Pursuant to Financial Actions Tasks Force (FATF), the risk coming from Politically Exposed Persons is increasingly high. We need to note, although, that whilst FATF guidance requires financial institutions to automatically classify persons prone to political exposure as a “high risk customer”, the same FATF guidance suggest FIs should take a risk based approach to process of verifying PEPs identity. But what does that mean exactly?
First of all, who are PEPs?
In short, Politically Exposed Persons are all holders of public functions who are exposed to the possibility of corruption or abuse of their position to a certain degree.
Why should we be concerned?
PEPs may represent increased risks due to the possibility that individuals holding such positions may misuse their power and influence for personal gain or advantage, or for the personal gain or advantage of close family members and close associates. Such individuals may also use their families or close associates to conceal funds or assets that have been misappropriated as a result of abuse of their official position or resulting from bribery and corruption. In addition, they may also seek to use their power and influence to gain representation and/or access to, or control of, legal entities for similar purposes. So, the focus of the PEP identification and risk management process should remain on the detection of “grand corruption”.
How should I act?
1. Identify whether a customer is PEP.
2. Assess whether the risk of PEP customer is high.
3. Document the length of time, the title and country in which PEP holds exposure.
4. Document the nature and intended purpose of the relationship, source of the initial funds, and anticipated levels of account activity.
5. Document customer’s source of funds and source of wealth.
6. Conduct Negative News/Adverse Media screening on the customer
7. In case of immediate family member or close associate of PEP, identify and document the relationship between the persons and all the information above.
8. Seek approval by senior management.
9. Apply enhanced monitoring (manual or automated) and periodic reviews on PEP customers.
10. Maintain highly trained staff to identify PEP risks.
What data do I need at least to do the screening?
PEP screening is the screening of customer names and associated details against PEP information at certain points during the customer relationship. PEPs should be screened as part of the onboarding process, at periodic customer review, and when thee is a trigger event which warrants a customer due diligence review. The data for screening should include at least the following:
1. Name (all known names and aliases)
2. Date of Birth, and where this isn’t available, Year of Birth
3. Country of political exposure
4. Gender (where available)
5. Politically exposed role(s), and date(s) or year(s) of appointment
6. Date or year that the PEP left their position (where applicable)
How to define the accuracy of PEP’s screening match?
FIs should rely on results which show “close match” rather than on “exact match” because the latter will likely be too restrictive. This should take account of transposition errors, common variations on names and minor typos and misspellings. When a true match to a PEP is identified, the appropriate team or individual responsible must be notified and the appropriate due diligence procedures should be instigated if not already underway or completed.
Is there a difference between foreign and domestic PEPs?
Typically, foreign PEPs may pose a higher risk compared to domestic PEPs. In some cases PEPs would want to establish the relationship with an FI outside of their country to avoid a direct rationale for holding an account.
Is it “once a PEP, always a PEP”?
Well, not really. However there is no agreed method for determining the time period that an individual should be regarded as a PEP after they have left the public function, all is, again, based on risk. There are a number of factors to refer to when identifying whether a past-PEP should undergo the same process of enhanced due diligence. This, for example, might be the level of inherent corruption risk in their country of political exposure, the ength of time in office and likelihood of return to office in future or how politically connected they remain once they have left office. It’s good when FI posesses such information, but when it does not, it should use available sources and still seek C-level approval to de-classify the person from PEP status.