PEPs, or P olitically Exposed Persons , are high-risk consumers who have a greater opportunity than other citizens to earn assets through illegal means such as money laundering and bribery.
A potential client's status as a PEP does not exclude a firm from working with them. Instead, discovering if a customer is a PEP is simply one step in the process that allows financial institutions to perform a comprehensive risk assessment. When performing a PEP check, it is critical to be aware of any red flags. Matching only one of these politically exposed person indications can sometimes lead to financial exploitation.
Risk Ratings For PEPs Based On FATF Red Flag Standards
Every regulated firm must adhere to the standards for working with a politically exposed person. Companies are liable for continuous due diligence that matches the client's PEP status after exposing the client's PEP status. The Financial Action Task Force , often known as the FATF, is an intergovernmental AML/CFT agency that supervises financial crimes. It is also a must-read for any other regulatory action.
FATF classifies PEPs into four groups based on their risk level:
FATF PEP Red Flags
The Financial Action Task Force established numerous politically exposed person red flags to assist businesses in detecting illegal activity. Matching several of these indications based on their information must generate some concerns of illicit behavior. In certain circumstances, it may even result in the direct exposure of money laundering. A nation or area may have its own PEP indications for suspicion, which should be taken into account as well.
1. Hiding Identity
Because PEPs are well aware of their risky position, they may attempt to disguise their identity or avoid being in the limelight. As an example:
- Give someone else legal ownership (a family member or a close colleague);
- Interacting incessantly or inappropriately through the use of intermediaries;
- Using company vehicles for no legitimate commercial motive or to conceal related industries and ownership.
2. Unethical Behavior
PEPs' conduct might sometimes reveal them:
- Being uneasy or secretive about the source of one's wealth and cash;
- Providing incorrect, incomplete, or outright fraudulent information;
- The information on PEPs does not correlate to other publicly accessible statistics.
- Reluctance to explain why they have a presence in the nation of the financial institution ;
- PEP has been denied entrance into the country;
- PEP money is transferred from one nation to another on a regular basis.
- A significant movement of cash or wire transfers into or out of PEP's account;
- There are no specifics or convincing justifications for specific business ties, account openings, or transactions.
- It is illegal in PEP's nation to have accounts or property in other countries.
3. Position in the Organization
The location of PEP might also be cause for concern:
- Authority, access, and control over the company's money, policies, and activities;
- Capability to control mechanisms against ML/TF on a formal/informal basis;
- Control over government or corporate accounts;
- Controls or owns financial institutions.
4. The Market
High-risk industries vary depending on location and vary from country to country. Examples of high-risk industries include:
- Finance and banking;
- Defense and military;
- Companies that collaborate with government or state agencies;
- Construction;
- Extraction and mining
- Provision of public goods
5. Transactions Types
The manner in which PEP spends or gets money might reveal a lot about them:
- After a lengthy period of inactivity, the PEPs account displays significant activity in a short amount of time.
- Banking for the wealthy;
- Wire transactions that have no economic justification or are missing beneficiary information;
- Transactions or payments made anonymously from an unknown third party;
- Without a commercial reason, funds are frequently transferred from one account to another or across financial institutions.
- Significant financial movements, significant foreign money transfers, or wire transfers into and out of the account;
- Having and utilizing several bank accounts for no discernible purpose.
6. Goods and Services
FATF also considers the following services and goods to be riskier and particularly vulnerable to being utilized by PEPs:
- Businesses that cater to international customers;
- Trusts and suppliers of services;
- Accounts for correspondents and concentrations;
- Property investment;
- Dealers in high-end transportation vehicles such as sports cars, ships, helicopters, and aircraft.
- Dealers of precious metals, gemstones, and high-end items.
7. Indicators on the Ground
The FATF also discusses why some nations are deemed to be riskier due to geographic risk considerations. When scanning a PEP, these signs should also be considered whether they come from:
- High-risk country, either foreign or local;
- A country where there is a serious danger of corruption;
- Countries having a single economy;
- A country that has not ratified a relevant anti-corruption agreement.
Sanction Scanner's KYC/AML solution is a great resource that assists in safeguarding the company by continuously and automatically checking PEPs across all databases.
