Introduction
Corruption and bribery are global crimes with eminent repercussions, involving around $1 trillion in bribes and an estimated $2.6 trillion in corruption annually, as reported by the United Nations. Money laundering & corruption scandals involving politically exposed persons (PEPs) have become increasingly common, revealing the criminal financial involvement of some of the most powerful and affluent individuals in the world. Notable cases such as the 1MDB scandal, the Panama Papers, the Pandora Papers, and the involvement of Russian oligarchs in concealing fund ownership and origins during capital outflows from Russia amid the Ukraine invasion underscore the extensive and widespread nature of the money laundering complexity. Therefore, PEP Screening serves as a preventive measure against these crimes and assists in identifying high-risk PEPs who have the potential to engage in illegal financial activities. In this blog, we’ll look at the particulars of PEP screening, why screen for PEPs, critically analyze the challenges faced by financial institutions, and how using the advanced technology program can help gain accuracy for high-profile individuals’ screening.
Definition Of Politically Exposed Persons
Financial Action Task Force (FATF) defines PEPs as referring to individuals who either currently hold or have previously held significant public positions. Article 52 of the United Nations Convention Against Corruption (UNCAC) broadens this definition to include not only the individuals themselves but also their relatives and close associates (RCA). PEPs are considered at a heightened risk for engagement in corruption, terrorist financing, money laundering, and bribery due to the influence derived from their prominent roles.
Who Needs To Screen For PEPs?
Any financial institution governed by AML regulations, including banks and credit unions, must conduct PEP screening. PEPs on an ongoing AML procedure should be carried out during the customer onboarding procedure. Politically exposed individuals should be given a risk score when identified, based on a risk-based methodology.
What Are the Consequences Of Neglecting PEP Checks?
Performing a PEP Check isn’t just a good practice; it’s a legal obligation. Failing to conduct these checks can lead to several compliance issues, including substantial fines, reputational damage, business interruption, and declined stock prices. Research by Themis, a financial crime intelligence provider, indicates that AML scandals can trigger a 5.2% drop in a bank’s share price on the day a fine is announced, with a further decline of up to 20.7% over the following six months. In March 2023, the FBI traced politicians with a $60 million bribery conspiracy in Ohio.
These cases highlight the importance of the proactive PEP Screening method for all institutions to create a more systematic and clean international financial system. Now let’s move forward and get an in-depth insight on multiple challenges involved in robust PEP screening measures.
Challenges Involved In PEP screening
Screening customers against various regulatory and sanctions lists is a complex and costly process. Have a closer look at some PEP list screening challenges and the associated risk of fraud with each challenge.
- Accessing and managing a vast database of PEPs from various locations and regions is challenging due to differences in data quality, formats, and accessibility.
- PEP status changes rapidly, with individuals moving in and out of political positions. So, keeping PEP profiles up-to-date is a continuous challenge.
- Managing the accuracy of PEP data is complex. False positives can disrupt legitimate transactions, while false negatives can lead to compliance breaches.
- Effectively assessing the risk posed by each PEP requires sophisticated risk-scoring models.
- Handling sensitive PEP data while complying with data privacy regulations is complicated.
- Adapting the PEP compliance program to accommodate business growth and increased transaction volumes can be challenging.
- Continuously monitoring client accounts for PEP status changes and updates manually is time-consuming.
Addressing these challenges requires a combination of PEP screening software and a need to stay updated with regulatory changes for PEP screening. Now, get highlights of how AI techniques help to overcome these challenges.
Importance of Technological Advancement To Mitigate PEP Risks
- Identify PEPS with enhanced detection capabilities.
- Real-time screening for quick results.
- Automation to streamline the screening process and minimize errors.
- Data analytics with detailed pattern recognition.
- Comprehensive risk assessment and profiling of PEPs.
- Regulatory compliance and reporting.
- Reduced false positives for improved operational efficiency.
- Global PEP screening to align with international compliance.
- Complete reporting and audit trails for transparency and compliance.
To conclude, PEP Screening is a crucial component of AML regulations that enables financial institutions to make sure that they are not doing business with high-risk customers who might be engaged in illicit activities. This involves the regular and more closely monitoring of PEPs. While considering its significance, AML Watcher stands distinguished with its extensive repository of databases encompassing adverse media checks, customized PEP screening solutions, 60,000+ watchlists, and sanction lists, spanning 235+ countries and available in over 80 languages to empower businesses to conduct robust risk assessments and ensure compliance. Partner with AML Watcher to strengthen your compliance efforts, PEP Screening method, and the organization’s security in the battle against financial crime. Embark on your PEP risk management journey with us today. Contact us to learn more about our PEP screening services.