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Beneficial owners of some companies could be more vulnerable to financial crime than owners of other companies. This is particularly true if they hold a prominent administrative or political position, where their misuse of authority might result in serious financial disturbances. These individuals are referred to as PEPs or Politically Exposed Persons. Even though organizations may have business contacts with certain companies, they should nevertheless exercise additional care when doing business with them. This entails carrying out a more comprehensive risk assessment and PEP screening to ascertain the likelihood that they will engage in (or are currently engaged in) illegal activity.
This article explains why companies should be extra cautious when evaluating companies that PEPs are connected with as partners and discover everything about PEP screening.
What is a PEP?
“Politically Exposed Person” is what PEP stands for. It refers to someone who now occupies (or sometimes has) a prominent position in public administration. Here are a few instances of these positions:
- Head of state or envoy in politics
- High-ranking military commander, judge, C-suite member of a state-owned firm, director of a financial institution, executive of an international committee
What is PEP Screening?
A PEP risk assessment or PEP screening is a procedure used in due diligence to examine a commercial connection. It is used to determine if a business partner is on the PEP list and, if so, to evaluate the level of risk involved with doing business with them.
Significance of AML PEP Screening
To be more precise, there are no set standards for PEP screening. This is because different national and international AML/CFT/CPF regulations have different definitions of PEPs, including the conditions under which an individual becomes or ceases to be a PEP.
However, businesses are typically expected by all of these regulations to use reasonable vigilance while establishing and preserving commercial ties. This involves figuring out if a PEP is connected to a company and the likelihood that they may get engaged in criminal activity in the future or already have.
Financial institutions must report PEPs suspected of money laundering and other crimes, therefore failing to identify and report a PEP for noncompliance may leave them in legal hot water and harm their image. Therefore, PEP screening is necessary for compliance in a broader sense. This is due to the fact that a business’s risk profile is heavily influenced by whether or not an individual associated with the enterprise may be classified as a PEP.
Why do PEPs Have a High-Risk Profile?
A PEP’s firm has a significant risk of liability since the PEP’s position gives them some degree of public political influence. They also get some access and administrative rights as a result. This implies:
- They have more resources at their disposal and/or more opportunities to perpetrate crimes.
- They are more desirable targets for criminals, who may influence or threaten their relatives or close associates (RCAs) in an effort to coerce them into cooperating with unlawful activity.
- Any crimes they commit (or at least assist in) may be more significant and/or have wider repercussions due to their public influence.
However, this does not imply that all PEPs are so high-risk that establishing and maintaining relationships with the companies they deal with is impossible. Many might, in fact, go through their whole customer lifetime without ever acting suspiciously or illegally. It simply means that you need to use further vigilance to ensure that the authority and power of a PEP aren’t being misused.
Are Politically Exposed Persons Involved in Money Laundering?
Because of their public political and administrative power, PEPs pose a danger of money laundering. On the one hand, this gives them more chances to make social contacts, which may include money-laundering criminal syndicates. However, as part of their other civic duties, it may make it simpler for them to hide the flow of earnings from crimes.
How to Carry Out a Risk Assessment for PEP?
Following the establishment of a framework, the actual procedures for evaluating PEP risk will be like this:
- Gather and confirm consumer data: Compile and verify information on companies and their beneficial owners.
- Examine many sources to confirm the PEP status: Make an effort to cross-reference these facts with other reliable sources in order to ensure that no possible matches are overlooked because of inaccurate or outdated data.
- Evaluate the risks associated with matches: Matched PEPs have to undergo enhanced due diligence (EDD), which includes investigating their financial, professional, and political histories as well as any relevant criminal activity and media coverage.
- Create strategies for ongoing monitoring: You should also create a plan detailing how (closely) you will keep an eye on a PEP’s activities for anything suspicious or unlawful based on their risk assessment.
- Submit an update to upper management: Senior management should get the PEP evaluations from risk teams and decide whether to onboard (or retain) the PEP and the company they represent as a partner or client.
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Conclusion
Determining whether companies are connected to PEPs might be a laborious task for companies. In addition, businesses need to evaluate the level of danger they pose for them in light of the PEP’s specific circumstances. It may consume a significant amount of resources that you would like to use for other company operations. With enhanced screenings, PEP screening serves as a CDD automation solution. This assists the team in determining the danger of establishing connections with other companies based on the PEPs they represent and whether or not they are engaged with them.
