Conducting a business relationship with a person having high social standing and holding a prominent public office presents itself with various business risks such as money laundering, frauds, corruption, bribery, embezzlement of state funds, bank fraud, terrorist financing, securities fraud and beyond. Various Risk assessment software are available in the regulatory technical markets to facilitate the process of conducting risk scores of potential politically exposed clients and
Automate Risk Assessment allows the financial firms to identify the prospective politically exposed client against millions of politically exposed persons holding positions of power from New York to Tokyo. The most challenging task for financial firms is to employ a risk assessment tool and make sure their pep screening systems comply with various financial compliance guidelines across various countries, regions, time zones, and continents. Navigating the pep screening guidelines such as the UK Modern Slavery Act, UK Bribery Act, United Nations conventions on drugs and crime, and the European Union directives, and identifying your politically exposed clients across various jurisdictions is a challenge indeed.
Integrated risk assessment tools that automate the Know Your Customer (KYC) database and information acquired on politically exposed persons are perpetually in “on” mode. This allows financial firms to have a proactive approach, identify risks beforehand, and manage the shifting powerful positions of politically exposed persons and their evolving circle of influence.
Evaluating the Risk Posed By Politically Exposed Persons
Comprehensive due diligence involves risk profiling and risk scoring a prospective politically exposed client. It is a mandated compliance procedure for all financial firms to perform. This involves verifying the original identity of a prospective politically exposed client, reviewing their past financial activities, conducting risk assessment and preparing their risk score profile, which actually means that to evaluate, observing, assessing and analysing the potential chances of committing financial crimes of a client that have immense social and political power, financial crimes such as bribery, corruption, money laundering, tax evasion, bank frauds, securities frauds, embezzlement of state funds and many more.
Why Should the PEP Status Be Reviewed Regularly?
The landscape involving politically exposed individuals is changing and evolving all the time. Their positions and circle of influence may continue to widen or grow smaller. With elections happening every four to five years, new appointments, resignations, sacking, retirements, births, deaths and marriages happening around the clock, the status of the politically exposed persons keeps on switching too.
Compliance officers should also have a hands-on approach to the evolving nature of the status of politically exposed individuals who may be retiring from their positions. For instance, in a country like Egypt identifying PEPs is essential and preparing their risk score profile by understanding the everlasting influence of military officials should always be taken into account as the military establishment exerts massive political influence, a retired military leader will still have influence over the decisions involving political power and state owned enterprises.
Compliance With Global Regulatory Guidelines
There are different compliance regulations issued by government organizations like European Union directives, and the UK Modern Slavery Act & the UK Bribery Act, international regulatory bodies such as United Nations Conventions on Drugs and Crime and law enforcement agencies, which all financial firms are mandated to act in accordance with. These organizations also made publicly accessible online PEP data for the financial industry to follow.
These PEP issuing agencies tend to have varying requirements depending on the country, region and jurisdiction. For instance, some regions make it mandatory to screen politically exposed persons classified into all kinds of categories whereas other regulatory guidelines emphasize the screening of foreign politically exposed individuals alone.
There is no hard and fast or clear-cut definition of politically exposed persons as indicated by the Financial Action Task Force (FATF). All powerful people holding influential public office and having high social standing are prone to committing financial crimes like money laundering, tax evasion, and corruption, and hence considered high-risk clients for the financial world.
Consequences of Neglecting PEP Risk Assessment Protocols
Financial crimes hinder the economic growth of countries and disrupt the social stability of societies. Financial crimes fund the illicit activities of organized criminal operations and sometimes lead to wars and political instability. Terrorist financing alone costs the lives of millions of humans and exacerbates the already existing social problems such as inflation, unemployment, poverty, extremism, costly housing and beyond.
Employing automated risk assessment and keeping an eye on the financial activities such as money transactions of powerful individuals, known as politically exposed persons in the world of regulatory compliance, can help mitigate the risks associated with conducting business with PEP clients.
Financial organizations are held accountable for allowing their platforms to fund criminal activities and be accomplice with their clients involved in criminal activities such as tax evasion, money laundering, bribery, corruption etc. For example, in the year 2021, financial firms were slapped with $9.95 billion due to their failure to comply with regulatory guidelines. Likewise, in 2020, the regulatory fines jumped to a shocking $22.86 billion.
