A Politically Exposed Person (PEP) is an individual who holds a leading public position or a position of influence and is considered to be at a higher risk of involvement in financial crimes due to their public exposure. PEPs are often involved in government, public administration, or international organisations.
Financial institutions regard PEPs as high-risk customers and require enhanced due diligence measures. Businesses dealing with PEPs must take additional steps to ensure that the transactions involving these individuals are legitimate and free from illicit activities.
The purpose of identifying and monitoring PEPs is to prevent money laundering, terrorist financing, and other financial crimes, as they may use their positions of power and influence to abuse the financial system for personal gain or to facilitate illegal activities. Various countries and international organisations have regulations and guidelines in place to combat the risks associated with PEPs, and to ensure transparency and accountability in any transactions involving those individuals.
The importance of PEP screening for AML compliance
Anti-Money Laundering (AML) compliance is crucial regarding PEPs due to the increased risk of financial crimes associated with them. By implementing robust AML compliance procedures specific to PEPs, financial institutions and businesses can effectively mitigate the risks associated with dealing with these high-risk individuals. This helps maintain the integrity of the financial system, prevents the facilitation of financial crimes, and ensures that transactions involving PEPs are legitimate.
There are several key reasons why PEP screening is important for AML compliance:
- Higher risk of corruption and bribery: PEPs often have access to significant public funds and resources, which makes them susceptible to corruption and bribery. They may use their positions to facilitate money laundering activities or accept illicit funds in exchange for political favours.
- Money laundering risk: It is possible that individuals use their influence to engage in money laundering activities, whereby illicit funds are integrated into the financial system to appear legitimate. This can involve complex transactions and shell companies to hide the source and ownership of the funds. Working with such people is dangerous to your own business legally, financially and reputationally.
- Influence peddling and embezzlement: PEPs may misuse their political influence to embezzle funds from government coffers or state-owned enterprises. Using AML compliance can help identify suspicious financial transactions that could be related to such activities.
- Terrorism financing risk: PEPs may unknowingly or knowingly facilitate terrorism financing through their networks or connections. Compliance measures help detect and prevent such activities, protecting the integrity of the financial system.
- Reputation and regulatory risks: Financial institutions and businesses dealing with PEPs face reputational risks if they are associated with individuals involved in financial crimes. Non-compliance with AML regulations can also lead to severe regulatory penalties and legal consequences.
- International sanctions: PEPs from certain countries or regions may be subject to international sanctions. AML compliance works to ensure financial institutions stay ahead of these measures and do not engage in prohibited transactions with sanctioned PEPs.
- Enhanced due diligence requirements: AML regulations require financial institutions to apply enhanced due diligence measures when dealing with PEPs. This includes gathering additional information about the individual and the source of their wealth and monitoring their financial activities more closely.
Balancing PEP screening for AML compliance with good customer service
It is important to balance thorough screening with a positive customer experience.
A recent BBC article highlights an incident involving Nigel Farage and his outrage at the closing of his bank account, supposedly with no good reason. Although the now ex-chief executive officer of Natwest admits to it being an error, the incident is a reminder that although PEPs need to be dealt with in a different and more thorough process, customer experience is still crucial.
Enhanced due diligence is often required when conducting checks on PEPs, which can be a long and tedious process without the implementation of automated solutions. Amid this increased scrutiny, it is important to not lose sight of delivering a good customer experience.
Simplify onboarding procedures
To enhance onboarding procedures, firms can focus on simplifying the due diligence processes for PEPs. While it is essential to conduct thorough and extensive due diligence, there are ways to improve efficiency, such as utilising automation and digital tools to streamline the overall onboarding process and reduce the repetitive and manual steps. By leveraging technology, firms can achieve a more effective approach and ensure compliance without compromising on speed and accuracy.
Ensure clear internal communication
Effective communication is crucial in maintaining a robust AML framework. It is essential to maintain transparency across teams in regards to policies and the necessity of EDD for PEPs. It is equally important to communicate with the PEPs themselves, explaining the reasons behind the enhanced processes and assuring them that these measures are not an unfair or unjust procedure. By practising clear and honest communication with PEPs, firms can establish trust, eliminate any misconceptions, and adopt a collaborative approach to combat financial crime effectively.
Train staff on how to manage PEPs effectively
Another crucial aspect of managing PEPs effectively is providing comprehensive training to staff members. It is essential to ensure that employees are well-equipped with the necessary knowledge and sensitivity towards the requirements and reasons behind conducting these enhanced checks and screenings. Empathy plays a vital role in this process, as it allows staff members to understand and address any potential inconvenience that PEPs may experience due to this increased scrutiny compared to that of a “regular” customer. By encouraging a culture of understanding and consideration, organisations can establish smoother and more respectful interactions with PEPs, enhancing compliance efforts while maintaining a positive customer experience.