In Financial and Trade industry, you may have often heard the term PEPs and importance of early stage PEP detection in order to offset money laundering and terrorist funding.

Politically Exposed Person(s) (PEPs) are profiled individuals who currently hold a public office or are associates of such personnel. The global approach by regulatory and financial bodies limits doing business with PEPs. Owing to likelihood of money laundering, bribery, and terrorist funding that may results due to influence of such individuals. Financial institutes view PEPs as a compliance risk. EU, UN, FINCEN, SECO and other regulatory bodies have strict rules when it comes to interacting with potential customers who are not vetted to assess their risk status. This a key component of AML compliance.

Organisations are subject to hefty fines and legal actions in case of non-compliance.

FATF defined PEPs

The Financial Action Task Force (FATF) is an intergovernmental organisation. It was established as an initiative by G7 to create practical policies for anti money laundering and due diligence. It acts as a supervisory body and formulates recommendations to assist legal framework of global financial space. Global institutions consider FATF’s guidelines as International Standards.

The latest definition of PEPs provides with four categories:

High Risk – Level 1 PEPs

  • Heads of state and government
  • Members of government (national and regional)
  • Members of Parliaments (national and regional)
  • Heads of military, judiciary, law enforcement and board of central banks
  • Top ranking officials of political parties

Medium-High Risk – Level 2 PEPs

  • Senior officials of the military, judiciary, and law enforcement agencies
  • Senior officials of other state agencies and bodies and high ranking civil servants
  • Senior members of religious groups
  • Ambassadors, consuls, high commissioners

Medium Risk – Level 3 PEPs

  • Senior management and board of directors of state-owned businesses and organisations – e.g. Chairman of a Bank

Low Risk – Level 4 PEPs

  • Mayors and members of local county, city and district assemblies
  • Senior officials and functionaries of international or supranational organisations

PEPs and Compliances

Financial Authorities and Regulatory bodies translate FATF’s guidelines into practical rules. Compliances define risk involved according to the nature of businesses. How and when to apply Customer Due Diligence. These compliances at international or state level monitor security measures taken by organisations. They identify and loopholes that may be there. As per compliance rules, it is a requirement for certain Institutes to perform Enhanced Due Diligence when it comes to PEPs.

KYC/AML Compliance in light of FinTRAC

Identifying PEPs

In order to implement AML compliance for PEP identification, businesses and financial institutions must have procedures in place to effectively identity and restrict a PEP. To do this two questions are of importance:

(i) When do you check for a PEP?
(ii) How do you check for a PEP?

EU and FINCEN regulations state that strict customer due diligence must be applied before establishing any business relation with a potential customer. This indicates that PEP screening must be done during the on-boarding process.

Financial Action Task Force (FATF) establishes a standardised “list” of known entities and profiles updated on daily basis with new data extracted from global sources. This enlists all individuals on the basis of their personal information (Name, DoB, Country of Residence) which satisfy FATF’s definition of a PEP. All potential customers must be screened against these lists to ensure that they are not present in them.

Is there a such thing as a good PEP?

The answer is no. The concept of PEPs is not defined on moral grounds. All PEPs are not inherently “bad”. Not in terms of morals. The risk of a PEP is relevant to possibilities to commit illegal activities under the Risk Based Thinking model. Risk Based Thinking approach means to ensure practices in place to proactively address future disasters.

As per FATF’s definition of PEP, four distinct categories are given. Businesses can apply restrictions and train their systems accordingly. A low risk PEP may be allowed performing transactions while a high risk PEP may not be allowed entry in the system altogether.

 

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