PEP: Politically Exposed Persons

Performing Due Diligence on PEPs

FATF requires that financial institutions apply a risk-based approach. This requires that regulated entities perform customer due diligence. What risk management system is appropriate for a financial institution depends on the nature of the institution’s business, the nature of its client profile, expected transactions and on other risk factors. 

However, when performing customer due diligence FATF provides that this should include,

• Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.
• Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.
• Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
• Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.

 In cases with higher business risk relationships FATF requires additional review known as enhanced due diligence such as,

• having appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person;
• taking reasonable measures to determine whether a customer or beneficial owner is a domestic PEP, a person who is or has been entrusted with a prominent function by an international organization, or a foreign PEP which FATF says always requires enhanced due diligence;
• obtaining senior management approval for establishing (or continuing, for existing customers) such business relationships;
• taking reasonable measures to establish the source of wealth and source of funds; and
• conducting enhanced ongoing monitoring of the business relationship.

FATF permits the use of Third Party providers as part of a robust customer due diligence program.

Nexis Diligence+ is a web-based third party risk and compliance tool for conducting due diligence. This due diligence software aggregates PEPs data from multiple sources to enable thorough checks of politically exposed persons.

Search & Retrieve API enables ongoing monitoring of specific records, such as PEP and watchlists, for integration with in-house systems for screenings.

Why are PEPs potentially risky

Due to their position and influence, it is recognized that many PEPs are in positions that can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing. 

What risks do organizations face if their PEP due diligence is insufficiently thorough?

Organizations that fail to perform adequate due diligence on their clients, business partners, and supply chains risk not only reputational damage but also fines. For example, in 2015 a bank was fined 72 million pounds sterling because the required PEP checks had not been performed.

Be on the alert: Doing Due Diligence on PEPs

PEPs call for enhanced due diligence, governance risk and compliance checks under Section 6 of the German Money Laundering Act (GWG). Among other things, the checks must clarify the origin of assets in order to prevent money laundering. In a risk-based approach, PEPs are automatically classed as high risk. A robust PEP check uses PEP lists of politically exposed persons. The regulatory authority or financial regulators established by the government is responsible for providing guidance, assessing and enforcing compliance with PEP standards to banks. Banks may oversee enhanced due diligence measures or legal action task based on the risk assessment. This may require intensive due diligence for higher-risk customers, especially those for whom the sources of funds are not clear.

In many organizations there is a widespread but mistaken idea that because you have worked with your business partners for many years, you know them sufficiently well and therefore do not need to perform a thorough risk and compliance check. This insight is usually lacking if you go further along the supply chain and realize that it affects the beneficial owner. This means that it is essential to check suppliers and also their suppliers against PEP lists to see if someone is a political figure.

With regard to holders of public office at sub-national level, PEP checks are usually regarded as unnecessary unless the person’s political importance is similar to that of a person in a similar public position at national level. In addition, KYC PEP checks are not necessary for business relationships that involve only occasional or very small financial transactions.

Nexis Diligence+ is a web-based third party risk and compliance check tool for conducting due diligence. This due diligence software aggregates PEPs data from multiple sources database to enable thorough checks of politically exposed persons or political figures.

A Search & Retrieve API enables ongoing monitoring of specific records, such as PEP and watchlists, for integration with in-house systems for proactive risk management and anti-money laundering (AML) checks.

What risks do organizations face if their PEP due diligence is insufficiently thorough?

Organizations that fail to check their business partners sufficiently thoroughly can expect not only reputational damage but also fines of an unlimited amount to stay safe from this avail Anti-money laundering services (AML) For example, in 2015 a bank was fined 72 million pounds sterling because the required PEP checks had not been performed.