As the global fight against money laundering intensifies AML regulations are becoming increasingly more stringent. Nowhere is this more true than in the United Kingdom, where an estimated £88 billion is laundered every year. UK companies identified as at risk of being exploited by money launders have strict regulations they must follow and face harsh punishments for non-compliance.
Amongst these requirements is to identify if a person has political power that can be exploited in criminal enterprise and money laundering. These politically exposed people are often referred to as PEPs and an increasing number of AML compliance tools are offering PEP searches.
But what is a PEP in reality, and what threat do they actually pose? In this article, we will explore both of these topics as well as some tips that can be worked into your AML due diligence process.
What is a PEP?
The Financial Action Task Force (FATF) of a politically exposed person is accepted as the industry standard. This is:
A person who is or previously has been entrusted with a prominent public function.
In practice, this generally means senior politicians, not only prominent or high ranking, and individuals in positions of power at large public bodies that are intrinsically linked to the government.
As a PEP may not be acting directly or may be able to protect the illicit activity of others, any family members or associates of a PEP must also be treated as one, as do any junior or mid-level officials. PEPs can be broadly split into two categories:
- Domestic PEPs – PEPs from the same country as those performing the AML check
- International PEPs – PEPs from any other country than those performing the AML check
The reason for this distinction is that those performing a check on someone based in or with wealth, and business dealings in a different country, may lack the local knowledge needed to contextualise if activities, wealth or business dealings are suspicious. As such, additional levels of enhanced due diligence may be required for international PEPs.
It is important to note that just because someone is a PEP does not mean that they should be denied service on this fact alone. Rather it means that an enhanced level of due diligence is required to clear them of money laundering and terrorist financing risk.
What is a PEP screening check?
A PEP screening check is a form of enhanced due diligence (EDD) and works similarly to a standard AML check. Where an AML check screens for links to money laundering and criminal activity, a PEP check screens individuals for if they do/have help political positions or if they have links to an individual that does or has.
Why are PEPs a risk for money laundering?
Whether a PEP is domestic or international, they all must be treated as a high money laundering risk and go through your company’s enhanced due diligence procedures.
The reason for this is that their position would allow them to use their status and influence to commit money laundering and related offences, including corruption and bribery, as well as conduct activity related to terrorist financing.
PEPs seeking to launder their own money will have, by definition, obtained it dishonestly. This is frequently done via the acceptance of bribes, embezzlement of public funds or via criminal activity they have used their position to allow and facilitate.
PEPs may also use their position to aid the money laundering of others. This can be to provide political protection and shield criminal and money laundering activities or individuals involved in these from investigation, hindrance or prosecution; or otherwise can be to actively help in the placement and/or layering stages of a money laundering scheme.
The placement stage of a money laundering scheme involves getting the physical ill-gotten gains into the banking system, which is usually time-consuming and involves some sort of ‘front’ business. A public figure can use their connections and status to facilitate this and allow large sums of money to be deposited directly into a financial institution without the need to disguise its origins.
The layering stage involves moving the money digitally through a complex web of transactions to further hide its origins should authorities try to investigate. A PEP can use its position to add a veneer of legitimacy to this as well as protect a scheme from any investigators.
Much of the £88 billion laundered through the UK each year comes from abroad and these schemes can be worth hundreds of millions or more. It is unlikely that any money laundering scheme of this did not involve at least one PEP somewhere along the line.
Things to consider when performing enhanced due diligence on a PEP
As previously stated, all investigations involving a PEP must be subject to enhanced due diligence procedures but just because someone is a PEP (or treated as one) does not mean they are involved in illicit activity. Each case must therefore be considered independently and judged on its own merits.
Some key things to consider when doing so are:
- Do they have business interests related to their public function and are they representing these interests with this potential transaction?
- Are they involved in the public procurement process and do they hold prominent public functions which enable influence to be exerted over key decision-making, especially relating to spending
- Are they from a high-risk or sanctioned country?
- Do they have a prominent public function in sectors known to be open to corruption? E.g. oil & gas, mining, construction, natural resources, defence industries, sports or gambling
- Has a prominent public function that would allow them to exert a negative impact on anti-money laundering and anti-terrorism funding activities
- Who is the ultimate beneficial owner of the funds
- Are they seeking undue secrecy regarding their activities or the source/destination of the funds?
- When additional information is requested are they forthcoming with it?
- Is this activity in any way unusual from the normal activity you would expect to encounter from a customer?
All businesses will have their own EDD procedures and exactly what they entail will vary depending on the type of transaction, services offered and sector; but measures should include:
- Obtain more information on the customer
- Obtain more information on the intended business relationship and reason for the transaction
- Source of funds
- Ultimate beneficial owner
- Monitoring the business relationship on an ongoing basis, including the cadence and value of transactions
PEPs checks and Red Flag Alert
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