Different levels of PEP and compliance management with PEP Screening

People in power holding prominent public offices are considered high-risk by the financial industry and financial regulators due to their high social standing and wide influence. High-risk customers are known to be prone to committing financial crimes and abusing the power they hold. Therefore, the financial regulators mandate the financial firms to identify and keep an eye on the financial activities of their high-risk powerful clients given their vulnerability to commit financial crimes and get away with it. Hence, the financial firms such as banking and non banking sectors are recommended to employ PEP screening solutions to stay vigilant and protect their businesses against the financial criminals. 

Different Levels of Politically Exposed Persons

To determine the PEP status of customers, financial firms classify their politically exposed clients into the following categories from high-risk customers to low-risk customers which helps in identifying PEPs.

Level I of High-Risk Politically Exposed Persons

The high-risk politically exposed persons consists of top power elite of the world which includes:

  • World leaders, heads of state & heads of government, monarchs, CEO of Multinational companies like Facebook, Amazon, SpaceX, and others.
  • Chief of the Army staff and top military generals, chief justices, directors of law enforcement agencies like the Central Intelligence Unit (CIA), Federal Investigative Bureau (FBI, and so forth.
  • Leaders of the political parties like Republican Party leaders in the US, Democratic Party leaders, leaders of the Labour Party in the UK and so forth. 

Level II of Medium-High Risk Politically Exposed Persons

The medium to high risk politically exposed persons consists of:

  • Cabinet Ministers, senior staff of the military including Lieutenant Generals and Major Generals, senior executives of law enforcement agencies.
  • Royal family members, Figure-heads of religious groups like the Pope, Supreme leader Ali Hosseini Khamenei, or spiritual leaders like the Dalai Lama.
  • State diplomats, government ambassadors, senators and parliamentarians. 

Level III of Medium-Low Risk Politically Exposed Persons

  • Senior political party members, Board of directors of state-run organizations, heads of non-government organizations.
  • Heads & board members of Trade Unions, middle ranking diplomats, members of state legislatures, commissioners, consuls and high ranking bureaucrats. 

Level IV of Low-Risk Politically Exposed Persons

  • City mayors, senior members of city councils, district, county.
  • International organizations officials, senior officials of sporting organizations. 

What Sources of PEP Lists Financial Firms Should Comply With?

Financial businesses are recommended to stay vigilant and comply with PEP lists issued by government organizations, international regulatory bodies and law enforcement agencies from around the world. Sometimes,  the PEP screening process becomes tricky for financial firms as identifying a politically exposed person gets challenging, especially when onboarding a foreign politically exposed person given their background data is not within reach. 

Following are some of the sources that the financial firms should employ before onboarding a potential customer. 

  • Asset disclosure databases.
  •  PEP databases which are maintained and made public by the government organizations.
  • Directory of world leaders & cabinet ministers maintained by the law enforcement agencies like Central Intelligence Agency (CIA).
  • PEP databases maintained by some private enterprises
  • Greylists & blacklists issued by international regulatory bodies like Financial Action Task Force (FATF) 

Freely accessible PEP lists by the government organizations tend to be unreliable due to their outdated PEP data and incomplete PEP lists. They tend to offer too little information which usually results in high false positives. This ends up wasting a lot of time to deal with false positives and avoid the risk of missing accurate matches. 

Compliance officers should employ PEP lists that comprise updated data and cover all regions, and countries. It must also provide updated PEP data on their close associates and family members. A reliable PEP lists tends to be 

  1. Updated, accessible and readily available. 
  2. Its PEP criteria is in line with the guidance provided by the international regulatory bodies and government organizations. 
  3. Comprises comprehensive background PEP data.
  4.  Readily update any change in PEP current role. 

Ramifications of Non-Compliance With PEP Screening

People sitting in the corridors of power are more vulnerable to exploiting the influence and power owing to their powerful public office. They are more prone to committing financial crimes such as terrorist financing, corporate frauds, bribery, money laundering, corruption, embezzlement of government funds, tax evasion, securities frauds, bank frauds and so on and so forth. Therefore, The Financial Action Task Force in their Recommendation 12 & 22 obligates the financial industry to conduct PEP checks before starting any business relationship with their PEP client. 

Negligence in conducting Anti-Money protocol such as PEP screening could also cause economic and reputation problems for the financial institutions themselves. The risk of reputational damage is always high when dealing with Politically Exposed Persons who have wide public influence and high social standing. Therefore, a financial firm must PEP risk assessment report before considering providing financial services to a client having a prominent public office.

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