Can PEP Status Expire and Should it Ever?
PEP screening is crucial to all AML/CFT compliance programmes as it identifies individuals who may be vulnerable to money laundering activities, helping to protect financial systems and the reporting entities operating within them.
Although, once a PEP steps down from their prominent office or public role, it could be possible to declassify them – reflecting the reduced risk level they present. While some AML/CFT approaches permanently maintain PEP classifications, others reject the notion of “once a PEP, always a PEP".
Depending on their compliance program and ad hoc risk assessment, reporting entities may declassify PEPs, particularly if they have been inactive for some time. The declassification of PEPs offers clear business advantages. However, must take place without placing AML compliance in jeopardy.
Accordingly, reporting entities should consider the contexts within which customers could shed their PEP status, along with potential risks or advantages.
How to Decide
As aforementioned, many reporting entities err on the side of caution, perpetuating “once a PEP, always a PEP”. This suggests that, whilst a PEP may no longer have their position of direct power or authority, they may have retained a level of influence or access to funds which require laundering.
Upholding an individual’s PEP status (regardless of their inactivity) ensures customers are subject to a consistent level of scrutiny throughout the business relationship. However, while this may reduce immediate risks to compliance, it is not necessarily congruent with the ‘risk-based approach’ (RBA) recommended by the Financial Action Task Force (FATF).
Under a risk-based approach, entities should adjust their compliance response to reflect the risk level presented by each individual. This means applying more scrutiny to active PEPs given their implied vulnerability to money laundering. With this in mind, some very high-risk PEPs should retain their permanent PEP status (even after long periods of inactivity), whilst others may be declassified on a more holistic consideration of certain factors.
Factors Influencing Declassification (or Permanency)
Declassifying a PEP will be based on the money laundering risk presented by the individual. This risk should progressively lessen from the moment they leave office. However, before making any calls, reporting entities should consider the following factors:
- Corruption level inherent in the PEP’s country of origin
- PEP’s linkages to industries in which money laundering is high risk
- Susceptibility to corruption associated with the PEP’s position
- Length of time PEP held their position, and likelihood they may hold it again in future
- Source of the PEP’s present wealth, and that previously acquired whilst in their position.
- Plausibility of the customer’s risk profile and net worth
- Whether transactions associated with the PEP’s account have been transparent
- Adverse media relating to the PEP
- PEP’s ongoing connections to their political establishment
The declassification of PEPs should be reviewed on a case-by-case basis and should be internally documented. It is essential for PEP classifications to be recorded, in case Suspicious Activity Reports (SARs) are subsequently filed with the Financial Intelligence Unit (FIU).
Why Consider Declassification?
Upholding PEP status permanently may only become a burden on AML compliance. If appropriately implemented, declassification can offer advantages for business and compliance.
From a perspective of business relationships, PEP declassification streamlines the onboarding process, reducing friction points during CDD. Similarly, it can expand the customer demographic that firms can engage with, potentially creating very lucrative relationships.
From a compliance perspective, PEP declassification reduces cost and increases efficiency. By reducing the compliance burdens associated with inactive PEPs, reporting agencies can satisfy their AML obligations faster, and divert resources towards high-risk consumers who warrant enhanced due diligence.
About First AML
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