Chantel Breedt
Politically exposed persons (PEPs) may not represent a heightened risk to organisations, but, in compliance with legislation and regulations, they may be required to conduct specific PEP screening and due diligence. A complex global PEP landscape means that screening for PEP-related risk is not always straightforward – but it remains a critical element of a successful KYC and AML management strategy.
- Explore the current global PEP landscape space, looking at some key regulatory drivers for successful KYC and AML management.
- Uncover what best-practice approaches entities can use to adopt a risk-based approach.
The global PEP landscape
Preventative measures related to politically exposed persons (PEPs) is a key requirement of anti-money laundering (AML) legislation and guidance worldwide. Engaging with PEPs could inadvertently introduce risk into any organisation – and it is therefore essential for regulated entities to screen for PEP-related risk prior to beginning any new business relationship.
This is not, however, always straightforward. The global PEP landscape can be challenging to navigate, with regulations varying widely across jurisdictions. More than this, it’s a dynamic space, with frequent updates to regulations requiring organisations to monitor and adapt to such changes. For example, in the UK, recent amendments to the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 have introduced changes to requisite business practices relating to domestic PEPs.
Nevertheless, where applicable, identifying potential PEP-related risk prior to onboarding any new business relationship is crucial – and screening remains the best tool for pinpointing risk effectively and efficiently.
A one-size-fits-all approach won’t work
It is important to stress that a one-size-fits-all approach to PEP screening simply won’t work, because PEP-related risk depends on a number of factors.
For example, the need to identify PEPs and any associated risks increase in jurisdictions where there is a higher risk of bribery or corruption. Moreover, once a PEP leaves office, not all individuals present the same risks. Requirements stipulating how long post-office PEP status should continue is often determined at a national level. For example, the EU’s Fourth Anti-Money Laundering Directive (4AMLD) considers an individual a PEP for a minimum of 12 months after they leave office. Other countries apply varying periods – some taking the view that once a PEP, always a PEP. Even then, PEP status can be more nuanced, such as in Canada, where foreign PEPs are considered PEPs for life, whilst their domestic counterparts are deemed PEPs for a maximum of 5 years after vacating office.
Within this varied and inconsistent landscape, rules adopted by risk and compliance teams understandably vary, with specific screening rules assigning different risk levels to different types of PEPs, ensuring they tailor their PEP assessments according to local laws and factors such as citizenship, the country where business is being conducted, the period of inactivity after vacating office, and more.
What does a best-practice approach look like?
PEP screening is a crucial element of any effective AML/CFT compliance programme – and best-practice requires regulated entities to adopt a risk based-approach, in which resources are concentrated on the areas of highest potential risk.
It is important to stress that this risk-based approach also continues beyond onboarding, because risk is dynamic, and risk profiles change over time. Deciding the level of risk a PEP may pose and whether to engage with them is simply the starting point – ongoing screening is also essential.
Where heightened risk is detected or suspected, regulated organisations are required to conduct enhanced due diligence (EDD). EDD reports can therefore deliver detailed background information on PEPs, unpacking information such as their source of wealth (SOW), source of funds (SOF) and financial activities, while also highlighting any potential red flags.
Other important elements of a best-practice approach include maintaining robust records of the PEP screening process and fully documenting the reasons behind risk-mitigation decisions and any action taken.
The key take-away is this: while the specifics of PEP screening and monitoring depends on many factors, implementing a risk-based approach is essential. Not only does this approach boost efficiency, freeing compliance teams to concentrate on areas of higher risk and reduce cost, but – importantly – it gives organisations their best chance of identifying and mitigating risks in line with global regulations.
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