Politically Exposed Persons (PEP) are high-risk clients with more opportunities than ordinary nationals to gain assets through illegal means like bribe-taking and money laundering. The potential risk of using titles for criminal activity makes them high-risky individuals.
Classifying a potential client as a PEP doesn't mean that a corporation can't work with them. PEP control is only part of the process that allows financial institutions to conduct a complete risk assessment, and awareness of red flags is essential in this assessment. Sometimes matching just one of these politically exposed person indicators might be linked with financial abuse.
What is PEP According to FATF?
There are several criteria to decide who PEP is according to FATF definition;
In governmental bodies
A senior government official in the legislative, judiciary or executive bodies and diplomatic roles. For instance, parliament members, ambassadors, or judges in the supreme court
In organizations
A senior executive of a government-owned commercial enterprise or senior official of a major political party. For instance, board members in a central bank, party presidents or high-ranking soldiers
Associates
Close associates who are closely connected to a PEP, socially or professionally. For instance, family members and close relatives of parliament members, someone with beneficial ownership of a legal entity or a company in which the government is the sole or majority shareholder
3 Types of Political Exposed Persons Defined By FATF
PEP Risk Levels Based on FATF Guidelines of Red Flags
Every regulated corporation must fit the guidelines while working with a politically exposed person. After the client is uncovered as a PEP, corporations are responsible for the ongoing due diligence checking process. FATF recommendations include four levels of risk for PEPs. The categories are listed as;
Low-level risk includes;
- Supranational or international business officials, senior functionaries
- Mayors and local, state district, and urban assemblies members.
Medium/Low-level risk includes the governmental board and top-ranking officials of state-owned organizations and businesses. For example;
- Head officials of judiciaries, banks, military, law enforcement
- Senior members of state agencies
- High-ranked civil servants and religious organizations
- Commissioners
- Consuls
- Ambassadors
High-level risk includes;
- Heads and government members
- Parliament members
- Head officials of judiciaries, banks, law enforcement, military and religious organizations
- Prominent political party members.
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Red Flags to Watch Out for in FATF
Financial Action Task Force (FATF) has introduced red flags of Political Exposed Persons to help corporations detect illegal activities. Several of these indicators should raise some suspicions based on their information matching. In some cases, it might even lead to PEP money laundering. Additionally, a particular nation or state may also have indicators for suspicion that must be considered crucial.
According to the FATF, the measures that will enable companies to detect and control these people are listed below.
Identity Shielding: As PEPs are aware of their status, sometimes they try and hide their identity or avoid being in the spotlight. For example:
- Assigning legal ownership to somebody
- Abnormally or constantly interacting with intermediaries
- Using corporate vehicles without valid business reasons or for confusing involved ownership and industries
Suspicious Behavior:
- Being secretive or uncomfortable about the source of funds and wealth
- Providing false, inaccurate, or insufficient information
- The information doesn't match with publicly available data
- Eagerness to explain the reason behind their business in the country's DNFBP or financial institution
- PEP has been denied an entry visa
- Funds belonging to PEP move from one country to another
- A steady flow of wire transfers or cash out
- No credible explanations or details for certain business relationships, transactions
Position in the Company: Position can become a reason for concern.
- Access, authority, and control over the corporation's funds, operations, and policies
- Informal/formal ability to control mechanisms against TF/ML
- Influence/control over government or corporate accounts
- Having authority or ownership over DNFBP for financial institutions.
The Industry: Industries are considered high-risk depending on the place, and the risks vary from nation to nation.
- Banking and finance
- Military and defense
- Businesses that work with the government or state agencies
- Construction; Mining and extraction
- Public goods provision
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FCA's Finalised Guidance for PEPs - Round-Up
FCA clarifies its PEP's manual on how companies should use PEP definitions in MLRs in the UK context.
PEP Screening Compliance by Region
PEP Screening compliance has some differences according to countries. Would you like to learn about requirements of your region?
Why PEP Screening Is Important for Business?
Approximately $ 1 trillion in bribes are processed each year, and the amount of corruption is estimated at almost 2.6 trillion. These numbers have serious implications, so financial institutions prevent these crimes.
- The account shows ongoing activity in a short period after a long period
- Private banking demands
- Wire transfers without economic explanation or lacking beneficiary information
- Anonymous payments or transactions received from an unknown third party
- Funds are moved constantly from one account to another or between financial institutions without a business rationale
- Steady cashflows, massive global funds transfers, or wire transfers
- Having and using multiple bank accounts without an apparent reason
Services and Products: FATF deemed some of the products and services are prone to risk and vulnerable to being used;
- Businesses are catering to foreign clients
- Service and trust providers
- Concentration/correspondent accounts
- Real estate
- Dealers in high-value transport vehicles like ships, sports cars, planes, and helicopters
- Dealers invaluable stones, metals, and luxury goods
Local Indicators: The FATF explains how some countries are considered high risk based on geographic risk factors.
- Domestic or foreign high-risk country.
- A country with a high risk of corruption.
- Countries with mono-economies.
- A country that did not sign a relevant anti-corruption convention like the OECD Anti-Bribery Convention and the UNCAC.
Why is PEP Screening Important?
Financial crimes pose major threats all over the world. Anti-money laundering regulations include firms' obligations to combat financial crimes. Institutions have to detect customers with more potential for financial crime. So, they need Political Exposed Person screening during customer account opening processes. AML regulators punish organizations that do not follow these screening procedures.
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