- October 25, 2020
- Posted by: Blue Azurite
- Category: Financial Scandals
Political Exposed Persons (PEPs) are defined as high-risk customers who have greater opportunities than ordinary citizens to acquire assets through illegal means such as taking bribes and money laundering. PEPs have to be identified and screened in financial institutions because of the risks they have. The process of identifying PEPs and determining their risks is generally referred to as PEP Screening and is a very important screening for the best implementation of AML compliance programs, especially in financial institutions.
Why Should PEPs be Determined?
Bribery and corruption crimes are very important problems globally, and the effects of these crimes are quite negative. Approximately $ 1 trillion in bribes are processed each year, and the amount of corruption is estimated at almost 2.6 trillion. These numbers have serious implications, so financial institutions try to prevent these crimes. PEP Screening is an activity aimed at preventing crimes such as bribery and corruption. PEP Screening allows PEPs to be detected. The most important reason for the detection of PEPs is that they are defined as high-risk people because they have more opportunities to earn illegal income such as money laundering, terrorism financing, corruption, and bribery. Therefore, according to the regulations, businesses have to detect PEPs and control their transactions. Businesses that do not detect PEPs and do not control their transactions are penalized for failing to comply with local or global regulations.
PEP Screening Process
Unfortunately, there are no universally accepted rules to define people in the PEPs category clearly. When conducting a PEP screening, it is necessary to identify the politically exposed people and their relatives and close associates (RCA). Besides, it cannot be said that every PEP has the same risk because PEPs are separated within themselves; The risk created by domestic PEP, foreign PEP, international organization PEPs, and for example, foreign PEP is much higher than the risk created by domestic PEP. No matter how complex it is to identify PEPs, financial institutions should implement and improve PEP Screening processes.
The PEP Screening should be performed in accordance with the risk understanding of a FI applying a risk-based approach. The PEP Screening should be performed during the customers’ initial engagement process while periodically reviewing customers when any triggering event requires a Customer Due Diligence review. In most cases, PEP Screening is not the primary control for identifying PEPs. Responsibility for the definition of PEP remains with the lines of business that are in direct contact with the customer and must be included in the CDD processes.
Data quality standards required for PEP Screening
Financial institutions have to have complete and accurate electronic customer data records so that the databases used for PEP Screening contain sufficient unique identification data. Without this information, the PEP Screening would be both inefficient and ineffective and yield irrelevant results inconsistent with an RCA. Therefore, the minimum data financial institutions should know for an effective PEP Screening include:
- Full name
- Date of birth or year
- Country of political exposure
- Politically exposed roles, appointment dates, and years
- The date PEP left its post
Screening Existing Customers Against PEP Lists Periodically
The precautions and procedures applied in customer purchases to determine whether a customer is a PEP is the first step, and PEP Screening alone is not enough. After the first screening process, these scans need to be performed at certain periods, but there is no clear definition of this period and these periods vary according to the enterprises. It is scanned periodically because the risks of the customer may change; for example, it may not be PEP when a customer opens an account for the first time, but there may also be ongoing processes. These examples can be reproduced, but as a result, PEP Screening should be carried out periodically to change risk levels and place these people in appropriate risk categories.
PEP Risk Management Framework
There are a wide variety of controls to define and manage PEP relationships. Financial institutions should also properly perform these controls. Here are some of these controls:
- New Customer Identification: Financial Institutions must have risk-based procedures to determine whether a customer is a PEP before or shortly after the relationship is established, in accordance with applicable laws. If a new client is designated as a PEP, financial institutions should apply appropriate due diligence measures to the client promptly.
- Existing Customers Identification: Financial institutions should implement risk-based due diligence and controls if they become aware of their current customers becoming PEP.
- Customer Risk Assessment: Once a new or existing customer has been identified as a PEP, financial institutions must perform a risk assessment to determine the level of financial crime risk posed by that customer and appropriate levels of due diligence and monitoring. Financial institutions should take into account risk factors such as business type, geography, and product, and make risk assessments accordingly. In determining geographic risks, financial institutions should consider information from reliable and independent sources in the country of political exposure.
- Approval: Financial institutions should also be approved by senior management, who have PEP relationships, financial crime risk, and responsibilities within the entity’s AML control environment. Enhanced Monitoring: Customers (accounts) with a PEPs relationship should be subject to enhanced proportional monitoring to detect unusual and potentially suspicious activity. These people can generally be called Relatives and Close Associates (RCA).
- Training: Financial institutions are the first line of defense in preventing and detecting financial crimes such as money laundering. In addition, financial institutions play an important role in identifying PEPs or potential customers. Therefore, it is very important that the risks, policies, procedures, and processes associated with PEPs are communicated to relevant employees and their managers, and form part of the regular AML training program.