• Kirsten Saliba
  • 6 May 2022
  • 5.1 mins

When individuals are elected to prominent positions in the political field or are assigned high-profile public roles, they must be categorised as Politically Exposed Persons (PEPs). It is important to note early on that a PEP can be defined as someone who has been (but may no longer be) entrusted with one of these roles. Once a PEP no longer remains in their position, their status as a PEP should continue until their status is thoroughly assessed on an element of risk and not a prescribed time limit.

Categories of PEP

Currently, there are no globally defined categorisations of politically exposed persons but, although it varies from jurisdiction to jurisdiction, most financial authorities separate PEPs into three main categories:

Foreign: Individuals elected to political positions or prominent public roles and functions in a foreign country should be classified as foreign PEPs for AML/CFT purposes. Foreign PEPs can include heads of state, cabinet members, government officials, military officers of judiciary members. They could also be senior executives of state-owned corporations.

Domestic: Domestic PEPs are those appointed to political positions or prominent roles within their own country of residence. Like foreign PEPs the ca category can include heads of state, other foreign government officials, members of political parties and senior executives, just to name a few.

International: Senior management employees who hold prominent roles within international organisations may be classified as international PEPs, this could include board members or company directors.

Why Should PEPs Be Determined?

PEPs are specified as high-risk customers due to the increased opportunity for them to acquire assets through illegal means versus ordinary individuals. This includes things such as taking bribes and money laundering. For this reason, PEPs must be identified and screened in financial institutions because of their risks. Identifying PEPs and their risks are generally referred to as PEP screening. IT is an essential screening process for the best implementation of AML compliance, especially in financial institutions.

Bribery and corruption crimes are very important problems worldwide, and the effects of these crimes are adverse and far-reaching. Approximately $1 billion in bribes are processed each year and the amount of money made through corruption is estimated at $2.6 trillion. Identifying PEPs and screening them can prevent crimes such as bribery and corruption. Therefore, businesses and financial institutions have to detect PEPs and control their transactions. Companies that do not screen and detect PEPs and control their transactions can be penalised for failing to comply with local or global regulations.

What is PEP Screening?

PEP screening is a process to identify and conduct customer due diligence (CDD) on any politically exposed person as part of a wider AML and KYC program.

PEP screening during the account opening process helps to determine if an individual is indeed a PEP and the potential level of risk that comes with doing business with that person. Depending on the jurisdiction and the risk profile of the company or financial institution, an account may still be opened for a higher risk PEP, but with the added factors of careful analysis and enhanced due diligence.

Ongoing monitoring of PEP status for accounts is advisable. The ever-changing nature of the political landscape and the people within it who have influence means that PEP lists are always evolving and must be monitored.

Why PEP Screening is Important

Organisations need to perform a detailed check on a PEP when onboarding new customers, as well as during periodical client reviews, to make sure that their reputation, revenue and capital are protected, and to keep themselves from being penalised too.

Financial Institutions that neglect to identify PEPs and breach rules put themselves at risk of heavy fines, which can be significant. Between 2008 and 2019, almost $27 billion in fines were levied as a result of fines related to watchlist screening. Notable offenders include BNP Paribas ($9 billion in 2014), Société Générale (settled for $1.3 billion in 2018) and Standard Chartered ($1.1 billion in 2019).

What is the Screening Process?

Unfortunately, there are no coordinated or globally accepted rules that apply to define people in the PEP categories so there is not a uniform process that can be applied. When conducting a PEP screening it is always necessary to identify the PEP and their relatives and close associates (RCA). But aside from that, it cannot be said that every PEP has the same risk or exposure as PEPs are diverse within themselves. For example, the risks created by foreign PEPs and international PEPs are much higher than those posed by domestic PEPs. A bespoke screening process should be implemented and constantly evaluated and improved to ensure it merits requirements and protects the organisation.

PEP screening should be performed in accordance with the understanding of applying a risk-based approach. It should take place during the initial engagement process while periodically reviewing the customer when any event triggers a CDD review; in many cases screening isn’t the primary control for identifying PEPs. Responsibility for the classification of a PEP still remains within the definition outlined by the business or institution in direct contact with the individual and must be outlined in the CDD process.

We Can Help

The Sekur.Transact module of our platform brings all the components of a robust compliance framework together under one roof. KYC, KYB, AML, Sanction Screening and more, we have everything needed to ensure the safety and security of your business from customers who could pose a threat to your reputation, revenue, or capital. Using our tools, you can identify who your customers are and whether they are of good standing, and eligible for you to do business with.

Visit us at www.sekuritance.com and get in touch to see how we can protect you and your business.

About Sekuritance

The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.

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