The finance industry is always evolving, and a crucial area that has been getting a lot of focus lately is Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT). To tackle new risks and challenges, regulations and strategies are continuously being reassessed.
The identification and screening of Politically Exposed Persons (PEPs) is critical in detecting potential money laundering risks, given that PEPs are considered to be at higher risk of money laundering and terrorist financing compared to ordinary individuals. As such, financial institutions are expected to implement stringent measures to identify and monitor PEPs.
However, it is important to note that the identification of a PEP does not automatically prohibit them from opening accounts with financial institutions. Instead, it requires that additional measures be taken to mitigate the risks associated with their status.
There is a controversial approach called the "once a PEP, always a PEP" philosophy that is being examined closely. This approach involves labeling customers as PEPs even after they have finished their public duties. The rationale for this approach is that PEPs might still have power, privileges, or illicit funds that require laundering, so they should be monitored thoroughly throughout the entire business association.
Risk-Based Approach and PEPs
It's worth noting that this approach might not align with the Financial Action Task Force's recommended risk-based approach (RBA), which is followed in most areas. According to the RBA, companies should adapt their AML/CFT strategies to match each customer's risk level. This means that PEPs should be subject to greater scrutiny due to their higher susceptibility to money laundering.
When it comes to customer classification, there has been much debate around the "once a PEP, always a PEP" approach. Some argue that this approach may not be fully in line with the RBA that is required for AML compliance. However, there are suggestions that can be implemented to address this issue.
One such suggestion is to base PEP declassification on a comprehensive evaluation of specific factors. These factors could include things like the level of corruption in the country where the politically exposed customer resides, their connections to industries at high risk of money laundering, and the risk associated with their previous political position. By taking into account these specific factors, firms can have a more nuanced understanding of an individual's level of risk.
Furthermore, it is essential for PEP declassification to be reviewed by senior management on a case-by-case basis. This review should be documented internally to ensure that the decision-making process is transparent and consistent. By implementing this approach, firms can more effectively comply with jurisdictional AML laws and fulfill their risk-based compliance obligations for each customer they serve.
To prevent unintentional facilitation of money laundering or illicit activities, it's crucial for companies to carefully evaluate all aspects before categorizing someone as a PEP. By adopting a thorough approach to PEP classification, businesses can ensure compliance with regulations.
Protect Your Business Against Risks
To better understand a Politically Exposed Person's level of risk, there are several key questions that must be considered. These questions are designed to determine if there have been any changes to the person's risk level over time, and if they should continue to be classified as a PEP. Some of these important questions include:
- How long did the person hold their political position and what was their role?
- What is the perceived level of corruption in the country where the person worked?
- Does the person have any visible connections to high-risk industries?
- What is the transparency level of the source of their wealth, and are there documents available to prove it?
- Has the person been involved in any negative news throughout their career?
- Does their political affiliation continue after leaving office?
By answering these questions, financial institutions can better assess the degree of risk associated with the person and make an informed decision about whether they should remain classified as a PEP. This approach ensures that appropriate measures are taken to mitigate risk while avoiding unnecessary restrictions on individuals who no longer pose a significant threat. Ultimately, a thoughtful and thorough evaluation process can help financial institutions fulfill their AML/CFT obligations more efficiently and effectively.
Declassification can provide various benefits for businesses and compliance purposes. For customers, PEP declassification can simplify the onboarding process, particularly during customer due diligence (CDD) and enhanced due diligence (EDD) procedures that assist financial institutions in confirming and validating customer identities. Additionally, declassification enables companies to engage with a wider customer base and establish new, potentially profitable business connections.
Making PEPs public can have cost and efficiency benefits for AML/CFT teams in terms of compliance. This is because it reduces the compliance burden associated with former PEP customers, which aligns with their new risk profile. As a result, firms can meet their AML/CFT obligations more efficiently and allocate important CDD and EDD resources towards high-risk customers that require greater scrutiny.
Sanction Scanner as a Solution
Sanction Scanner's PEP classification system is a critical component of its AML compliance solution. The system identifies PEPs and categorizes them according to their classes. Also, it assigns them a risk score based on various factors, determined by your company and its risk appetite.
The PEP identification and classification system considers a wide range of data sources, including official PEP lists, news articles, and social media posts. By combining this data with advanced machine learning algorithms, the system can accurately identify PEPs and assess their level of risk. This risk score helps financial institutions to determine the appropriate level of scrutiny and monitoring that should be applied to each PEP.
The software is designed to help financial institutions comply with the requirements of the Financial Action Task Force (FATF) and other global regulators. By accurately identifying and assessing the risk of PEPs, financial institutions can strengthen their AML compliance programs, reduce the risk of money laundering and terrorist financing, and protect their reputation and assets.