Politically Exposed Persons or PEPs can be tied to various areas of financial risk – such as fraud, corruption, money laundering – making it important to understand if someone is a PEP before they are onboarded to your customer or supplier network. And, as PEP status can change with some frequency, it’s also imperative to know where PEPs exist across your entire customer base/business network.
Globally, there are millions of PEPs from Albania to Zimbabwe, and everywhere in between etc. Moody’s Analytics, for example, has data on more than 2.7 million PEPs. Only a relatively small percentage of those people defined as a PEP will ever be involved in organized or financial crime, however, PEP status does bring an elevated level of risk due to a PEP’s position of power and influence.
Ensuring compliance with different global regulation is a key component of PEP risk management. European Union directives, United Nations conventions on drugs and crime, the UK Bribery Act, and the UK Modern Slavery Act are just a few of the frameworks institutions must navigate in relation to PEPs. However, PEP screening requirements can vary widely between jurisdictions. While some African nations, for example, require screening for all categories of PEPs, others mandate screening only for foreign PEPs.
To address PEP-related risks, the Financial Action Task Force (FATF) issued its guidelines advocating a risk-based approach - advising organizations to conduct thorough due diligence and implement risk mitigation measures. And while the FATF guidance is clear, there is no universal definition for what constitutes a PEP, so compliance teams must be alive to the applicable regulation and definitions in their operational jurisdiction.
Further complications arise in PEP screening, because as well as the millions of elected or appointed individuals who are PEPs, people can also be “PEPs by association.” Through marriage, birth, business partnership, millions of PEPs by association may be part of a screening process.
False positives are also an area of focus in PEP screening. Many people share identical names, which means individuals can be incorrectly flagged as a PEP. This issue can be mitigated through use of intelligent screening solutions that use automation to analyze and filter PEP data, such as date of birth and year of birth, which can reduce false positives.
The PEP landscape is continually in flux – elections, appointments, births, deaths, and marriages all contribute to changing PEP status. There are arguments for taking the approach of “once a PEP, always a PEP.” This is because of influence – be that current, future, or residual – which may never be lost to someone who has been categorized a PEP. For example, a retired, but senior, politician may always have the ability to influence decisions involving public funds of stated owned enterprises.
These factors make managing PEP-related risks dynamic to say the least.
Perpetual KYC provides an effective, risk-based approach to due diligence and monitoring of PEPs risk. pKYC enables organizations to automate data checks during an onboarding process that identify PEPs and PEPs by association. For example, if there is a PEP who is an ultimate beneficial owner of an organization being onboarded, checks can reveal this information, and show what percentage ownership they have. In addition, checks can also show what level of risk a PEP represents based on information such as the role they perform, their seniority, and which country they’re based in.
After onboarding, organizations can use pKYC to carry out a continual risk assessment process in near real-time that analyzes a PEP’s risk profile for changes or identifies new PEPs or PEPs by association. Perhaps a PEP is onboarded and a risk factor changes – maybe there is a new negative news story linking them to corruption – this can be flagged to compliance teams and action taken accordingly. Or, if a customer/entity has been onboarded and there is an election with a new PEP created, this can also be flagged to compliance teams to trigger enhanced due diligence.
pKYC offers organizations dynamic, automated, integrated risk assessment, so that it’s possible to know whom you are doing business with and to make better decisions based on an accurate picture of risk.
Moody’s Analytics offers a platform that automates perpetual KYC integrated with powerful data that means PEP screening is “always on”. This helps organizations identify risk, make decisions based on their risk appetite, and manage the dynamic nature of PEP-related risk.
Here are three other elements to PEP risk management and compliance we can help with:
Moody’s Analytics KYC is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence.
Our intelligent screening solutions are designed to help organizations with efficient, effective PEP screening, as well as a host of other areas of compliance and third-party risk management.
Customers build their own unique know your customer (KYC) ecosystems. They use our innovative AI, flexible workflow orchestration, access to real-time data, analytical insights, and integrations with other global data providers to support a risk-based approach to compliance.
Get in touch for more information on how we can support your business with PEP screening – we would love to hear from you.