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What to Do When Working with PEPs

Working with PEPs requires extra due diligence. In this article, we outline how to screen for PEPs, and how to work with them effectively.

A politically exposed person (PEP) is an individual who is currently or has previously been entrusted with a prominent public position. PEPs are considered to be higher risk customers to both financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) because they are more likely to acquire assets through illegal means, such as bribery and corruption. 

That being said, being a PEP does not mean that someone is a criminal or has participated in any criminal activity. The goal of these procedures and regulations are to prevent individuals in positions of power from abusing the trust of the public and financial institutions for personal gain (such as through money laundering).

There are a number of extra measures you need to have in place when working with PEPs. Here we will outline what defines a PEP, and what steps you need to take when working with one. 

What is a PEP?

As mentioned above, a PEP is someone who currently or has at some point held a prominent public position, but the true definition is more detailed than that. There is no universally agreed upon definition of what a PEP is, but most countries base their definition on the Financial Action Task Force (FATF) guidelines.

The FATF defines a PEP as:

  • A current or former senior official in the administrative, executive, judicial, legislative, or military branch of a government (elected or appointed)
  • A senior official of a major political party
  • A senior executive of a government-owned commercial enterprise, such as a corporation, business or other entity formed by or for the benefit of any such individual
  • An immediate family member of such an individual; meaning a spouse, parents, siblings, children, and the spouse’s parents or siblings
  • Any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate

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As you can see, there are many different types of PEPs, and each has its own level of risk. A higher risk PEP would be a head of state or government, a top ranking official in a political party, or a member of government or parliament. A low risk PEP would be someone who was a mayor, a senior official of an international or supranational organization, or a member of local government. Generally, international PEPs are considered to be higher risk than domestic PEPs.

As a rule, once someone is a PEP they remain one for life. However, their risk factor may decrease over time, especially if they were low risk to start with. PEPs do retain their full status for one year after leaving their position, but family members and associates are no longer considered to be a risk once the PEP leaves office. 

Will I work with PEPs?

Whether or not you will work with PEPs and subsequently need to screen them depends on what business you are involved in. Financial institutions are the most common, but DNFBPs should not be ignored. DNFBPs include the following professions: 

  • Lawyers
  • Casinos and other gambling service providers
  • Real estate agents
  • Company service providers
  • Dealers in precious stones and/or metals
  • Notaries and other independent legal professionals
  • Auditors, external accountants, and tax advisors
  • Trusts

If your business falls into any of the above categories, it is extremely important that you screen for PEPs and also ensure that you have adequate procedures in place. This is required by law. Although cryptocurrency exchanges and initial coin offerings (ICOs) are not on the above list, it is worth the effort for them to screen for PEPs as well.

How to screen for PEPs

Taking a risk-based approach with PEPs is important to protect both your potential clients, and your business. Conducting a risk assessment is vital. Here, enhanced Customer Due Diligence (CDD) is always necessary. This includes not only verifying the identity of your potential client and having an automatic screening system in place, but also utilizing a technology called “fuzzy matching”.

Fuzzy matching technology allows the detection of data matches that are not a 100% match. For example, fuzzy matching could detect a PEP even if they use an alternate spelling of their name. Normal screening technologies would require an exact match. If a PEP is genuinely corrupt, they are more likely to provide false information about themselves, which is why fuzzy matching is so important.

It is also necessary to check a PEPs country of origin and compare it against sanction lists. Ideally, this would already be included in your automated screening process. For example, a prospective customer living in North Korea should almost always be treated as a high risk individual.

Another important, and perhaps overlooked, step to take is to look at the public information that is available regarding your potential client. Were they recently elected into public office? Were they appointed to a higher government position? Here the internet, news, and social media may be of use to you. Additionally, institutions and businesses should conduct an in-depth analysis into PEPs, mostly to determine if they have previously been involved in any scandals or misconduct.

It may also be worth your while to check your prospective customer against commercial research databases. There you may discover that your customer is a PEP or closely related to one. While you can ask a potential client if they are a PEP, they might not know what that means or may not be very forthcoming with an answer for a multitude of reasons.

Lastly, it is necessary to determine if a PEP is an Ultimate Beneficial Owner (UBO). Not only are certain PEPs in a position to obtain significant amounts of wealth as a result of illegal actions, they could also be the owner of a far-removed parent company, have controlling influence over the board, or control the property of a business entity. While having a complex business structure is certainly not illegal, it can be a way for PEPs to circumvent regulations.

Ultimately, managing PEPs effectively will come down to constant and consistent due diligence. Institutions that employ innovative tech-based screening solutions with real-time data, fuzzy matching capabilities and appropriate human supervision will be those best prepared to manage this ever-fluctuating corruption risk.

How to work with PEPs

Working with PEPs requires constant monitoring and due diligence. A PEPs status can change at any time, so it is necessary to have a system in place to identify potential risk factors such as relationships, sources of wealth, et cetera. 

Once again, the media is a useful tool and one that should be taken advantage of, and this includes adverse media. It is important to know if a PEP has been implicated in an illegal activity or scandal in order to properly regulate their activity. Additionally, your business could possibly suffer reputational damage for being involved with such a person. It is important to stay on top of any negativity for both regulatory and PR purposes. 

It is also vital to be aware if a PEP receives a promotion or holds a new, more powerful type of office, as their risk factor will increase. Once again, having an automated system alongside manual monitoring is almost a necessity, and will save you a lot of time and resources.

Something many forget is that a normal customer may become a PEP at any point in time. Again, this is where media can be useful for learning such information. Once a customer becomes a PEP, it is necessary to determine where their wealth and funds are coming from and to keep a watchful eye on their activities within your business. 

Lastly, any accounts held by PEPs need to be kept up to date. Not only does this include things like the position they hold and where their money is coming from, but also more generic things like their address and other material changes. It should be noted that risks associated with material changes are heightened when PEPs are involved. 

Conclusion

In 2020, the 5th AML Directive comes into effect in the European Union. This means that EU-based businesses will have to take extra precautions when working with PEPs. Additionally, member states of the EU will need to provide lists of PEP positions in their governments in order to help make identifying PEPs easier. It is likely that as time goes on, more countries will follow in the footsteps of the EU, and laws surrounding PEP regulations will become stronger.

In order to efficiently and legally work with PEPs, a number of measures need to be in place to accurately assess risk as time goes on. A combination of manual monitoring alongside a thorough, automated system is the best approach.

There are millions of people across the globe that occupy politically exposed positions, and who occupies those positions is constantly changing. At KYC-Chain, we use the latest technologies and integrated PEP databases to monitor new and existing Politically Exposed Persons (PEPs), and their web of connections.