Politically Exposed Persons And Their Impact On AML

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Politically exposed person (PEP) checks are an integral part of customer due diligence, and an important factor in ongoing due diligence checks as people’s roles and status can evolve and change.

While some countries are more exposed to PEP risks than others there is a very real risk for all reporting entities, as people with influence, or those in prominent roles with incriminating secrets to hide, can be exposed to bribery, or use the privileges of their position to facilitate money laundering.

Here’s how to identify a PEP and what to do when you find one.

What is a politically exposed person?

A politically exposed person (PEP) is an individual who holds a prominent public role, or who is closely associated with such an individual. PEPs may be current or former government officials, members of the judiciary, senior executives of state-owned enterprises, or important political party officials. The definition of a PEP can also be a person that is a close family member, or a close known associate, of that person – for example, the children of a head of state. 

Why are PEP checks important?

PEP checks are important because often the politically exposed person is in a position to influence the decision-making of public bodies, or to benefit from these decisions. They may also be able to access sensitive information, or be in a position to facilitate, or be used for, the commission of bribery, embezzlement, or money laundering. 

For these reasons, PEPs may pose a higher risk of corruption, and criminal activity can involve large amounts of money and/or assets.

A well-known example of a PEP using their position is ex-President Trump’s campaign manager Paul Manafort, who laundered an estimated $75 million USD through corporations, bank accounts and partnerships to hide financial payments from Ukraine.

Difference between foreign and domestic PEPs

When reviewing a PEP it is important to not only look at the person, but also to look at their role and where they are based. Generally, conducting business with foreign PEPs is considered more risky than conducting business with domestic PEPs as you are less likely to have an understanding of the potential for corruption in a foreign country.

However, a domestic PEP can pose a high risk depending on your domestic country, and how much local politics, or the local environment provides a vehicle for corruption in the country you are based.

The FATF describe foreign PEPs asindividuals who are or have been entrusted with prominent public functions by a foreign country’ and domestic PEPs as ‘individuals who are or have been entrusted domestically with prominent public functions’.

How do you capture PEP status?

Conducting PEP checks can be an automated process using a database such as Dow Jones. If you’re searches have found a PEP, ensure you:

  • Record your PEP details 
  • Conduct enhanced due diligence and record the process
  • Assign a risk rating to that PEP
  • Rationalise why that person is at the given risk level
  • Provide rationale why you continue to do business with the PEP, and be cognate with the risk, or provide rationale why you are no longer able to continue in business with the PEP.

It’s important to rationalise and record your decisions, reviewing any potential matches and confirming them as a risk or ruling them out. In New Zealand, regardless of risk, it is a legal requirement to carry out enhanced due diligence on PEPs, and this is something that will be looked at by independent auditors or by the regulators. If you conduct business with a PEP without doing EDD you could find yourself in trouble with authorities even if ultimately no evidence of criminal activity is found. 

However, PEP screening requirements vary around the world, so it is important to check requirements for your jurisdiction. For example, in the UK there is an obligation for foreign, domestic, and international PEP screening and we have seen some heavy fines when companies fail to follow the correct procedures. In 2015 Barclays was fined over 72 million GBP for among other things, failing to implement a higher level of due diligence on individuals with PEP status, despite there being no evidence of transactions involving financial crimes.

The tic company difference

At TIC. Co we run a PEP check every single time we run customer due diligence checks, even if a customer has onboarded with us before. We then review any potential matches and determine if there is a potential match, and what potential risk exists. 

This risk-based approach means you are always reviewing customers against up-to-date information and datasets, and getting an expert, rational decision on the outcomes. Our data sources are continually updated with the latest information and updates.

Get in touch for more information on our risk-based approach and PEP screening services, including bulk screening solutions designed to save you time and money.

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