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Identifying Politically Exposed Persons (PEPs) is a crucial part of protecting your business from risks related to money laundering, corruption, and other financial crimes. PEPs often occupy powerful roles in government, military, or major organisations, giving them access to public funds and influence that could be misused.
If PEPs aren’t properly identified during onboarding and due diligence, it can lead to hefty penalties, reputational damage, and increased regulatory scrutiny. With that said, businesses can still work with PEPs by carrying out enhanced due diligence (EDD) and risk assessments to manage those risks effectively.
In this guide, we’ll walk you through what PEPs are, the risks they bring, and provide you with practical strategies to navigate PEP-related compliance challenges with confidence.
Who Are Politically Exposed Persons (PEPs)?
At its core, a PEP is any individual who holds or has held a prominent public position. Because of their position, they hold significant influence and decision-making power within government, international organisations or state-owned enterprises.
The concept of a PEP does not just end with the individual, it also extends to their immediate family members and close associates, who may also be at risk of engaging in illicit activities such as money laundering or corruption due to their connections.
Categories and Examples of PEPs
Before understanding the risks posed by PEPs, it’s essential to classify them, as each of them carries a unique level of risk. This classification enables businesses to better assess and manage these varying risks. To guide us in this process, we refer to the Financial Action Task Force (FATF) Recommendations, which categorise PEPs into three groups:
Domestic PEPs
Domestic PEPs are individuals who occupy or have occupied significant public positions within their own country, granting them influence over government, judicial, military, or state-owned enterprises. The nature of their positions place them at an elevated risk of corruption or misuse of power.
Foreign PEPs
Foreign PEPs hold or have held prominent roles in a foreign country, similar to domestic PEPs, but with jurisdictional differences. Their jurisdictional context introduces distinct risks, which we will explore further in the next section.
International Organisation PEPs
International Organisation PEPs are individuals with high-level responsibilities within global or regional organisations, typically in senior management or governance roles, such as directors or board members.
Why Are PEPs Considered High Risk?
Politically Exposed Persons (PEPs) are considered high risk in Anti-Money Laundering (AML) due to their influence, access to public funds, and powerful connections. This visibility and authority increases the likelihood of PEPs being targeted or involved in illegal activities like corruption, bribery, and money laundering.
Key Factors Contributing to PEP Risks
Political Influence and Power
PEPs by virtue of their political power can influence and shape laws, regulations and policies that may directly or indirectly benefit their personal or business interests. For instance, a PEP serving as Minister could pass a bill that benefits a family-owned energy company, securing subsidies and grants that would otherwise not be available.
Access to Public Assets
PEPs often oversee substantial public funds, creating opportunities for unethical actions, like awarding contracts to preferred partners or hiding illicit deals. For instance, an official managing infrastructure funds might direct contracts to close associates, bypassing fair competition.
Complex Ownership Structures
PEPs can leverage their political influence and access to resources to create complex ownership structures, such as shell companies and offshore accounts, which conceal their true financial interests. These structures make it difficult for regulators and financial institutions to trace illicit wealth, increasing the risk of money laundering and financial crimes.
Involvement in High Value Transactions
PEPs frequently handle large financial transactions, which, while often legitimate, carry a higher risk of misuse to disguise the origins and nature of the funds. For example, a foreign direct investment might require thorough screening and enhanced due diligence to ensure it isn’t masking proceeds from bribery or corruption.
Heightened Corruption Risks by Jurisdiction
PEP risk varies greatly by region. In countries with weak oversight or political instability, PEPs are more prone to corruption. For example, in areas with weak anti-corruption laws, officials might use their influence to secure contracts for personal gain, posing serious risks for institutions working with them.
Now that we understand the risks PEPs pose to your organisation, it's important to consider how long these risks may persist as the insight can guide businesses in allocating resources more efficiently. In the next section, we will explore the declassification period for PEPs and when to taper down monitoring efforts.
Declassification Period: How Long Should an Individual Be Considered a PEP?
Although there are no universal standards for how long a PEP should be monitored after leaving their position, two key declassification approaches can help guide your business in optimising resource allocation.
Risk-Based Approach to Declassification
The Financial Action Task Force (FATF) promotes an open-ended approach, suggesting that "once a PEP, always a PEP." FATF recommends that institutions make declassification decisions based on individual risk assessments, considering factors like:
Influence and decision-making power in their former role
Corruption risk and regulatory strength in their jurisdiction
Time elapsed since they left office
Ongoing influence in political or economic sectors
Current public profile and visibility in media
Relevant legal or regulatory changes
Connections with high-risk individuals or entities
Unusual patterns in financial activities or transactions
This approach enables institutions to tailor PEP declassification based on evolving risk factors rather than pegging the decision to a fixed timeframe.
Hybrid Approach to Declassification using Risk & Time Factors
Some jurisdictions integrate specific timeframes into their declassification criteria, using them alongside risk assessments for added clarity and structure.
Canada
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) applies a five-year declassification period for domestic PEPs, after which they may no longer be considered high-risk. Foreign PEPs, however, remain under indefinite monitoring due to perceived higher risks.
Jersey
In September 2023, the Northwestern European Country introduced new amendments allowing for a hybrid approach with the addition of risk assessments. Domestic PEPs may be declassified after two years if deemed low-risk, while foreign PEPs require five years and a low-risk assessment before declassification.
Both the risk-based and hybrid approaches provide useful strategies for managing PEP declassification, balancing the need for compliance with realistic monitoring timelines. With the declassification methodology covered, the next section explores the risks of onboarding PEPs and provides best practices for managing these challenges effectively.
Risks to Your Business When Onboarding PEPs
Onboarding Politically Exposed Persons (PEPs) presents significant challenges to your business, impacting compliance, operational efficiency, and long-term stability. The presence of PEPs can affect business dynamics in the following ways:
Potential Impacts to Your Business:
Enhanced Compliance Requirements
Onboarding a PEP demands Enhanced Due Diligence (EDD), continuous monitoring, and transaction scrutiny. This increases administrative workload and requires specialised processes to manage evolving risk factors.
Resource and Cost Implications
Managing PEPs long-term requires additional resources such as additional staff, advanced monitoring tools, and training. All of which leads to higher operational costs.
Operational Complexity
PEP accounts introduce complexity, requiring frequent risk assessments and comprehensive monitoring on an ongoing basis. This can slow down business operations and lead to process delays.
Public Perception and Reputation
Businesses that associate with PEPs risk attracting public scrutiny, and any negative publicity surrounding a PEP such as involvement in corruption or criminal activity, can significantly damage their brand image and erode customer trust.
Managing Dynamic Changes to Risk Profile
A PEP's risk profile can change rapidly due to shifts in political, personal, or global factors. Businesses must stay agile, adapting their risk management strategies and ensuring compliance teams stay vigilant.
Increased Audit and Reporting Demands
Onboarding PEPs increases the likelihood of frequent audits and more detailed reporting requirements, putting added pressure on compliance teams to maintain thorough documentation and ensure regulatory compliance.
By assessing these risks, businesses can determine if onboarding a PEP aligns with their risk tolerance. In the next section, we explore best practices to help you safeguard your business and stay compliant with AML regulations.
Best Practices for Managing Risks Associated with PEPs
Effectively managing PEP risks is essential for businesses to remain compliant with anti-money laundering laws. By adopting a risk-based strategy, utilising technology, and actively monitoring PEPs on an ongoing basis, businesses can safeguard against exploitation and misuse. Here are five best practices to effectively manage PEP risks:
Implement Comprehensive PEP Screening and Due Diligence
Use automated screening tools to identify PEPs during onboarding and perform Enhanced Due Diligence (EDD) for high-risk individuals, ensuring a thorough understanding of their background to minimise exposure to money laundering or corruption risks.
Adopt a Risk-Based Approach to PEP Risk Management
Assess PEPs based on their risk level by considering their political influence, jurisdiction, and financial activities, allowing businesses to focus resources on higher-risk individuals while streamlining efforts for those at lower risk.
Establish Clear Internal Policies and Procedures
Develop and maintain documented procedures for identifying, screening, and monitoring PEPs, ensuring compliance with regulations and providing consistent decision-making across the organisation.
Monitor PEP Relationships Continuously
Continuously monitor PEPs’ transactions and risk profiles, ensuring access to updated information as soon as their circumstances change, to maintain compliance and detect potential red flags early.
Leverage Technology Solutions
Implement robust technological solutions with workflows that allow for PEP screening and real-time transaction monitoring, increasing efficiency, reducing errors and ensuring effective risk management.
How Technology Can Help In Managing PEP Risk?
Managing PEP risk can be challenging due to complex regulatory requirements and the ongoing need to screen and monitor high-risk individuals. This process is time consuming, resource draining, and often does not deliver proportional benefits.
Technology can be leveraged to automate and streamline these tasks, allowing your compliance team to focus on more strategic priorities, such as efficiently processing low-risk clients and expanding your customer base.
Robust solutions enable your team to intervene only when necessary — such as when a PEP risk alert is triggered during client screening or when monitoring reveals a change in a client’s risk profile. This allows for quick, targeted action to reduce your organisation’s exposure and ensure effective risk management.
What to Look for in a Solutions Provider
When you are ready to take action and enhance your PEP screening and monitoring process, here are several factors to consider when putting together your research on solution providers:
Comprehensive PEP Identification and Screening
Identifying PEPs during onboarding and ongoing monitoring is vital for compliance. Onboarding screening acts as a preventive control, ensuring access is granted based on risk tolerance. Ongoing monitoring is equally important, as client profiles can change, and existing customers may become PEPs, enabling businesses to adjust to shifting risk profiles and reassess ongoing relationships.
Bonus Tip: An advanced solution provider should integrate with global PEP watchlist and/or databases to ensure your business is alerted to high-risk individuals, thereby facilitating further decision-making on whether to engage or avoid them.
Ongoing Monitoring and Risk Updates
Risk associated with PEPs can change over time due to political shifts, personal circumstances or legal developments. Even after leaving their position, PEPs can still pose significant risks and require prolonged monitoring throughout the declassification period.
Bonus Tip: Look out for solution providers that offer active monitoring of client relationships on an ongoing basis, complemented with alerts or cues that notify compliance teams of any changes in their profile that may increase your business’s risk exposure.
Ability to Uncover Ultimate Beneficial Ownership (UBO)
Unwrapping UBOs is essential for managing PEP risks, as these high-risk individuals may use complex structures like shell companies to hide their ownership or control of assets. By identifying UBOs, businesses can ensure they know exactly who they are dealing with, reducing the risk of hidden corruption, money laundering, or other illicit activities.
Bonus Tips: A robust solution should include features that help you uncover the network of individuals and entities behind PEPs and their transactions. Advanced vendors not only identify these networks but also offer intuitive, interactive interfaces for easy visualisation and exploration.
Alignment with International Anti-Money Laundering Regulations
Compliance with AML regulations is mandatory, and failure to comply can lead to severe penalties for businesses. Solutions must align with international AML frameworks, streamlining the compliance process and equipping businesses with the necessary features and tools to stay compliant.
Bonus Tip: While there are many International AML frameworks and regulations, the Financial Action Task Force’s recommendations are the most widely adopted and robust international AML framework, providing comprehensive, evolving guidelines that ensures global compliance.
Audit Trail and Proper Documentation
Businesses must demonstrate compliance by providing thorough documentation to ensure transparency, support investigations, and protect against potential penalties. This includes properly recording all PEP-related documents and risk assessments, with a clear audit trail and precise time stamps.
Bonus Tip: Look for vendors offering solutions that generate detailed audit trails with accurate time stamps. Advanced providers should also feature a secure and centralised document repository for quick and easy access to documents and risk assessment reports.
Introducing Artemis: Our Customer Lifecycle Compliance Risk Management Solution
As regulatory requirements around PEPs become more complex and penalties for negligence become more severe, AML compliance processes must evolve to meet these challenges. To help businesses address regulatory pain points, we’ve developed Artemis — a powerful platform designed to streamline compliance risk management throughout the customer lifecycle.
Artemis offers a comprehensive suite of features that simplify your KYC compliance processes. Artemis consolidates robust PEP, Sanction, and Adverse Media screening, risk assessments, beneficial ownership mapping, ongoing monitoring, periodic reviews, and case management into one intuitive, centralised platform.
Key Features of Artemis
A robust customer lifecycle compliance risk management solution can help businesses gain visibility to risks associated with their client and partner base, providing actionable insights to make informed decisions. In this section, we uncover key features that make Artemis an outstanding choice for your business’s compliance risk management needs.
Comprehensive PEP, Sanction and Adverse Media Screening
Artemis is integrated with leading compliance and risk databases, enabling institutions and businesses to perform comprehensive risk screening that go beyond identifying PEPs. The platform is specifically designed to meet Enhanced Due Diligence requirements by screening against multiple sources, including sanction lists, adverse media and even internet searches, ensuring comprehensive risk screening.
The platform is also flexible in allowing businesses to tailor fit the screening modules according to their unique circumstances. This customisation is achieved through the ‘Own Restricted List’ module where compliance teams can curate an exclusive internal list consisting of blacklists or VIP lists across jurisdictions that they would like to monitor.
Ongoing Monitoring and Periodic Reviews
Artemis offers continuous monitoring of your clients' risk profiles on a daily or weekly basis, promptly alerting your compliance teams to any significant changes, such as shifts in a PEP’s political status. In addition, the platform features an automated periodic review module that notifies users of upcoming risk assessments due within three months before expiry. This system reduces human error and eliminates repetitive manual tasks, allowing your team to focus on more important, high-priority activities.
Ultimate Beneficial Ownership Mapping
Artemis features an interactive and visual relationship mapping tool that enables your compliance team to link individuals and gain a clear overview of the entities and people connected to a PEP or their transactions. This helps your business uncover hidden relationship structures, providing a high-level overview and enhancing your ability to manage and mitigate risks effectively.
Dynamic Risk Assessment Designed in Accordance to FATF Indicators
Artemis is designed with an automated dynamic risk assessment module powered by proprietary algorithms that continuously updates risk parameters in accordance to evolving FATF standards, it ensures compliance with changing regulations and enhances AML risk management by adapting to the latest guidelines.
Digital Audit Trail and Time Stamping
A cornerstone of compliance and accountability during audits is the ability to provide detailed, immutable records of client risk profiles, assessments, and actions taken. Artemis offers digital audit trails that track every decision and updates to a client's profile, with precise time stamps for maintaining a chronological record. This ensures your businesses meet regulatory documentation requirements and are well prepared for audits.
Central Document Repository and Expiring Document Alerts
Artemis simplifies client profile management with a central document repository, securely storing IDs, forms, and risk assessments in one place. This allows compliance teams to quickly access and update records, ensuring continuous compliance.
Artemis also includes expiring document alerts, notifying teams when key identity documents are close to expiration. This helps ensure timely renewals, preventing lapses and minimising the risk of outdated information.
Collaborative Case Management with Multi-Tier Role Access
Artemis offers a collaborative case management system that enables team members to assign and work together on cases, streamlining workflow and boosting efficiency. With multi-tiered role access, senior compliance staff can focus on high-risk clients, while junior members manage lower-risk cases, optimising resource allocation and enhancing overall risk management.
Integration with Ares
Artemis seamlessly integrates with Ares, our digital onboarding solution, to simplify the entire onboarding and KYC process. Customer checks and documentation captured in Ares are securely transferred to Artemis for advanced due diligence, ensuring a smooth onboarding experience for your customers and helping your business achieve improved compliance outcomes within an integrated workflow.
Learn How Artemis Can Help from Our Solutions Experts
Curious about how Artemis can elevate your customer lifecycle risk management? Join a live demo with our experts, where we’ll walk you through how the platform can enhance your compliance processes. You’ll see how Artemis not only ensures comprehensive compliance and faster turnaround times but also gives you a competitive edge — helping you stay ahead while your competitors struggle with the growing complexities of ever-evolving regulations.
Concluding Thoughts
In this guide, we've discussed the significant risks posed by Politically Exposed Persons stemming from their position of influence, access to resources, and powerful connections. Effectively managing these risks is vital to protecting your business from exploitation and unintentionally enabling money laundering or corruption.
Technology becomes key in streamlining this process by proactively screening and identifying high-risk individuals. Through dynamic risk assessments and continuous monitoring, businesses can maintain compliance with evolving regulations.
Investing in technology is a strategic move to avoid costly penalties for non-compliance. By equipping your compliance teams with advanced risk management tools, you can improve efficiency and gain a competitive edge over your competitors.
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