What is a politically exposed person? | PEP screening

PEPs (or politically exposed persons) are individuals in high-profile roles in the government, an organization, or an institution. They may also be people who have a close relationship with the ones in power. 

What is Politically Exposed Person in banking/financial institutions?

 Or you may ask why PEP is a high-risk client for financial institutions. 

Due to their network and influence, a PEP has more opportunities to acquire illegal assets when compared to a common man. Hence, a ‘Politically Exposed Person’ or PEP in a bank means a high-risk client who can potentially acquire assets through illegal means like bribery, terrorism funding, corruption, and money laundering. 

 Note: A PEP is not a fraudster, but a high-risk client for whom financial institutions follow additional due diligence. 

Are you a Politically Exposed Person?

If you belong to any of these categories, you might be identified as a PEP. The five types of PEP accounts are:

1. Domestic PEP: They hold prominent public positions or functions at the domestic level. Examples include heads of the State or government, senior executives, financial regulators, etc.
2. International PEP: They hold prominent public positions or functions at an international level. Examples include board members, individuals in senior management positions, etc.
3. Foreign PEP: Individuals with prominent public positions or functions in a foreign country. Examples include heads of the State or government, senior executives, or financial regulators in foreign countries
4. PEP family members: An individual who is related to a PEP is identified as a PEP
5. Close associates: Individuals with close social or professional relationships with a PEP are classified as PEPs

 

PEP examples 

 PEPs in Government Roles include – members of the legislative, judiciary, and executive bodies; individuals in diplomatic roles and seniors at state-owned enterprises. 

 At central financial institutions, PEPs identify as a court of auditors, board members, etc. High-ranking officers in the armed forces and members of international sports committees are classified as PEPs. 

 Further, the third category of PEPs is ‘close associates of PEP’. It includes individuals with a business relationship, joint beneficial ownership of legal entities, or legal arrangements with a PEP. They may also be someone who has sole beneficial ownership of a legal entity which has been set up for the benefit de facto of a PEP. 

 The immediate family members of PEPs are also considered PEPs. They may be children, spouses/partners, siblings, uncles/aunts, in-laws, or close relatives of PEPs. 

RBI on ‘Politically Exposed Person’

In a circular rolled out on July 1, 2008, the Reserve Bank of India (RBI) pays special attention to foreign PEP accounts and states that: 

“Banks should gather sufficient information on any person/customer of this category intending to establish a relationship and check all the information available on the person in the public domain. Banks should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer. The decision to open an account for a PEP should be taken at a senior level which should be spelled out in the Customer Acceptance Policy. Banks should also subject such accounts to enhanced monitoring on an ongoing basis. The above norms may also be applied to the accounts of the family members or close relatives of PEPs.”

Further, on enhanced monitoring of transactions, the circular states that:

“The extent of monitoring will depend on the risk sensitivity of the account. High-risk accounts have to be subjected to intensified monitoring. Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved, and other risk factors. Banks should put in place a system of periodical review of risk categorization of accounts and the need for applying enhanced due diligence measures. Such review of risk categorization of customers should be carried out at a periodicity of not less than once in six months.”

Source: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/85454.pdf 

Financial Action Task Force and PEP

Once someone has identified themselves as PEP, the FATF asks financial institutions to perform additional due diligence on them. The nature of this additional due diligence is based on the ‘risk category’ that the PEP falls under. These risk categories are formed based on Financial Action Task Force or FATF’s guidelines. 

What does FATF mean?

 The FATF is an international policy-making body that sets international anti-money laundering standards and counter-terrorist financing measures.

 PEP risk categories based on FATF guidelines

 FATF is an AML/CFT intergovernmental institution that regulates financial crime. It has categorized PEP accounts as per the level of risk involved. They are: 

1. Low-risk PEP 

• Supranational or international business officials
• Senior functionaries and mayors, and local, state district, and urban assemblies members

2. Medium/Low-risk PEP

• Governmental board and top-ranking officials of state-owned organizations and businesses

3. Medium risk PEP

• Head officials of judiciaries, banks, military, law enforcement, senior members of state agencies, high-ranked civil servants, and religious organizations
• Commissioners, consuls, and ambassadors

4. High-risk PEP

• Heads and government members, parliament members, head officials of judiciaries, banks, law enforcement, military, and religious organizations
• Prominent political party member

 

Watch out for these Politically Exposed Person red flags

 Released by the Financial Action Task Force, here is a list of red flags to help businesses prevent PEP fraud risks.  

 Note: The below pointers are only indicators of fraud risk and not a list of the actual fraud types. Spotting the below flags indicates the need for businesses to take appropriate safety measures. 

1. Identity Shielding 

Assigning legal ownership to someone; abnormally or constantly interacting with intermediaries; confusing involved ownership or industries, etc. are some ways in which a PEP might try to hide their identity and avoid the spotlight. To avoid getting caught for illegal reasons. 

2. Suspicious behavior

A series of shady PEP activities can raise suspicion and help businesses prevent crime. They can be:

• Secrecy around the source of funds and wealth
• False, inaccurate, or insufficient information
• Publically available data doesn’t match with the PEP’s data
• A denial of an entry visa
• Fund transfer from one country to another
• A steady flow of wire transfers or cash out
• No credible explanations or details for certain business relationships and transactions

 

3. Position in the Company 

A powerful position at an organization comes with access to things like authority and control over the corporation’s funds, operations, and policies; informal/formal ability to control mechanisms against TF/ML, influence over government or corporate accounts, control or ownership of DNFBP for financial institutions. 

A fraudulent PEP might want to leverage such accessibility for their selfish motives. Sometimes, these motives may involve criminal activities. Hence, when onboarding a PEP who comes from a powerful position, financial institutions need to screen them at regular intervals. 

4. The Industry

PEP from certain high-risk industries like banking and finance, military and defense, businesses that work with government/state agencies, construction, mining and extraction, and public goods provision need to be watched closely. 

5. Transactions 

Monitoring PEP transactions is a necessary activity that businesses must carry out regularly. Suspicious activities like the ones listed below can help prevent illegal financial activities. 

• The account shows ongoing activity in a short period after a long period
• Private banking
• Wire transfers without economic explanation or lacking beneficiary information
• Anonymous payments or transactions received from an unknown third party
• Funds are moved constantly from one account to another or between financial institutions without a business rationale
• Steady cashflows, massive global funds transfers, or wire transfers
• Having and using multiple bank accounts without a clear reason

 

6. Services and Products

FATF has also flagged PEP involvement with certain high-risk products and services.  

• Businesses catering to foreign clients
• Service and trust providers
• Concentration/correspondent accounts
• Real estate
• Dealers in high-value transport vehicles like ships, sports cars, planes, and helicopters
• Dealers invaluable stones, metals, and luxury goods

 

7. Local Indicators 

 

• Domestic or foreign high-risk country
• A country with a high risk of corruption
• Countries with mono-economies
• A country that did not sign a relevant anti-corruption convention like the OECD Anti-Bribery Convention and the UNCAC

PEP screening | PEP KYC | PEP AML

Any customer undergoing a KYC journey has to reveal if they belong to the PEP category. Yet, in certain cases, the customer might mistakenly select the PEP option, or not reveal their PEP status on purpose.  

To ensure that PEP customers are correctly identified, IDfy checks the customer’s name against a PEP database. If the customer is politically exposed, banks/financial institutions practice additional due diligence on them after onboarding them.  

PEP database check is a part of the AML check. Other parts of the same include:

1. AML database check (to check if the individual has any AML cases against them)
2. Check for adverse PR against the customer