A politically exposed person (PEP) is someone who has a high-profile political role or has been entrusted with a high-profile public duty. Because of their position, they are more likely to be involved in money laundering and/or terrorist financing.
In simple terms, a Politically Exposed Person is someone who is more likely to be involved in bribery or corruption due to their prominent position or influence. Furthermore, any close business colleague or family member of such a person will be considered a risk and may be added to the PEP list.
Having a PEP status does not mean that the person is involved in criminal activity. However, financial institutions must take precautions if they have PEPs as their customers as these people are of high risk.
What is An Example of a Politically Exposed Person?
People who are politically exposed include:
- Heads of state or heads of government
- Senior government officials and politicians
- Officials from the military or the judiciary
- Senior officials from government-owned businesses
- Members of high-ranking political parties
- PEPs include close associates such as immediate family members and support employees
It’s tough to compile a list of politically exposed people because the criteria are so broad and differ from country to country. The Financial Action Task Force (FATF) makes periodic suggestions on PEPs, making a precise PEPs list even more difficult.
Most countries, on the other hand, base their PEP definitions on FATF recommendations, which categorises PEPs as follows:
Senior Government Officials
Current or former government officials who have been assigned to positions in the domestic government or in a foreign government could be politically exposed. This could include leaders of state or people in elected or unelected positions in the executive, legislative, administrative, military, or judicial departments.
Members of Political Parties
One category of PEPs is senior officials appointed to positions in major political parties in the United States or abroad.
Individuals functioning as senior executives in government-owned commercial firms or international organisations, including directors or board members, may be labelled PEPs.
Relatives, Close Associates and Support Employees
PEPs might also include relatives and close associates (RCA). They include immediate family members such as spouses, parents, siblings, children and spouses’ parents and siblings. Support staff, especially of a government official, are also part of the list.
What Are the 4 Risk Levels for PEPs?
It is critical for financial institutions to understand the level of risk that their clients pose because this can influence how much scrutiny is applied to them as part of the risk-based strategy. Although the status of PEPs does not predict criminal activity, the heightened risk exposure it involves necessitates additional anti-money laundering and counter-terrorist financing (AML/CFT) protocols when establishing a commercial partnership.
It also means that these organisations must conduct ongoing monitoring to ensure that any changes in a PEP’s risk profile are not overlooked. The purpose of the PEP screening regulations is to prevent illegal behaviour.
Depending on one’s position, there are varying degrees of risk that a politically exposed person can bring.
High Risk Level 1
This category generally includes:
- Political party officials at the highest levels
- Members of parliament (national and regional)
- Military, judicial, and law enforcement leaders, as well as members of the central bank board of directors
- Members of the government (national and regional)
Medium Risk level 2
This category includes:
- Military, judicial, and law enforcement officers at the highest levels
- High-ranking civil employees and officials from various governmental agencies and entities.
- Senior members of religious organisations
- Diplomats include ambassadors, consuls, and high commissioners, to name a few.
Medium Risk level 3
This risk category includes senior management and board of directors of state-owned businesses and organisations.
Low-Risk level 4
This category includes:
- Members of municipal, country, city, and district assemblies, as well as mayors
- International or supranational organisations’ senior leaders and functionaries
The Importance of PEP Screening in Financial Institutions?
Businesses must utilise PEP screening techniques as part of their anti-money laundering (AML) programmes to determine their clients’ PEP status, according to financial regulators. In order to implement acceptable AML practises, businesses must be aware of the PEP legislation in effect in their country.
In addition to having a PEP screening procedure in place, PEP policy varies over time, requiring businesses to keep track of these changes and how they influence their business.
A complete revamp of existing PEP screening processes is imperative for financial institutions given that the AML compliance space is becoming more complex. It is time to embrace modern-era intelligent technology to enhance efficiency and effectiveness in AML compliance programmes, establish next-gen financial crime surveillance and ensure robust risk management practices.
Tookitaki’s Smart Screening Solution
As an award-winning regulatory technology (RegTech) company, we are revolutionising financial crime detection and prevention for banks and fintechs with our cutting-edge solutions. We provide an end-to-end, AI-powered AML compliance platform, named the Anti-Money Laundering Suite (AMLS), with modular solutions that help financial institutions deal with the ever-changing financial crime landscape.
Our Smart Screening solution provides accurate screening of names and transactions across many languages and a continuous monitoring framework for comprehensive risk management. Our powerful name matching engine screens and prioritises all name search hits, helping to achieve 80% precision and 90% recall levels in screening programmes of financial institutions.
The features of our Smart Screening solution include:
- Advanced machine learning engine that powers 50+ name matching techniques
- Comprehensive matching enabled by the use of multiple attributes i.e; name, address, gender, date of birth, incorporation and more
- Individual language models to improve accuracy across 18+ languages and 10 different scripts
- Built-in transliteration engine for effective cross-lingual matching
- Scalable to support massive watchlist data
Speak to one of our experts today to understand how our Smart Screening solution helps your compliance teams to ensure future-ready compliance programmes.
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