Politically Exposed Persons are more at risk of money laundering than ordinary people. PEP screening is critical in detecting such people. Financial institutions should identify PEPs and take action.
Just because someone has a PEP doesn't mean they can't open accounts with financial institutions. Only different applications should be made according to these people. So, will a person who has been identified as having PEP always remain so, or will precautions be taken as an average person when the risk disappears after a specific time?
Financial institutions maintain the "PEP once, always PEP" approach to their customers who have left their political and public roles. Thanks to this approach, it is aimed to be protected from the risks that may occur if PEPs continue to use their powers and funds while in office. In addition, maintaining the PEP classification ensures that clients are subject to continuous auditing throughout the business relationship.
This approach aims to minimize the compliance risk of firms. With risky procedures, firms adjust their AML/CFT responses to reflect the level of risk presented by individual customers and consider implied vulnerabilities to money laundering.
According to some procedures, a PEP person must remain a PEP for a certain period after leaving office. After sufficient time has elapsed, it is removed from the PEP category. For example, some financial institutions consider PEPs to be risky for 18 months after someone leaves office. It takes action accordingly. Some institutions argue that this situation may vary from person to person. For example, some people are more prone to risk during their job. In this case, it would be the right approach to continue researching these people after they leave their employment.
After a PEP leaves office, financial institutions ask some questions about that person's background. These questions determine whether or not they will change the person's risk level. Some of these questions are:
- How long did he spend on the job?
- What was his position?
- What is the perception of corruption?
- What is the Corruption Index of the country in which he works?
- Does the person have any visible links to high-risk industries?
- The degree of transparency at the source of one's wealth?
- Are documents available to prove one's wealth?
- Is there any negative news that the person has been involved in throughout their career?
- Does his political affiliation continue after leaving office?
We can better determine the degree of risk of the person by asking questions such as. Thanks to these questions, it can be seen whether the person should be kept in PEP status and measures will be taken accordingly, or whether the PEP status will be lowered.
Changing the status of a PEP is solely the job of senior management in the organization; this is too important a matter to be left to the discretion of an office clerk.
It should be noted that if restrictions and safeguards are lifted after a PEP is dismissed, that person still has a risk potential. Because, thanks to his past duty and connections, he may be involved in financial crimes.
The "PEP once, always PEP" procedure is guaranteed to avoid risk. But this method has some difficulties. First, checking the PEP contact even after it's done can burden AML experts. Thousands of people who are already on duty go through these checks, and it is a heavy burden to control those whose responsibility is over.
If the appropriate conditions are met, removing the PEP classification makes it easy for AML officers. As we mentioned above, it is necessary to ask some questions to PEP people and determine their risk level. In this way, we remove those people from the PEP classification, and AML experts do not waste time examining them again.
Declassification of PEP offers both business and compliance benefits if controls are carried out correctly. For example, the removal of the PEP classification makes it easier for financial institutions to create customer IDs. It also avoids wasting time verifying contacts and processes such as customer due diligence or advanced due diligence.
Declassification allows firms to work with a broader customer demographic. However, it provides cost and efficiency advantages for AML officers. Firms reduce the compliance burden associated with formerly PEP clients in proportion to their new risk profile. This way, it can fulfill its AML/CFT obligations faster and direct Customer Due Diligence reviews to more at-risk customers.
Firms should determine how to manage their PEP risk obligations. They should analyze these people well and perform CDD and EDD controls carefully. Following the regulations is very critical in these matters.