Identifying Politically Exposed Persons

Who are Politically Exposed Persons (PEPs)?

According to the Financial Action Task Force (FATF) recommendations 12 and 22, a politically exposed person (PEP) is an individual who currently holds or has held a prominent public position. PEPs are highly susceptible to corruption, money laundering, and bribery due to the power they hold.

The term “PEP” first appeared after Nigeria’s infamous  “Abacha affair” in the 1990s. The scam involved the  Nigerian dictator “General Sani Abacha” and his family and associates taking huge amounts of money from the government and transferring it to foreign banks. The FATF defines PEPs and Associates of PEPs as individuals who meet certain criteria:

• The closest to them: PEPs include immediate family of Members of Parliament, individuals with profitable legal entities, or those involved in government-only companies or majorities.
• Government officials: A government official, such as a judicial, legislative, or executive official, ambassador, representative, or other parliamentarian
• Individuals in high organizational positions: These include political figures such as central bank board members, top military officers, or heads of government-owned companies and government departments.

Types of PEPs

The AML/CTF Act 2006 Australia identifies three types of PEPs.

• A domestic PEP is someone who holds a public position or someone with an important job within a government.
• Foreign PEP- Someone who works in a government agency in a foreign country and holds a prominent position.
• International Organizations PEP– This refers to people with public posts or specific duties who work for international organizations like the UN  (United Nations), WTO (World Trade Organization), North Atlantic Treaty Organization (NATO), etc.

How to Identify Politically Exposed Persons (PEPs)?

To determine whether a customer or a business’s owner has political ties or meets the criteria to be considered a politically exposed person (PEP), the procedure involves conducting customer due diligence (CDD) by doing the following steps

• Reliable documentation is used for identity verification.
• Insight into the ownership strategy of the company.
• Screening against reliable PEP databases.

Financial institutions depend on reliable sources to evaluate individuals and determine whether a person is PEP and then evaluate their risk level. Apart from PEP identification to comply with Anti-Money Laundering regulations, it is essential to check a potential customer’s status against sanctioned entities list to ensure compliance with international sanctions.

To comply with global sanctions, the following are a few of the international organizations and institutes whose sanctioned individuals and entities databases should be accessed to assess potential associated risks.

These organizations include but are not limited to;

United Nations (UN):

The Security Council has sanctioned individuals and groups within the UN, including those involved in terrorism, nuclear proliferation, and other threats to international peace and security.

Office of Foreign Assets Control (OFAC):

The U.S. Treasury Department’s branch, OFAC actively manages trade and economic restrictions based on America’s foreign policy and national security goals. OFAC’s comprehensive database includes a list of Blocked and Specially Designated Nationals.

Bureau of Industry and Security (BIS):

BIS functions, under the US Department of Commerce. It issues the list of businesses that are banned from purchasing American exports due to their involvement in actions that are contrary to US foreign policy and national security objectives.

Her Majesty’s Treasury (HMT):

The UK financial regulator publishes a list of individuals and entities subject to financial sanctions, including UN and EU policies and UK-specific sanctions

State Secretariat for Economic Affairs (SECO):

SECO oversees Switzerland’s Continental structures and the names of individuals and companies with financial restrictions.

European Union (EU):

The European Union provides its list of individuals, groups, and entities subject to economic sanctions within the EU, reflecting its foreign protection policy.

How to Create a Strong PEP Compliance Program?

Here are some ways to create a strong PEP compliance program.

Access Complete PEP lists

The PEP search through an automated data solution can help ensure the freshness of information. Consider opting for a comprehensive database with a high number of sources and a high frequency of information updates.

Tailored List Selection

Ensure list coverage meets organizational risk profile criteria by area.

Check PEPS and Risk Factors

Choose a database that not only offers comprehensive PEP data but also lists the risk levels associated with those PEPs. This is because merely being a PEP doesn’t mean that a potential customer is also a money launderer or financial criminal. Therefore, a data solution that offers a complete overview in the form of a well-curated risk profile can be instrumental.

Continuous PEP Monitoring

The status of PEP risk levels may change constantly therefore it is necessary to have a robust data analysis tool that helps in continuous monitoring of evolving PEP status and thus risk profiles to help detect suspicious activity accurately. 

Fixing Mistakes and Updating Information

Errors in PEP lists and inappropriate documentation can lead to false positives resulting in slow and expensive manual inspection. The use of artificial intelligence and machine learning can strengthen testing and compliance, making the identification of potential risks more accurate and efficient. Therefore, an AI-powered database solution for PEP identification with more automated tools is significant.

Why Are PEPs Important in the KYC/AML Compliance?

Know your customer and anti-money laundering compliance is critical for the banking and financial industry. Assessing a client’s true risk level can be challenging. However, certain indicators, such as being a politically exposed person (PEP), being associated with PEP, or living in a high-risk jurisdiction, may simplify the process of determining the actual risk level of an individual. 

Anti-Money Laundering jurisdictions in different countries,  establish stringent guidelines for handling PEPs. Financial institutions need to take extra precautions, including digging deeper and taking a closer look at their client’s businesses. This helps to ensure that criminal activities are not inadvertently supported.

Conclusion

Financial regulators require businesses to screen politically exposed persons (PEPs) as part of their anti-money laundering (AML) programs. Companies must understand and follow PEP risk assessment rules in their jurisdictions to comply with money laundering laws. DataSpike provides a streamlined solution for KYC and AML compliance. It helps financial institutions implement anti-money laundering programs by providing them with the latest and updated data in line with the ever-evolving global regulatory landscape.