Have you ever thought about how you can protect your business from hidden risks?
Hidden risks include having a business relationship with a person who is or has been involved in financial crimes like money laundering and terror financing or exposing the business to such crimes.
When we talk about risk, politically exposed persons are considered high-risk individuals due to their positions and influence, which could lead to corruption, money laundering, and other illegal activities.
What should businesses do if PEP tries to build relationships with any business?
Businesses and particularly financial institutions first implement the comprehensive risk assessment on all the customer that lie in the PEP list.
After assessing, it will also be helpful for the company to determine how the risk can affect their business.
When should organizations conduct risk assessments? This is an ongoing process until the individual remains with the financial institutions.
Screening them when opening accounts, when they make the transaction, and random quarterly and yearly screening and monitoring is very beneficial and mitigates the chances of being exposed to money laundering and other criminal activities.
This blog will discuss PEP screening, the importance of PEP risk assessment, and what PEP checks businesses must conduct for effective AML compliance.
Why is PEP risk Assessment Essential for Businesses?
PEPs are individuals who hold public office or are in the government, such as judges of supreme courts and military officials. Due to their influence and power, they are more prone to financial crimes.
Therefore, assessing the risk a PEP individual can pose to the business is essential. This involves identifying the level of risk a business could face if it has any relationship with him/her.
Who is added to the PEP list? State presidents, PMs, military officials, judges, ministers, ambassadors, and other senior office holders are more likely to be included in the PEP list.
Are Politically Exposed Persons the Hidden Catalyst for Money Laundering Risks?
If we answer it boldly, yes, the PEPs increase the risk of being involved in money laundering and other crimes.
Because of their influence, their relationships with criminals, and their knowledge of how to breach financial security, they are more prone to indulge in money laundering crimes.
What framework should businesses opt for for practical PEP risk assessment?
So, the question arises here: What approach should businesses take for better risk assessment? We have developed key components that are very helpful in risk assessment.
1. Making Policy and Procedures Regarding PEPs
Obviously, before assessing the level of risk each customer can pose to your business, you need to implement a policy and procedure that defines the identification and management of PEPs.
At this early stage, every organization must include criteria such as a guideline for identifying the PEPs, risk assessment criteria, and other measures necessary to conduct while onboarding new clients.
2. Customer Due Diligence (CDD)
this process needs more attention and focus because, at this stage, the organization must collect customer information while onboarding them. Suppose you find that the person you are trying to onboard is on the PEP list.
In that case, you need to be extra careful in verifying his identity and screening his business relationship against PEPs and RCAs. And more importantly, they assess the risk based on their activity and position in public office.
3. PEP and RCAs Screening and Monitoring
PEPs are not the only ones prone to indulge in criminal activities. It has often been observed that they use their close associates and relatives for such crimes so that they do not get any media coverage of such activities. So, while onboarding them, they screen the PEPs and their RCAs and create their risk profile accordingly.
For that, you need to get the most relevant information about the person, which is often done during the due customer diligence process.
4. Training and Awareness
This is an area Institutions often neglect because they either think they have the Advance
AML software tool or believe there is no need for such training for the compliance team staff.
However, providing regular training to staff on identifying and managing PEP risks mitigates the chances of exposing your business to criminal activities. Therefore, financial institutions must provide training and awareness of the latest regulatory requirements and best practices in PEP risk management.
5. Incorporate OSINT in your Compliance Efforts.
The internet is full of information about PEPs and their close associates. Getting such information from OSINT can be very handy for organizations. What should businesses do? Businesses need to incorporate social media and open-source intelligence methodology to gather information on PEPs.
The process involves monitoring the social media activities of PEPs and their RCAs, news articles about them, and other publicly available data to get a comprehensive view of the PEP’s activities and associations.
What’s the way Forward?
To meet all regulatory requirements, businesses, particularly financial institutions, need to integrate an updated and efficient compliance system.
