Political Exposed Persons (PEPs) encompass individuals who hold influential positions in society, such as politicians, directors of international organizations, bureaucrats, prominent foundation members, association leaders, and trade union executives. Additionally, close partners and family members of PEPs are also classified as PEPs. The Financial Action Task Force (FATF) classifies PEPs into three categories: Foreign, Domestic, and International, based on their respective risk levels.
Globally, trillions of dollars are exchanged as bribes each year, posing a significant challenge for countries worldwide. Consequently, financial institutions should consider PEPs as high-risk individuals due to their potential involvement in bribery and corruption. However, it is not prohibited for financial institutions to open accounts for PEPs. AML regulators mandate that financial institutions identify PEPs due to the potential risks associated with high-profile crimes.
Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures form the foundation of PEP controls as AML regulations. These procedures are implemented during customer onboarding, enabling the determination of the customer's risk level. PEP detection is an integral part of the CDD procedures, requiring companies to conduct PEP screening in accordance with AML regulations during the customer onboarding process. However, the specifics of PEP screening compliance may vary across different countries.
Global PEP Regulations: A Comprehensive Overview
In the United Kingdom, there are robust regulations in place to address the risks associated with PEPs. Financial institutions, virtual currency providers, luxury goods traders, art traders, and tax experts operating in the UK have specific responsibilities when it comes to PEP screening and sanction screening.
As part of the customer onboarding process, institutions in the UK are recommended to identify their customers and carry out these transactions automatically. In line with PEP screening regulations, these institutions are obligated to conduct thorough screening of foreign, domestic, and international PEPs.
The regulatory framework governing PEP screening in the UK is primarily overseen by the Financial Conduct Authority (FCA). Financial institutions, including banks, are required to adhere to the FCA regulations, which mandate the screening of PEPs and the implementation of effective measures to detect and mitigate the risks associated with PEPs and potential financial crimes.
To ensure compliance with PEP screening regulations, financial institutions, virtual currency providers, luxury goods traders, art traders, and tax experts are expected to have robust screening systems in place. This includes conducting comprehensive checks on customers against relevant PEP and sanction lists.
By adhering to these regulations, institutions operating in the UK contribute to the prevention of money laundering, terrorist financing, and other illicit activities associated with PEPs. The stringent PEP screening requirements help safeguard the integrity of the financial system and ensure compliance with the UK's anti-money laundering and counter-terrorism financing obligations.
In Europe, there are comprehensive regulations in place to address the risks associated with Politically Exposed Persons (PEPs). These regulations encompass various screening requirements that must be fulfilled during a customer's initial engagement as part of the KYC process.
PEP screening in Europe goes beyond just identifying PEPs. It also includes investment screening, screening of high-risk countries, and screening for Ultimate Beneficial Ownership (UBO). These screenings help financial institutions and other relevant entities assess and mitigate the risks associated with PEPs and high-risk individuals.
As part of the risk-based approach to AML/CFT in the EU, if a customer is identified as a PEP or if they originate from one of the high-risk third countries, Enhanced Due Diligence (EDD) procedures are triggered. These procedures involve conducting more thorough investigations and implementing additional measures to ensure the integrity of financial transactions.
The EU's PEP screening regulations also extend to EU-sanctioned countries and high-risk countries that lack sufficient AML/CTF regimes. For instance, countries like Albania and Bosnia and Herzegovina, identified as high-risk by both the FATF and the EU, require further PEP reviews.
PEP screening regulations in the Middle East vary across different countries, and it is important for institutions to understand and comply with the specific requirements in each jurisdiction. The Middle East and North Africa Financial Action Task Force (MENAFATF) plays a significant role in shaping AML/CFT standards and regulations in the region.
Countries in the Middle East, such as Oman, Yemen, United Arab Emirates, Saudi Arabia, Iraq, Jordan, Israel, Lebanon, Turkmenistan, and Afghanistan, have implemented PEP screening regulations that encompass foreign, local, and international PEPs. These countries recognize the importance of screening individuals in prominent positions to mitigate potential risks.
However, there are variations in PEP screening requirements within the region. For instance, Iran mandates incumbent organizations to screen both foreign and international PEPs, while Syria focuses on screening foreign and local PEPs. Additionally, Armenia and Azerbaijan only require screening for foreign PEPs.
It is noteworthy that several Middle Eastern countries, including those associated with Iran, have been identified as high-risk jurisdictions for AML/CFT purposes due to the prevalence of government corruption. Consequently, the screening of PEPs should be conducted with a heightened sense of risk awareness and stringent measures to safeguard against potential financial crimes.
Turkey has recently implemented significant updates to its regulations regarding PEPs in 2022. While there was previously no screening requirement for PEPs in Turkey, the country has taken significant steps to align its anti-money laundering efforts with international standards, including the EU's fourth anti-money laundering regulations.
As Turkey has not yet joined the European Union, it is not directly obliged to comply with EU anti-money laundering software. However, to strengthen its AML framework, Turkey has adapted its laws to align with the EU regulations. The determination of Political Exposed Persons and the obligations related to PEP screening in Turkey are now governed by the Turkish Financial Crimes Investigation Board (Masak) and supervised by the Banking Regulations and Supervision Agency (BRSA).
These regulatory bodies play a crucial role in overseeing the implementation of PEP screening procedures in Turkey. The updated regulations aim to identify and mitigate the risks associated with PEPs, who hold prominent positions in society and may have a higher potential for involvement in money laundering and corruption.
While specific screening requirements for PEPs are not mandated, financial institutions and relevant entities operating in Turkey are encouraged to exercise due diligence in identifying and assessing PEP-related risks. By implementing robust internal controls and risk management practices, these institutions can effectively address the potential threats posed by PEPs.
The recent regulatory developments in Turkey underscore the country's commitment to combating financial crimes and ensuring the integrity of its financial system. By aligning its AML laws with international standards, Turkey aims to enhance transparency, protect against money laundering, and contribute to the global efforts in combating financial crimes.
Across the African continent, various regulations exist concerning the screening of PEPs. Many African states, including South Africa, are members of the FATF and have implemented regulations that mandate firms to conduct PEP screening for foreign, local, and international PEPs. However, it is important to note that jurisdictions in Africa can vary significantly, and certain states face challenges related to high levels of corruption and financial crime.
Notably, the FATF has identified Botswana, Uganda, Zimbabwe, Ghana, and Botswana as high-risk countries in Africa. These countries require heightened vigilance and thorough screening measures to address the associated risks.
While most African countries have implemented screening requirements for all categories of PEPs, there are notable variations across the continent. For instance, firms in Egypt, Mauritania, Eritrea, Guinea, Sierra Leone, Somalia, Malawi, Namibia, and Eswatini are required to screen both foreign and domestic PEPs. In Angola, the focus is on screening foreign and international PEPs, with no requirement for local screening. Conversely, Algeria, South Sudan, and Tanzania only require screening for foreign PEPs.
It is worth mentioning that the requirement for PEP screening in South Africa was established following the 2009 FATF assessment. This assessment highlighted the importance of implementing robust measures to identify and mitigate the risks associated with PEPs operating within the country.
Given the diverse landscape of regulations and the unique challenges faced by different African jurisdictions, financial institutions operating in Africa need to navigate these variations diligently. By adhering to the prescribed screening requirements, institutions can contribute to the prevention of financial crimes, enhance transparency, and protect the integrity of their operations in line with international best practices.
United States of America
In the U.S., if a firm identifies or suspects the involvement of a PEP in money laundering activities, it is required to submit a suspicious activity report (SAR) to the Financial Crimes Enforcement Network (FinCEN). This reporting mechanism helps ensure timely information sharing and assists in the prevention and detection of financial crimes.
Moving on to Canada, PEP screening is also an integral part of the country's AML/CTF program. The Proceeds of Crime and Terrorist Financing Act (PCMLTFA) in Canada establishes specific requirements for screening local PEPs. While foreign PEPs are generally considered high risk in Canada, it is crucial to identify and monitor the risks associated with local PEPs upon their recruitment or establishment within the country.
By incorporating PEP screening measures into their AML/CTF programs, both the United States and Canada aim to strengthen their financial systems' integrity and combat illicit financial activities effectively. Compliance with relevant regulations, such as submitting SARs in the U.S. and adhering to the PCMLTFA in Canada, plays a critical role in maintaining the vigilance necessary to protect against money laundering and terrorist financing threats.
It is important for institutions to be aware of the particular PEP scanning requirements in different jurisdictions and comply with them accordingly. PEPs present significant challenges in combating money laundering in several Asian countries due to the prevalence of government and institutional corruption.
For instance, financial institutions in the Philippines are required to screen both foreign and local PEPs, as well as international ones. Meanwhile, Cambodia only mandates screening of foreign and international PEPs. China, New Zealand, Vietnam, Japan, South Korea, and India only require the screening of foreign PEPs. Uzbekistan, on the other hand, does not have any specific requirement for PEP screening at the moment.
Certain Asian countries pose a higher risk for money laundering, which demands increased vigilance. Myanmar, Cambodia, and Pakistan are currently under additional monitoring by the Financial Action Task Force (FATF). Additionally, North Korea is on the FATF blacklist due to significant deficiencies in its AML framework.
To address the AML risks associated with PEPs in Asia, companies operating in the region should be prepared to tackle these challenges. They should implement strong AML measures, which include comprehensive PEP screening, to reduce the risk of financial crimes. It is crucial for institutions to stay up-to-date with regulatory developments in each jurisdiction and comply with local AML regulations and FATF recommendations.