Verify a Politically Exposed Person

Mitchell
MitchellAugust 29, 2019

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Verify PEPs

Politically Exposed Persons are individuals who occupy a prominent public position or function in a government body or international organisation. This definition also extends to their immediate family members and close associates.

Politically exposed persons are vulnerable in that they have the capacity to control or divert funds and to award or deny large-scale project for illicit gain. Due to this exposure to predicate offences such as bribery and corruption, if a customer is identified as a PEP they should be treated as higher risk. AIC article “Challenges in Dealing with Politically Exposed Persons.”

Knowing your PEPs

Politically exposed people can be organised into categories. These will act as a frame of reference for assessing the risk of each individual PEP and what measures and risk mitigation strategies should be performed for AML/CTF compliance:

  • Domestic PEPs are individuals who hold a prominent public position or function in a government body from the same jurisdiction as the reporting entity
  • Foreign PEPs are individuals who hold a prominent public position or function in a government body of a foreign country
  • International organisation PEPs are individuals who hold a prominent public position or function in an international organisation.
  • PEPs by association are individuals directly related to a PEP, such as an immediate family member or a close associate.

These categories are not intended to be prescriptive or the only people considered as PEPs. It is important to have a flexible definition of what is perceived as a PEP. If a global and all-inclusive list of PEPs were produced, it would also make it easier for criminals and terrorists to obtain the required information for targeting PEPs who may not receive as much scrutiny and enhanced due diligence when using a financial service.

For this reason, a risk-based approach should be taken when verifying all individuals regardless of their status as a PEP.

Identifying a Politically Exposed Person

Classifying an individual as a PEP is a preventative system, and should not be interpreted as stigmatising PEPs as being involved in criminal activity.

While holding the position of a PEP provides more opportunity to engage in money laundering and terrorist financing this does not necessarily mean they are, however, it should still be a priority of a reporting entity to protect their financial service from being used for the purpose of ML/TF.

Identifying a customer as a PEP is primarily used for measuring the increased risk associated with serving this customer due to their position in society. Checking a customer name against world leader and government ministry lists is included in the bronID Know Your Customer process.

Any individual who is identified as a PEP should automatically be given a medium to high-risk score triggering ML/TF risk mitigation processes and enhanced due diligence. As a reporting entity, your risk-based approach and procedures for these situations are drawn out in your AML/CTF program. Do I need an AML/CTF Program?

bronID PEP results card

You've just verified John Doe and they have appeared on a PEP watchlist, what happens next?

Measuring and Mitigating the ML/TF Risk of a PEP

With every new customer, a reporting entity must carry out the customer identification and verification procedures which apply to individuals. First, measure the level of risk in accordance with your customer risk assessment and procedures in order to Create and Update the ML/CTF Risk Profiles of your Customers. Then implement and execute on the strategies outlined in your AML/CTF program to mitigate the risks of money laundering and terrorist financing posed when serving this customer.

Based upon the results of this, if the individual is considered to be a high-risk customer such as a PEP, additional enhanced due diligence should be taken. The mitigation strategies for serving a PEP customer could be:

  • Obtain senior management approval before establishing or continuing a business relationship with the customer and before providing, or continuing to provide, a designated service to the customer.
  • Take reasonable measures to establish the customer's source of wealth and source of funds.
  • Comply with enhanced customer due diligence requirements under Chapter 15 of the AML/CTF Rules

FATF also provides guidance within Recommendations 12 and 22, on how to both identify and interact with PEP customers.

When verifying a customer as a PEP, conduct some of the outlined ML/TF risk mitigation measures and controls, for example enhanced due diligence. This way you are then able to calculate the residual risk of this customer. If the residual risk of this PEP customer falls within your customer risk appetite you can then provide a designed service, else you may choose to reject working with the customer. When providing services to politically exposed people implementing robust ongoing customer due diligence procedures is recommended as a risk mitigation tool.

Ongoing Due Diligence Procedures

It is good practice to take an ongoing risk-based approach implementing risk mitigation controls when providing service with all of the medium-high and high-risk customers especially any of your customers who are politically exposed people.

As listed within the AML/CTF Rules

  • a reporting entity must put in place appropriate risk-based systems and controls to determine whether any further ‘know your customer’ (KYC) information should be collected, updated or verified in respect of a customer.
  • a reporting entity must include a transaction monitoring program in Part A of its AML/CTF program.
  • a reporting entity must include an enhanced customer due diligence program in Part A of its AML/CTF program.

Keeping up to date with a PEP

When a person ceases to be a PEP a reporting entity should continue to apply a risk-based approach to determine whether an existing customer who is no longer a PEP should continue to be treated as a high-risk customer, often this process results in an individual reducing their risk level over time.

It is also important to note that an existing customer who may not have originally classified as a PEP can become a PEP. It is therefore important to perform ongoing due diligence on all customers over-time to maintain an up to date risk score.

Complying with your AML obligations can be a complex process, and yet a crucial piece for proving a legitimate service. bronID is here to help you navigate the complexities of the AML/CTF regulatory requirements.

By following our Knowledge Centre guides we aim to help you automated your AML/CTF compliance obligations and make achieving industry best practices the bronID standard.

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Mitchell
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