High-profile politicians and public officials are considered especially vulnerable to criminal behaviour as they exert substantial influence, and usually have access to a myriad of resources. This means, PEP screening aids reporting entities in identifying and managing risks associated with new and ongoing business relationships.
While all PEPs may be susceptible to money laundering activity, not all PEPs present equal risk – some may be considered more dangerous than others, warranting extra scrutiny. Regulatory institutions, like the Financial Markets Authority and Reserve Bank of New Zealand, recognise this and take care to draw a line in the sand by distinguishing domestic PEPs from foreign PEPs.
Most countries align with the Financial Action Task Force (FATF) definition of foreign PEPs – “individuals who are or have been entrusted with prominent public functions by a foreign country”. These individuals include:
- Heads of State/Government
- Senior Politicians
- Senior Government, Judiciary, or Military Officials
- Senior Executives of state-owned corporations; and
- Important political party officials
Entering business relationships with foreign PEPs is generally considered more high risk than domestic PEPs. This calls for greater scrutiny during the customer due diligence process because reporting entities are less likely to have true understanding of overseas political landscapes. They are also less likely to be aware of the PEP’s exposure or ability to exploit possible corruption.
Reporting entities should carefully consider why an overseas PEP may wish to do business away from home and take reasonable steps to determine their source of wealth of funds within the onboarding process.
Domestic PEPs are those persons who FATF defines as “are or have been entrusted domestically with prominent public functions”. This is similar to the above definition for foreign PEPs. However, the difference is only a matter of which country has appointed the individual.
White domestic PEPs are considered less risky in comparison to foreign PEPs, reporting agencies will come across them more often in the course of business. While risks associated with domestic PEPs are less, it may be more difficult to discern initial red flags, given that it only seems natural for these individuals to engage in business in their home jurisdiction.
Factors to Consider During PEP Screening
To determine the risk level of each PEP, reporting entities must apply a risk-based approach, which takes a holistic view of the PEP (not just whether they are foreign or domestic). For example, some factors to consider are:
- PEP Jurisdiction: the levels of corruption, political stability, and whether strong checks and balances are in place for proper management.
- PEP Position: where the PEP’s access and influence levels lie, as each PEP will vary depending on their position (e.g. a president will have higher levels of exposure compared to a mayor)
- PEP Business Objectives: what kind of products/services is the PEP looking to use? And are these high or low risk?
- PEP Spending Behaviour: Do their habits align with the salary/source of wealth associated with their position?
- Adverse or negative news about the PEP: it is important to look out for any potential criminal behaviour.
- Relatives and Close Associates: who the PEP associates with personally and professionally, as sometimes it’s not the PEP who raises red flags, but their relatives or close associates.
About First AML
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