What is PEP Compliance and Why do Financial Institutions Need it?

For Politically Exposed Persons (PEPs), an inter-governmental body established in 1989, Financial Action Task Force (FATF) a canonical definition.

According to the global financial regulator FATF (Financial Action Task Force), a PEP or a Politically Exposed Person is one who is or has been entrusted with a public office or function. It can include anyone from the Prime Minister of a country to a locally elected official in a small town. It also includes senior officials in administrative, legislative, military or other branches of a government – whether still serving or retired. All such people require financial services but are, at the same time vulnerable to financial crimes like corruption and money laundering. The financial services sector, therefore, classifies them as higher risk clients and implement the necessary PEP compliance measures to protect themselves from being implicated in such crimes.

FATF has set standards to promote the implementation of regulatory measures to combat financial crimes such as money laundering and terrorist financing. Due to risks associated with exposed persons, FATF presents some recommendations according to which businesses need to take AML/CFT measures.

However, it is not just financial institutions that require compliance and regulatory measures. Designated Non-Financial Businesses and Professions (DNFBPs) that includes audit and law firms, dealers of precious stones and metals, real estate agencies and trusts. PEPs are in a unique position of, and have a better opportunity to, accept bribes, embezzle funds and launder money. This makes them riskier for banks and other businesses to onboard as clients. But with the proper measures, it is possible for the financial sector to mitigate their risks.

What is PEP Compliance?

Once a financial institution or DNFPB has determined that their client (or potential client) is a PEP, it is important for them to implement the necessary AML/CTF (Anti Money Laundering and Counter-Terrorism Financing) measures to monitor the risk associated with their clients. Such measures include enhanced due diligence of clients, transaction monitoring and building risk profiles of clients to enable them to safeguard their business from being used for any kind of financial crimes. Implementing PEP compliance does not necessarily mean that a person or client is being scrutinised for involvement in criminal activity. It simply indicates that their risk level is higher than any other client the bank may have.

Who May be Included in PEPs Lists?

The FATF has increased its scrutiny over governments and financial institutions around the globe. As a result, banks and financial institutions are supposed to be vigilant in their business practices regarding customer verifications. The reason is no matter whether your business is knowingly or unknowingly facilitates a criminal entity, it would definitely be subjected to harsh regulatory fines in form of monetary loss or penalties such as imprisonment and business asset abandonment.

FATF has classified the following entities as politically exposed;

• Serving or retired/discharged official in the executive, legislative, administrative, military or judiciary departments of a government.
• Senior officials of a political party with a significant following.
• Executive members of a state-owned enterprise that is a business or corporation.
• Immediate family members of all such individuals, above mentioned. This includes parents, spouse, siblings, children and spouses parents and/or siblings.

All such types of PEPs are designated different levels of risk according to their involvement with a political or public office or position. These individuals can be domestic as well as foreign. A domestic PEP may include a senior official of a local political party, corporation, a politician or an official from a state institution. On the other hand, an individual is a foreign PEP if he/she holds a notable position in a foreign country.

Why is PEP Compliance Necessary for Financial Institutions?

All such individual who falls under the PEP definition must be classified according to their level of risk and hence be screened. Financial institutions have to implement some PEP AML measures in order to reduce their risks and liabilities. With the increased scrutiny from local and international financial regulatory authorities, it has become important for financial institutions to protect themselves from all kinds of fraud and financial crimes. Regulators like FATF and FinCEN have issued millions of dollars in sanctions and fines to financial institutions for not complying with AML laws and regulations. This in itself is a strong enough motivation for businesses to screen for politically exposed persons.

After getting a clear picture of what is a PEP and assigning a risk rating by classifying the individual as high, medium or a low-risk individual, a financial institution must then implement ongoing due diligence measures. This can include anything from constant screening to the monitoring of transactions to maintaining risk profiles of such clients. Therefore, it deters the risk of fraudulent activities and suspicious transactions by assigning a risk rating and spotting suspicious identity beforehand. 

Real-Time AML Screening

Shufti offers comprehensive PEP compliance for the financial services sector and DNFPBs and covers over 200 jurisdictions around the globe. It uses more than 10,000 data sources, that are updated every 15 minutes, to screen PEP individuals all over the world. It runs AML screening checks in the background, without any delays and can relay results within 5 seconds. The advantage of customer screening against various updated data sources ensures that no criminal entity is overlooked. 

Businesses can implement these checks of their clients through three different screenings including ongoing screening, which is performed constantly for certain high-risk individuals. This allows them to receive an alert whenever a client is added or removed from a watchlist. Another type of screening performed by Shufti is through batch screening where a bank can feed their existing client list for AML checks and can get a comprehensive idea of which of their clients are included in PEP lists.

To sum up, for businesses PEP compliance is more than mandatory. It is crucial to identify the risk associated with your onboarding customers. Therefore combating fraudulent actors and suspicious transactions that could be facilitated through your business and can subject regulatory penalties. Hence, to retain a business reputation, PEP compliance is very important. 

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