Customer Due Diligence (CDD) is not only about verifying identities, but also evaluating which customers present higher money laundering risks. So how is this established? This is done through examination of contextual information – such as political status, negative media, personal or professional connections, and most importantly an individual’s involvement in criminal activity (real or potential).
In some circumstances KYC/AML (Know Your Customer/Anti-Money Laundering) investigations reveal higher risk customers, known as Politically Exposed Persons (PEPs) and Special Interest Persons (SIPs).
What/Who is a Politically Exposed Person (PEP)?
PEPs are defined as individuals with high-profile political roles, or people who have been entrusted with a prominent political function. Due to the conspicuous positions they hold, they can present a higher risk of being involved in money laundering and/or terrorist financing.
It is important to note that PEP status does not automatically predict criminal behaviour, and that all monitoring requirements are simply preventative in nature. However, the extra risk exposure PEPs bring means that reporting entities must apply additional AML/CFT measures, when necessary, before establishing business relationships. This may mean conducting Enhanced Due Diligence (EDD), and it also means ongoing monitoring should occur to ensure reporting entities don’t miss changes in a PEP’s risk profile.
The criterion for PEPs varies globally and appears very broad. However, the Financial Action Task Force (FATF) issue frequent recommendations on PEPs, categorising them as:
- Government Officials
- Political Party Officials
- Senior Executives
- Relatives and Close Associates
Government Officials: are current or former officials appointed to domestic or foreign government positions.
Political Party Officials: are senior officials appointed to roles in major political parties.
Senior Executives: serve in positions, such as directors or board members, in government-owned commercial enterprises, or international organisations.
Relatives or Close Associates: include immediate family members of the previously mentioned - Government or Political Officials, or Senior Executives. This means spouses, parents, siblings, and spouse’s parents and siblings.
What/Who is a Special Interest Person (SIP)?
Like PEPs, SIPs are sanctioned because they present elevated risks of money laundering. In their case, however, this risk usually is predictive of criminal behaviour – due to their real or suspected involvement in crime.
More specifically, SIPs are likely high-profile individuals who have either been convicted of financial/organised crime, or they have been subject to said investigations. SIPs may be identified via intelligence gathered during KYC/AML screening. SIPs are included on First AML’s watchlist, and should be considered high risk by the firms doing business with them.
Activities which may warrant an individual’s SIP status include:
- Financial crimes such as money laundering, fraud, tax evasion or theft
- Terrorism or the financing thereof
- Drug, weapons or human trafficking
- Corruption, bribery or extortion
- Organised crime, or
- War crimes
Again, like PEPs, firms entering business relationships with SIPs should consider the issue of RCAs (Relatives and Close Associates) when determining risk levels. Although it is not illegal to deal with SIPs, firms with high internal AML control, or firms concerned with reputational risks, should consider this status when engaging new customer relationships.
About First AML
First AML is an AML technology provider, and the maker of Source, an all-in-one AML platform. Source powers thousands of compliance experts around the globe to reduce the time and cost burden of complex and international entity KYC. Its enterprise-wide, long term approach to the KYC / CDD data lifecycle addresses time and cost challenges while minimising compliance, reputational and security risks.