Are PEPs Always High Risk?
Is Every Politically Exposed Person Considered a Risk?
Individuals identified as politically exposed persons (PEPs) have important roles that can make them susceptible to dealings that involve criminal behavior like money laundering, terrorism financing, corruption and bribery. PEPs are not necessarily going to be involved in crimes like money laundering or bribery, but having procedures in place to identify and monitor these accounts is critical.
Under U.S. law, companies must accurately assess risk exposure when establishing new business relationships with PEPs by implementing the appropriate anti-money laundering (AML) measures. Doing so helps to protect them from the consequences and blowback of the financial crimes listed above, among others.
In this article, we'll review the risk factors that influence a PEP's status and how businesses can best mitigate risk while designing and implementing procedures regarding PEPs.
Learn more about how Cognito Screening can help you screen for PEPs easily.
What Qualifies Someone to Be a PEP?
A PEP is defined as someone with a high-profile public or political role or who maintains a very prominent public role. Not surprisingly, the criteria for a PEP are broad and vary from country to country.
Regardless, many companies adhere to the criteria provided by the Financial Action Task Force (FATF), which categorizes PEPs as:
- Government officials: An individual who currently holds or previously held a domestic or foreign government position, including elected or unelected roles, could be considered a PEP. Political party officials: Senior officials appointed to roles in major political parties in the U.S. or other countries could be classified as PEPs.
- Senior executives: Individuals serving in senior executive roles (such as board members) in a government-owned commercial business or an international organization may also be considered PEPs.
- Relatives and close associates: Immediate family members of a senior executive, political official or government official can also be PEPs. That could include spouses, siblings, children, parents and other close relatives.
There are varying levels of risk for all types of PEPs, which affects the amount of scrutiny a company must place on each individual. Although every PEP is not always high risk, businesses and financial institutions must do their due diligence to avoid doing business with someone who is likely to commit financial crimes or other fraud.
What Are the Risk Factors?
The level of risk associated with a PEP depends on several factors, including their:
- Geographic location
- Level of influence or authority
Additionally, when assessing the potential risk of a PEP, companies should also consider the purpose of the account and its anticipated activity, the services or products requested and the size or complexity of the account relationship.
As you can see, a PEP's risk level will vary quite a bit depending on the individual situation and the factors listed above. As a result, some PEPs are considered higher or lower risk for certain crimes like foreign corruption or money laundering.
How to Mitigate Risk
Whether a PEP's risk is determined to be low or high, businesses must take action to prevent criminal behavior that could harm their financial health and reputation. The best solution is to implement appropriate PEP screening measures as a part of their AML programs. That way, they can determine their clients’ PEP status.
When companies or financial institutions open accounts with new customers, they employ KYC (know your customer) procedures to obtain information about the customer for identification purposes. They also perform customer due diligence, a KYC process of doing background checks on each customer to assess their risk before establishing a business relationship with them.
The types of customer due diligence that companies and financial institutions may employ when opening a new account with a customer include:
- Customer due diligence (CDD): CDD is a background check process that helps companies assess the level of risk a customer carries.
- Enhanced due diligence (EDD): EDD is a more strict verification procedure used for customers classified as high risk. Typically, this involves verifying the customer's identity and address and evaluating their risk category. Companies may also need to obtain additional information when necessary.
In addition to conducting CDD and EDD during the customer onboarding process, companies should prioritize ongoing account monitoring. Customers are not static, and their status will change over time. As such, companies must monitor their PEP accounts regularly to catch any of those changes and reassess their risk profile.
Since PEP laws also change over time, organizations must be aware of those changes and how they affect their business to adjust their processes accordingly.
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The risk mitigation efforts companies must take to comply with KYC and AML laws can be expensive and time consuming — not to mention, the likelihood of human error is high when an organization completes the entire process manually.
Cognito's AML watchlist and PEP screening software offers automated solutions that complete reliable CDD and EDD as well as PEP screening procedures without the drawbacks of doing it all manually. It's designed to provide a frictionless customer experience by starting the screening process with as little information as necessary and gradually filling out their profile.
Our application programming interface (API) is sophisticated and secure and complies with best practices for data protection. It's also flexible to meet the needs of any organization and will maintain ongoing sanction screening and automated Office of Foreign Assets Control (OFAC) screening. To meet ongoing compliance needs, Cognito's API also provides automatic re-scans to catch any changes in the status of your customers.
If you're searching for a complete compliance customer relationship management (CRM) solution, Cognito can help. Let us help you improve your company's efficiency and organization with our watchlist screening product. Sign up for free or contact our sales team today for more details.