The significant influence of PEPs on KYC and AML
In the world of "Know Your Customer and Anti-Money Laundering" the phrase Politically Exposed Person/(s) or otherwise known as PEP, is one that you hear most often. A Politically Exposed Person is someone who, through their prominent position or influence, is more susceptible to being involved in bribery or corruption. In addition, any close business associate or family member of such a person will also be deemed as being a risk, and therefore could also be added to the PEP list.
The designation "Politically Exposed Person" dates back to the late 1990s, in what was known as the "Abacha Affair." The corrupt official, in this case was a Nigerian dictator who organised a large-scale, systematic theft of assets from the Nigerian central bank for some years with his family members and associates. It is believed that several billion dollars were stolen and that the funds were transferred to multiple bank accounts in the United Kingdom and Switzerland.
Even though the term "PEP" has been around more than 20 years there is a lot of ambiguity on the exact definition. Most of the countries have based their definition of PEP on the 2003 FAFT standards.
FATF is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering. In 2001 the purpose expanded to act on terrorism financing. It monitors countries' progress in implementing the FATF Recommendations by ‘peer reviews’ (‘mutual evaluations’) of member countries.
Almost all of the FATF member countries treat domestic and foreign PEPs with heightened scrutiny. The FATF guidance implies that if a person is a foreign PEP, it by default makes them a domestic PEP in their own country. This makes sense for crime prevention because to export proceeds of crime, the PEP must first use their own domestic financial system and thus, importance is placed on domestic, and non-foreign PEPs.
4MLD has brought in a new dimension to the definition of PEP; it has now been widened to include domestic individuals occupying prominent public positions; this could include MPs, members of supreme courts, ambassadors, high-ranking military staff and managers of state-owned enterprises. The provisions will similarly apply to “close associates” and family members of PEPs.
4MLD has made it clear that in all scenarios where PEP is involved, Enhanced Due Diligence measures should be followed.
Most financial institutions view a PEP as a potential risk and perform enhanced monitoring of accounts. There are vendors available in the market who own particular database of PEPs and other high-risk customers, such as Lexis Diligence by Lexis Nexus, World-Check by Thomson Reuters.There are quite a few startup firms, using artificial intelligence and machine learning techniques which can basically navigate through millions of publicly available records, apply fuzzy logic and throw up the exact matches for the financial institutions pursue.
These requirements are preventive (not criminal) in nature, and should not be interpreted as stigmatising PEPs as such being involved in criminal activity. Refusing a business relationship with a PEP simply based on the determination that the client is a PEP is not the purpose of the entire activity; the purpose is to rather prevent financial institutions being used as a vehicle for money laundering.
Source: Financial Action Task Force- Recommendations