How Does PEP Screening Ensure AML Compliance Across Jurisdictions?
PEP stands for politically exposed person. PEP check is considered to be a vital mechanism for identifying individuals who hold prominent public positions or have associated with those who do. Such individuals are considered to be high risk due to their potential access to public funds and influence, which could be exploited for illegal purposes such as money laundering, corruption, or money drawing activities. However, not every PEP engages in criminal activity but their exposure to such an environment elevates their risk profile which necessitates thorough scrutiny to prevent financial crimes.
What is a PEP in Relation to AML/CFT Compliance?
PEP in Relation to AML/CFT Compliance can be defined as a person who currently holds or has held a significant public position in the past is considered a Politically Exposed Person (PEP) for the purposes of Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) compliance. PEPs are seen to be more likely to be involved in financial crimes including bribery and corruption globally due to their own powerful positions. Institutions must deal with PEPs with increased PEP check in order to stop financial systems from being abused.
What are the three types of Politically Exposed Persons?
Global financial watchdog, The Financial Action Task Force (FATF) has officially identified three PEP types that have a tendency to pose a business risk which are described as follows:
Domestic PEP: A diverse group of people who occupy public office or designation in a given country are referred to as domestic PEP.
Foreign PEP: Foreign PEPs can be defined as those individuals who hold high profile public positions in a nation other than the one in which a financial institution was first established.
International organization PEP: The classification of individuals who have been assigned as a high profile position by an international organization like board members, directors, or deputy directors, are referred to as International organization PEP.
Although it completely varies from nation to nation where definitions may be rather broad. That is why authorities mostly target heads of state, high ranking officials in the military or judiciary, and top executives from state owned enterprises (SOE).
Here is the interesting fact that family members of PEP may also be recognized as “related PEP” during the screening process because of their professional or social links as they may also participate in these activities.
Explain PEP Risk Levels
In AML/CFT compliance, assessing the risk level associated with a Politically Exposed Person (PEP) is considered to be a key step. It is essential to know that not all PEPs carry the same level of risk that is why they are further categorized which helps financial institutions implement the right level of scrutiny. Below are the common PEP risk levels:
1. Low Risk PEPs
Low Risk PEPs have limited influence or control over public funds and decision making processes as they typically hold lower profile public positions which leads to low corruption levels.
Compliance Approach:
Standard due diligence (SDD) might be enough with occasional monitoring for changes in risk profile.
2. Medium Risk PEPs
Medium risk PEPs hold positions of moderate influence with some level of corruption risk as they are not directly managing large sums of public funds. To make it more clear, they may have access to sensitive resources or decision making power.
Compliance Approach:
Enhanced due diligence (EDD) might get applied periodically with some increased focus on transaction monitoring and adverse media checks.
3. High Risk PEPs
High risk PEPs hold quite prominent positions with significant control over public funds, policies, or high value contracts which makes them more vulnerable to widespread corruption and financial crime.
Compliance Approach:
Rigorous Enhanced Due Diligence (EDD) is mandatory. This includes:
- Continuous monitoring of transactions.
- Frequent adverse media and sanctions checks.
- Detailed scrutiny of source of funds and wealth.
4. Extreme Risk PEPs
Politically Exposed Persons (PEPs) are further classified as very high risk which are either directly involved in financial crimes like money laundering, or are strongly suspected of involvement in such activities.
Compliance Approach:
- Immediate termination of business relationships where required.
- Detailed reporting to relevant authorities.
- Complete transaction freeze, if mandated by sanctions.
The Politically Exposed Person (PEP) regulations in Europe
As part of national AML regulations, there are numerous nations or governments out there who have have established their own standards and definitions for determining who qualifies as a Politically Exposed Person (PEP). With their sleek and premium appearance,add a touch of luxury that With respect to Europe, its fifth directive (5AMLD) which significance of custom cbd boxes packaging was put into effect in 2020 and it significantly strengthens AML regulations for the region.
Although there is a fine distinction as PEP does not always mean that a person has committed crimes, it is more of a warning that should be considered when evaluating the individual and transactions to prevent high risk in the future.
How can AML Watcher be of your help?
AML Watcher’s Comprehensive PEP Screening offers access to 2.1M + PEP profiles with real-time updates from 1,300+ watchlists and 5,000+ news sources which ensures no PEP goes undetected. It usually categorizes PEPs by risk level and includes family and associate screening to uncover hidden risks.
AML Watcher is going to turn High-Risk PEPs into Low-Risk Decisions!
