Throughout the years, governments and institutions try to reduce corruption, fraud, and other illegal and immoral activities globally. It would be tough to find a country with little to no regulations on financial institutions. Anti Money Laundering (AML), Know Your Customer (KYC), and Know Your Business (KYB) guidelines are expanding each year in an attempt to fight various acts of money laundering, fraud, and terrorist financing.
Although this “war” is far from over, and the money laundering schemes have become more devious than ever, there’s knowledge to be found amidst the fog of war. It makes sense that some people are more likely to commit fraud or be involved with corrupt entities than others.
Politically Exposed Persons (PEPs) is such a category. PEP screening has become one of the branches of KYC guidelines, requiring institutions to perform enhanced Customer Due Diligence (CDD) procedures on people who are PEPs. If the fight against financial crimes is to be taken seriously, PEP screening should be implemented worldwide – and most developed countries are already legally mandating these regulations.
To thoroughly screen a person, institutions have to check the relevant information in two ways:
- Sanctions – to ensure the individual is not allowed to make transactions if she or he is on global law enforcement or a sanction list. Here are the main sanctions databases: United Kingdom – HM Treasury Consolidated, United, Nations – Consolidated sanctions list, European Union – Consolidated list of sanctions, United States – The Office of Foreign Assets Control (“OFAC”, “OFAC Non-SDN”, “OFAC SDN”), International Organization of Securities Commissions (IOSCO)
- PEP screening – to assess whether the person is a PEP and to correctly conduct CDD processes
It’s important to note that the watch lists are continuously updated. Therefore, a thorough screening must be done in real-time and based on the latest databases to comply with KYC and AML regulations.
What is PEP?
As with every other term, Politically Exposed Person (PEP) has many definitions, varying from country to country. It’s best to use unifying terminology to avoid any potential confusion. An independent inter-governmental body responsible for the development of policies to fight money laundering and terrorist financing – The Financial Action Task Force (FATF) – defines the term in the FATF recommendation 12 this way:
“A politically exposed person (PEP) is defined by the Financial Action Task Force (FATF) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offenses and related predicate offenses, including corruption and bribery, as well as conducting activity related to terrorist financing (TF).”
It’s not enough for PEPs to be monitored more carefully. Family members, siblings, and partners of PEPs should also be involved in the PEP screening processes.
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Variations of Politically Exposed Persons
Practical and broad as it is, the definition of PEP requires some clarity to distinguish various entities from one another. For this reason, FATF defines different categories that the term PEP encompasses:
- Foreign PEPs are the individuals entrusted with prominent public functions by a foreign country
- Domestic PEPs are the individuals entrusted with prominent public functions domestically
- International organization PEPs are persons entrusted with prominent functions by international organizations, refer to senior management members, or are entrusted with equivalent functions
- Family members are individuals related to a PEP – either directly or through civil forms of partnership
- Close associates are individuals closely connected to a PEP, either socially or professionally
It’s important to note that both individuals who are currently entrusted with prominent public functions and those no longer holding such a position should be marked when PEP screening is performing. The same can be said about people related or associated with them.
Depending on which of the categories an individual falls under, different measures should be taken in response. For example, the enchanted risk mitigation measures should be applied whenever dealing with a foreign PEP. At the same time, these measures should only be used when establishing a higher-risk business relationship in the case of domestic/international organization PEPs.
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Why is PEP Screening Important for Businesses?
The reasons why PEP screening should be a priority for various institutions (primarily financial) is first and foremost to prevent fraud, money laundering, and terrorist financing. Those are crucial issues yet to be resolved globally, and more often than not, financial institutions hold the key to successfully fighting them. It’s a responsibility not to be taken lightly.
According to the World Economic Forum, the global cost of corruption is at least $2.6 trillion, while the World Bank estimates that various businesses and individuals pay more than $1 trillion in bribes every year.
We all want to live in an orderly world, and there’s nothing like corrupt politicians, agencies, or government entities to get our blood boiling. Being involved with a person who later abuses their position to commit money laundering offenses or meddle with corruption and bribery reflects poorly on the public. The company’s reputation may be irreversibly damaged if it’s found to be responsible for doing business with unreliable entities – and no amount of promises or apologies will help if the public loses its’ trust in it.
Furthermore, PEP screening is currently mandatory in most countries worldwide. The regulations differ country from the country – some only require identifying Foreign PEPs, while the strictest obligations require the screening of Domestic, Foreign, and International PEPs. Only a handful of countries impose no obligations on their residents to identify PEPs – and they likely will in the future.
The companies’ reputations are not the only things on the line – failure to adhere to the regulations puts them at risk of being fined. Between 2008 and 2018, $27 billion was levied in fines against financial institutions for Anti-Money Laundering (AML) and Know Your Customer (KYC) sanctions violations globally.
For PEP screening to be effective, financial institutions ought to know this information about their potential clients:
- Full name
- Date of birth
- Country in which the person held a politically exposed position
- Roles, appointment dates, and duration of said position
- The date a person left his post (if he is no longer a PEP)
The Problem and the Solution
Now that the importance of complying with governmental regulations is established let’s move on to the challenges. Screening customers against various sanctions and regulatory lists is a costly and time-consuming task if done manually. Even then, there’s a risk of false positives, tampering with the experience of customers unnecessarily flagged, as well as a risk of missing the real positives, making companies susceptible to fines due to negligence.
An automated identity verification system powered by AI is the solution iDenfy can offer its clients. Among other features, iDenfy allows its’ partners to meet the KYC and AML regulations and directives – including PEP screening. It supports more than 2000 documents from 200+ countries and extracts relevant identity information in just 0.02 seconds.
For Enhanced Due Diligence iDenfy can offer AML databases monitoring, which means that in the event of a person’s PEP status change during the year. iDenfy will flag this and show which actual PEP, sanctions, or other law enforcement database was triggered.
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