting entity.
The FATF aims to develop global policies to combat money laundering, terrorist financing, and proliferation financing. To stay compliant with their policies and guidelines, identifying a PEP's risk level is essential before engaging in business. This can be done through a PEP screening solution.
This process involves screening a PEP's relevant information into an online database to check for three major elements:
Alongside online screening, you may need to determine the level of risk associated with the PEP. To assess this, the FATF provides guidelines that include paying particular attention to the following red flags:
Even if a PEP passes the initial screening process, it is essential to continue monitoring them to reduce future risk. This is where an Ongoing Monitoring solution will help.
A general rule of thumb that many use when conducting business with a PEP is "once a PEP, always a PEP." Although not entirely accurate, it speaks to the need for ongoing monitoring to assess the risk levels of individuals you are conducting business with.
For example, say you conduct business with a high-profile politician who decides to leave politics. Although they may have left their position of public prominence, they may still have a lot of influence.
This can be determined by looking at the level of informal influence a PEP still has on senior officials and the relationship between a PEP's current role and their previous role.
Since the risk does not disappear when a PEP leaves their public position, many experts recommend a risk-based approach rather than a time-based approach when it comes to assessing risk.
A time-based approach would determine that a PEP is no longer a PEP after a certain amount of time has passed. In contrast, a risk-based approach monitors ongoing activity to create a continually updated risk profile.
Since 2008, MemberCheck has been helping clients comply with Anti-Money Laundering regulations through our comprehensive PEP and Sanction Check service.
This service inputs relevant data from a Politically Exposed Person into a special Watchlist Database. Created through Machine Learning and AI (Artificial Intelligence), this database provides global coverage and daily updates.
When a PEP is scanned through the database, any sanctions, adverse media checks, and red flags are highlighted. These in turn are put through intelligent filters to reduce the risk of false positives. The result of the entire process is a high-quality risk profile of a PEP.
This profile not only ensures AML compliance, but it also provides valuable data to guide decision-making. If you would like to reduce your risk by complying with AML regulations, request a PEP demo today to see how it can help.