The terminology of Politically Exposed Person can refer to someone who tends to occupy or has held a prominent public position or job in their previous tenure. People who belong to such a category tend to have a lot of power and might be able to access public funding or make choices about policy-making as well.
Heads of state, prominent politicians, high-ranking judges, military commanders, and board members of state-owned businesses are all included in the phrase, and usually, their respective family members or close associates are also included in this group at the same time. Although holding such positions does not necessarily imply activity like corruption, the nature of their positions might put them at a greater risk of financial misbehavior like embezzlement and bribery.
Why is PEP Screening Important?
PEP screening is taken as an essential checkbox to tick off with the intention of protecting the financial system from financial crimes and corruption as well. Entities that are politically exposed tend to engage in activities like corruption due to their access to the wealth of others and authority. Dangers of such a nature are more likely to be recognized and reduced with the effective utilization of PEP screening features accordingly.
Frameworks regarding the regulations around the world require an obligation of identification and monitoring of PEPs as a mandatory part of the process of anti-money laundering and counter-terrorist financing initiatives that might include the FATF Recommendations, EU AML Directives, and the U.S. Patriot Act as well. Institutions that are connected to illegal operations are more likely to face financial penalties and serious harm to their reputation altogether. Early detection of high-risk persons can help institutions or organizations stop the financial system from being abused for illegal purposes as well.
The PEP Screening Process
PEP screening is more likely to necessitate a number of painstaking measures in which the institutions first gather the information in a comprehensive manner on their clients throughout the overall onboarding process in order to determine whether a person is a PEP or closely related to one. Screening with respect to databases comes next where the clients are further compared to the international PEP lists by utilizing the trustworthy and frequently updated lists at the same time.
A key component of the process is risk assessment where the degree of risk is assessed in light of variables such as the role of a person, jurisdiction, and financial activity as well. Increased due diligence might be required for the PEPs that tend to pose a high risk in their nature. Oftentimes, modern features of continuous monitoring further assist in guaranteeing that the contacts and transactions are continuously evaluated for questionable activity and risk profiles are further modified on account of the evolving situations simultaneously.
Best Practices for Effective PEP Screening
Approaches of a systematic nature can be considered as necessary for the overall PEP screening program to be successful where the features of artificial intelligence and machine learning have proved to be quite helpful. Incorporation of such technologies have the ability to further improve the accuracy and efficiency level simply through automating the flagging procedures and lowering false positives as well. The practice of regular staff training is taken as an essential checkbox in order to guarantee that the staff members are prepared to identify the PEP hazards and regulatory obligations.
Clear and strong policies must be put in place for the purpose of specifying how PEPs are found, dealt with, and forwarded for additional examination at the same time. Adopting a risk-based approach further allows the institutions to distribute resources effectively among them, focusing on the high-risk regions like states with weak governance accordingly. Working together with regulators is also considered as necessary as the companies may stay up to date on new hazards and best relevant practices simply by participating in the industry initiatives and maintaining open lines of communication.
Facts and Figures
- The United Nations estimates that $2.6 trillion is stolen annually through corruption whereas about $1 trillion has been spent in bribes worldwide each year.
- Financial institutions were hit with over $10.6 billion in fines on account of incomplete compliance regarding anti-money laundering during the year 2020 which clearly shows the pressing need for effective measures like PEP screening.
- Since more than 1.2 million people are considered PEPs around the world which has made extensive screening programs have been made mandatory.
- According to studies, businesses or organizations that are using features of artificial intelligence in compliance procedures are more likely to improve operational efficiency simply by reducing the false positives by as much as 30%.
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