Politically Exposed Person(PEP)

 A Politically Exposed Person (PEP) is an individual with a high profile political role, or someone who has been entrusted with a prominent public function. These individuals present a higher risk of involvement in money laundering and/or terrorist financing because of the position they hold.

While politically exposed person (PEP) status does not predict criminal behavior, the risk exposure that it brings means that financial institutions must apply additional AML/CFT measures when establishing a business relationship and conduct ongoing monitoring to ensure that they capture changes in their customer’s risk profile. PEP monitoring requirements are preventative in nature and should not be considered indicative of criminal behavior.

 The term “politically exposed person”, sometimes used interchangeably with “Senior Foreign Political Figure”, emerged in the late 1990s in the wake of the Abacha Affair: a money-laundering scandal in Nigeria which galvanized global efforts to prevent abuse of the financial system by political figures.

 In the United Kingdom, the Financial Conduct Authority (FCA) clarifies the dangers of PEPs. “A PEP may be in a position to abuse their public office for private gain and a PEP may use the financial system to launder the proceeds of this abuse of office,” the agency stated. The FCA also recently announced a policy review on PEPs that, at its core, offered an excellent opportunity to revisit the regulated sector’s approach to PEPs and re-examine some of the core principles underlying the U.K.’s anti-money laundering (AML) regime.

 

A joint statement issued in August 2020 by the Board of Governors of the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Financial Crimes Enforcement Network (collectively, the agencies) weighs in on PEPs and the treatment they receive in business relationships. “Not all PEPs are high risk solely by virtue of their status,” the agencies say in the statement. “Rather, the risk depends on facts and circumstances specific to the customer relationship.” While acknowledging that PEPs can pose additional risks, the agencies provide no clear standard for when that risk is posed and how to handle it.

Further, the joint statement does not indicate that there is a regulatory requirement in the customer due diligence (CDD) rule, nor is there a supervisory expectation for banks to have unique, additional due diligence steps for PEPs. The CDD rule also does not require a bank to screen for or otherwise determine whether a customer or beneficial owner of a legal entity customer may be considered a PEP. In short, the review of PEPs comes down to the institution’s risk appetite.

One major difference between the U.S. and U.K., is that the U.K. requires enhanced due diligence on individuals who are considered PEPs to allow the institution to properly handle business relationships with PEPs.

A Politically Exposed Person (PEP) is an individual who holds or has held a prominent public position, either domestically or internationally. This includes government officials, senior executives of state-owned corporations, high-ranking military officers, and influential political party members.

According to the revised KYC master direction from the Reserve bank of India, PEPs are described as “individuals who are or have been entrusted with prominent public functions by a foreign country, including the heads of states/governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.

The World Bank on PEP

 

The World Bank estimates that more than $1 trillion is paid in bribes each year. The proceeds of corruption stolen from developing countries alone ranges from $20 billion to $40 billion per year—roughly equivalent to the annual GDP of the world’s 12 poorest countries where more than 240 million people live.

We do not know the amount of public assets stolen or extorted by prominent public office holders—referred to as grand corruption—and mostly laundered through financial institutions, in particular, through banks.

In addition to the early efforts of some governments, the international community made valuable commitments to address these pressing challenges. The United Nations Convention against Corruption was concluded in 2003. The same year, the Financial Action Task Force on Money Laundering (FATF) reviewed its Forty Recommendations to include standards that specifically target the laundering of the proceeds of corruption.

The Basel Committee on Banking Supervision, an international body of banking supervisors that formulates broad supervisory standards and guidance for implementation by its members, made plain the drawbacks of insufficient action for the international financial system as early as 2001: It is clearly undesirable, unethical and incompatible with the fi t and proper conduct of banking operations to accept or maintain a business relationship if the bank knows or must assume that the funds derive from corruption or misuse of public assets. There is a compelling need for a bank considering a relationship with a person whom it suspects of being a PEP to identify that person fully, as well as people and companies that are clearly related to him/her. 

Accepting and managing funds from corrupt PEPs will severely damage the bank’s own reputation and can undermine public confi dence in the ethical standards of an entire financial centre, since such cases usually receive extensive media attention and strong political reaction.

The picture today is of an overall failure of effective implementation of international PEP standards. There is surprisingly low compliance with FATF requirements on PEPs, especially among FATF members. Of the 124 countries assessed by FATF or by FATF-Style Regional Bodies, 61 percent were noncompliant and 23 percent were partially compliant. More than 80 percent of these jurisdictions are far behind. This paper identifies three key actions necessary to make a genuine difference:

1.      Strong and sustained political will and mobilization.   

Political will is needed to change laws and regulations, to create momentum for government authorities to make this a real priority, to ensure allocation of adequate resources, and to support more aggressive enforcement by regulators. Political will is also important on the implementation side: Absent such political commitment, some banks will not be motivated to make a meaningful commitment to improving customer due-diligence procedures with a view to detecting the proceeds of corruption.

2.      Clarification and harmonization of the international requirements on PEPs.

The current variations among approaches serve as both a good excuse not to act and are seen by some as a real impediment to the development and implementation of effective PEP controls. Harmonization would pave the way for useful guidance to be issued at the international or national level. Jurisdictions and banks would be provided with sounder and more consistent parameters.

3.      Stock-taking of the emerging typologies, with a focus on lifting what impedes the identification of beneficial owners who are PEPs.

PEP identification efforts are complicated by the increased use of close associates, legal entities, and other methods used to hide beneficial ownership or control by senior public officials

PEP Screening Regulations and Standards

Global Regulatory Frameworks (FATF, EU, USA)

1. FATF: The Financial Action Task Force sets international standards for AML and CTF, including guidelines for PEP screening.
2. European Union: The EU’s AML directives require member states to implement rigorous PEP screening processes.
3. USA: The USA PATRIOT Act mandates comprehensive PEP checks as part of its AML and CTF measures.

 

 

While it may be useful for financial institutions to build a list of designated PEPs to reference, doing so is often challenging since the criteria that qualify an individual as a PEP are broadly defined and vary from country to country. The FATF also periodically issues new AML/CFT recommendations on PEPs which further complicates the implementation of any ‘definitive’ PEP list. 

 Financial Action Task Force (FATF) on PEP

A politically exposed person (PEP) is defined by the Financial Action Task Force (FATF) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing (TF). This has been confirmed by analysis and case studies. The potential risks associated with PEPs justify the application of additional anti-money laundering / counter-terrorist financing (AML/CFT) preventive measures with respect to business relationships with PEPs. To address these risks, FATF Recommendations 12 and 22 require countries to ensure that financial institutions and designated non-financial businesses and professions (DNFBPs) implement measures to prevent the misuse of the financial system and non-financial businesses and professions by PEPs, and to detect such potential abuse if and when it occurs.

 

These requirements are preventive (not criminal) in nature, and should not be interpreted as stigmatising PEPs as such being involved in criminal activity. Refusing a business relationship with a PEP simply based on the determination that the client is a PEP is contrary to the letter and spirit of Recommendation 12.

 

The FATF first issued mandatory requirements covering foreign PEPs, their family members and close associates in June 2003.  In February 2012, the FATF expanded the mandatory requirements to domestic PEPs and PEPs of international organisations, in line with Article 52 of the United Nations Convention against Corruption (UNCAC). Article 52 of the UNCAC defines PEPs as “individuals who are, or have been, entrusted with prominent public functions and their family members and close associates”, and includes both domestic and foreign PEPs. The main aim of the obligations in Article 52 of UNCAC is to fight corruption, which the FATF endorses. However, it is important to note that the aim of the 2012 FATF requirements extends more broadly to the fight against ML and its predicate offences (designated categories of offences), including corruption, and TF.

Consistent with this objective, Recommendation 12 requires countries to implement measures requiring financial institutions to have appropriate risk management systems in place to determine whether customers or beneficial owners are foreign PEPs, or related or connected to a foreign PEP, and, if so, to take additional measures beyond performing normal customer due diligence (CDD) (as defined in Recommendation 10) to determine if and when they are doing business with them.

For domestic PEPs and international organisation PEPs, financial institutions must take reasonable measures to determine whether a customer or beneficial owner is a domestic/international organisation PEP, and then assess the risk of the business relationship. For higher risk business relationships with domestic PEPs and international organisation PEPs, financial institutions should take additional measures consistent with those applicable to foreign PEPs.

Recommendation 12 applies to financial institutions, and Recommendation 22 requires countries to apply these requirements to DNFBPs.

Effective implementation of the PEPs requirements has proven to be challenging for competent authorities, financial institutions and DNFBPs worldwide. This is evident from the results of the assessments of compliance with the 2003 FATF 40 Recommendations, undertaken by the FATF, FATF-style regional bodies, International Monetary Fund and World Bank.4 Implementation challenges have also been identified through publicly available supervisory reports and regulatory actions, and high profile cases of (former) government leaders and their relatives who appeared to have significant assets available abroad which were inconsistent with their official or licit income.

It is also important to note that the effective implementation of Recommendations 10, 12 and 22 have to be part of a full and effective implementation of the FATF Recommendations as a whole. See the Reference Guide and Information Note on the Use of the FATF Recommendations to Support the Fight Against Corruption.

This guidance paper is non-binding and should be read in conjunction with FATF Recommendations 12 and 22, and their Interpretive Notes. It is a guidance tool that is based on the experiences of countries, international organisations, the private sector and non-governmental organisations, and which may assist competent authorities and financial institutions and DNFBPs to effectively implement those Recommendations.

 

The FATF  DEFINITIONS

 

For the purpose of this guidance paper, the definitions set out in the Glossary to the FATF Recommendations apply.

The FATF Glossary definition of politically exposed person is meant to have the same meaning as the term persons with prominent public functions (as used in UNCAC Article 52).

In particular, the following definitions, which do not cover middle ranking or more junior individuals, apply to this guidance paper:

n        Foreign PEPs: individuals who are or have been entrusted with prominent public functions by a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.

n        Domestic PEPs: individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.

n        International organisation PEPs: persons who are or have been entrusted with a prominent function by an international organisation, refers to members of senior management or individuals who have been entrusted with equivalent functions, i.e. directors, deputy directors and members of the board or equivalent functions.

n        Family members of individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership.

n        Close associates are individuals who are closely connected to a PEP, either socially or professionally.

 

The difference between a foreign PEP and a domestic PEP is the country which has entrusted the individual with the prominent public function. Pursuant to the definition of PEPs, other factors, such as country of domicile or nationality, are not relevant in determining the type of PEP, but may be relevant in determining the level of risk of a specific domestic PEP (as foreign PEPs are always high risk). It should also be noted that a domestic PEP is subject to the foreign PEPs requirements if that individual is also a foreign PEP through another prominent public function in another country.

FATF on Sources of information on PEPs

Risk-based PEP screening

 

A risk based approach requires firms to deploy AML/CFT measures commensurate with the level of risk their clients present – applying enhanced due diligence measures (EDD), for example, to higher risk customers. In the context of PEP screening best practices, firms should ensure that their definition of the term is broad enough to capture all relevant roles and positions, along with family members and close associates. 

FATF on CDD Measures for PEP

A sample risk grading of PEP given by comply advantage can be accessed on this link.

A risk based approach to PEP screening should be built around the following principles: 

 

·         Fuzzy searches: Where possible, PEP search settings may be less fuzzy than those deployed for sanctions searches. Unlike sanctions targets (which should never be onboarded), PEPs are less likely to vary their names. 

·         Search frequency: While sanctions lists change constantly, the PEP landscape is less volatile. Accordingly, PEP screening processes may take place on a weekly or monthly basis.

·         True positives: When sanctions screening returns a hit, firms must apply enhanced due diligence and freeze the relevant transaction. For PEP screening, however, certain jurisdictions allow for firms to adjust their compliance response: for example, it may be permissible to apply less intensive EDD measures to domestic PEPs than foreign PEPs.

Changes in PEP status

 

Customers become PEPs in a variety of ways including through electoral victories, changes in employment, political appointments, and promotions – and firms must be able to capture that change in risk profile as soon as possible. Similarly, firms should also know when customers may be declassified as PEPs. 

The FATF also sets out guidance for detecting changes in PEP status:

 

·         Customer Due Diligence: Firms should monitor non-PEP customer accounts on an ongoing basis to capture changes in PEP status. Practically this means ensuring effective due diligence (CDD) checks are in place. 

·         Employee training: Firms should train their employees to detect changes in PEP status. The FATF recommends ongoing training programs incorporating real-life case studies and input from human compliance experts. 

·         Adverse Media : Changes to a customer’s PEP status may be revealed in news stories before confirmation by official sources. Accordingly, firms should search for adverse media involving their customers, across both internet, screen, and print sources.

·         Commercial databases: PEPs are listed in a variety of commercially-available databases. While these databases should not be regarded as a replacement for CDD measures, firms may use them to add depth to their PEP screening measures. 

·         Government PEP lists: Many governments maintain lists of PEPs and lists of public roles that qualify their holders as PEPs. Like commercial databases, these lists may help firms add depth to their PEP screening process but should not replace CDD. 

·         PEP declassification: When an individual steps down from their government or prominent public role, it may be possible to declassify them as a PEP. However, in some cases, leaving a political role may not alter a customer’s risk profile. Accordingly, firms should consider a range of factors when seeking to declassify a customer as a PEP, including how long the customer held office, the customer’s ongoing links to the political system, and the level of corruption associated with the territory in which they reside. 

Although there is no accepted time limit for PEP declassification, the FATF emphasizes that the declassification process should be based “on an assessment of risk and not on prescribed time limits”.

With that in mind, an effective PEP screening process should be built on the following principles and considerations: 

 

·         High quality data: The quality of the data that firms collect on their customers is vital to establishing PEP status with speed and accuracy. 

·         Global coverage: A comprehensive PEP screening process ensures customers are screened against live data from international, regional, local, and proprietary sources.   

·         Risk-based: Customizable search profiles should be used to apply different search settings to groups of customers based on a firm’s business model and risk appetite.

·         Supplementary screening: The PEP screening process should be supported by additional customer screening solutions, including adverse media searches.

·         Ongoing monitoring: PEP legislation changes over time,  meaning that businesses must monitor regulatory trends – and how they affect their business – on an ongoing basis.

PEP Screening Regulations in India

In India, the Reserve Bank of India (RBI) has established detailed guidelines for PEP screening, requiring banks and financial institutions to conduct enhanced due diligence for PEPs. This includes verifying the customer’s identity, monitoring transactions, and maintaining detailed records to ensure compliance with national and international standards.

In India, the Reserve Bank of India (RBI) mandates that banks and financial institutions implement robust PEP screening procedures as part of their know your customer (KYC) norms.  These regulations align with global standards set by FATF and other international bodies to ensure consistency and effectiveness in combating financial crimes. Non-compliance can result in severe penalties, legal repercussions, and reputational damage.

 

RBI MD 29/11/2004

Customer Acceptance Policy ( CAP )

Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. to enable categorization of customers into low, medium and high risk (banks may choose any suitable nomenclature viz. level I, level II and level III ); customers requiring very high level of monitoring, e.g. Politically Exposed Persons (PEPs – as explained in Annex I) may, if considered necessary, be categorised even higher;

Banks may prepare a profile for each new customer based on risk categorisation. The customer profile may contain information relating to customer’s identity, social/financial status, nature of business activity, information about his clients’ business and their location etc. The nature and extent of due diligence will depend on the risk perceived by the bank. However, while preparing customer profile banks should take care to seek only such information from the customer which is relevant to the risk category and is not intrusive. The customer profile will be a confidential document and details contained therein shall not be divulged for cross selling or any other purposes.

For the purpose of risk categorisation, individuals ( other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk. Illustrative examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government departments & Government owned companies, regulators and statutory bodies etc. In such cases, the policy may require that only the basic requirements of verifying the identity and location of the customer are to be met. Customers that are likely to pose a higher than average risk to the bank may be categorized as medium or high risk depending on customer's background, nature and location of activity, country of origin, sources of funds and his client profile etc. Banks may apply enhanced due diligence measures based on the risk assessment, thereby requiring intensive ‘due diligence’ for higher risk customers, especially those for whom the sources of funds are not clear. Examples of customers requiring higher due diligence may include (a) non-resident customers, (b) high net worth individuals, (c) trusts, charities, NGOs and organizations receiving donations, (d) companies having close family shareholding or beneficial ownership, (e) firms with 'sleeping partners', (f) politically exposed persons (PEPs) of foreign origin, (g) non-face to face customers, and (h) those with dubious reputation as per public information available, etc.

It is important to bear in mind that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged.

Annexure-1 to MD dated 29/11/2004

Accounts of Politically Exposed Persons(PEPs) resident outside India

Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc. 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 PEP should be taken at a senior level which should be clearly spelt out in 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.

RBI  on Politically Exposed Person

The amendment rules have introduced [ Oct 2023] a new clause, which defines “Politically Exposed Persons” (PEPs) as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.

 The new rules also include a person who is entrusted by a foreign country with a public function

Bank accounts of PEPs have additional KYC norms under the current provisions and special due diligence has to be undertaken by a senior bank official.

• REs have the option of establishing a relationship with PEPs (whether as customers or beneficial owners). 
• REs have to perform regular customer due diligence and also follow additional conditions prescribed by the RBI to transact with PEPs.
• Some additional conditions include establishing an appropriate risk management system to determine whether the customer or the beneficial owner is a PEP.
• REs have to take reasonable measures to establish the source of funds/ wealth.
• They also need to get approval from senior management to open an account for a PEP.

PEP Screening Process

Countries might publish two types of list: (1) a list of positions/functions that would be held by a PEP, or (2) a list of names of PEPs. In general, while inclusion on a list can confirm that a person is a PEP, not being featured on a list does not exclude the possibility that a person is a PEP.

Sample Profiling

Steps In Conducting A PEP Check

Conducting a PEP check involves several steps to ensure comprehensive scrutiny:

1. Customer Identification: Collecting and verifying the identity of the customer.
2. PEP Status Verification: Using databases and software to determine if the customer is a PEP.
3. Risk Assessment: Evaluating the level of risk associated with the PEP, considering factors like the individual’s position, country of origin, and nature of transactions.
4. Enhanced Due Diligence (EDD): Implementing additional measures such as continuous monitoring, transaction analysis, and deeper investigation into the customer’s background and source of funds.
5. Regular Review: Periodically updating the PEP status and risk assessment to account for individual circumstances or global regulatory standards changes.

Importance of PEP Screening

 

PEP screening is crucial for mitigating the risks associated with financial crimes, including money laundering and terrorist financing. By identifying PEPs, financial institutions and businesses can apply enhanced due diligence measures to monitor their transactions and relationships more closely. This proactive approach helps maintain the integrity of the financial system and prevents illicit activities that could jeopardise the organisation’s reputation and legal standing. For example, the Panama Papers published in 2016 revealed details of 140 PEPs who had used letterbox companies to launder money or disguise their ownership of assets procured through illicit manner.

The documents that were published in 2016 are 11.5 million leaked financial and attorney-client details of over 214,488 offshore entities which were created by Panamanian law firm Mossack Fonseca in order to evade taxes and other money fraud.
The leaked documents contain financial information of public officials, corporate honchos, celebrities, politicians and more that were previously kept private.

This data was released by a German newspaper 'Suddeutsche Zeitung' under the title of ‘Panama Papers’ on 3rd April 2016 in which celebrities, businessmen and famous personalities of dozens of countries including India were named.

The Panama Papers disclosed data from the years between 1977 and 2015 and shook the entire world with shocking revelation.

500 Indians In The Club
It had around 500 Indian names including several Bollywood personalities such as Amitabh Bachchan, his daughter-in-law Aishwarya Rai, actor Ajay Devgn, businessman Vijay Mallya, former Solicitor General of India, Harish Salve, along with the most wanted underworld figure Iqbal Mirchi, who was allegedly Dawood Ibrahim's right-hand man.

The Panama Papers exposed alleged illegal properties worth around Rs 20,078 crore of 500 Indians who were named in the documents.

John Doe, the Whistleblower

The documents were leaked to a journalist working for the German newspaper by a person using the pseudonym John Doe. Till date, the whistleblower remains anonymous, even to the journalists who worked on the investigation.

The anonymous whistleblower, told German journalist Bastian Obermayer that his "life was in danger" and cited income inequality as the reason for leaking the documents.
The data was leaked "simply because I understood enough about their contents to realize the scale of the injustices they described," Doe told the journalist.

After the German publication broke the news, the International Consortium of Investigative Journalists (ICIJ) posted the full document on its website later.

Several countries initiated their separate investigations in the matter after the papers were leaked and named many big personalities from across the world.

The Indian government created a multi-agency group (MAG) combining central investigative agencies under the chairman of the Central Board of Direct Taxes (CBDT) that includes officials from the ED, Reserve Bank of India (RBI) and the Financial Intelligence Unit (FIU) to monitor a probe into the Panama Papers and similar global tax leaks cases.

It had recently said that as on October 1, 2021, "total undisclosed credits of Rs 20,353 crore" have been detected with respect to 930 India- linked entities in the Panama and Paradise paper leaks.

The leaked documents are back making headlines Dec 20, 2021 after the agency summoned Bollywood actress and former Miss World, Aishwarya Rai Bachchan, to join the probe in a matter linked to the 2016 Panama Papers case.
The actress is facing money-laundering allegations for her involvement in an offshore entity.

The 'Devdas' star's husband Abhishek Bachchan and father-in-law Amitabh Bachchan are already facing investigations in separate cases under the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) being probed by the ED.

Among the rich and famous Indians named in the Panama Papers so far are billionaire property baron Kushal Pal Singh, billionaire Gautam Adani’s brother Vinod Adani, and billionaire real estate magnate Sameer Gehlaut.

Mossack Fonseca, the law firm outed by the Panama Papers as a hub of illicit money flows, outsourced its offshore business to a network of companies tied to a Kerala-based accountant just weeks after ICIJ’s 2016 investigation, according to The Indian Express. shortly after the global exposé, which led the firm to close within two years, an Indian citizen, Mathew George, allegedly began doing “third-party collections” for Mossack Fonseca and its clients.

India’s Enforcement Directorate, which is leading a multi-agency probe into George, reportedly uncovered a master list of 599 Mossack Fonseca clients during a raid on his Kochi residence and office in April 2022.

The list, reviewed by The Indian Express, included details of dozens of payments to entities in countries such as Switzerland, Monaco, Luxembourg and the U.S. — all well-known financial secrecy havens — via the bank accounts of four companies registered in his name. All the transactions took place in 2017.

The Pulitzer Prize-winning Panama Papers investigation, which drew in 370 journalists from over a hundred media organizations around the world, was based on one of the biggest data leaks in history

 Thus the significance of PEP's CDD is summarised in the following:

1. Risk Mitigation in Financial Transactions

PEP screening helps financial institutions identify high-risk individuals and transactions, reducing the likelihood of involvement in money laundering, corruption, and other financial crimes. By applying enhanced due diligence measures, institutions can mitigate potential risks and protect their assets and reputation.

2. Prevention of Money Laundering and Terrorist Financing

PEPs are often targeted by criminal organisations seeking to launder money or finance terrorism. Effective PEP screening disrupts these illicit activities by detecting and preventing suspicious transactions, ensuring compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

3. Enhancing Business Reputation and Integrity

Adhering to PEP screening regulations and maintaining stringent compliance standards demonstrate a commitment to ethical practices. This not only safeguards the organisation’s reputation but also builds trust with clients, partners, and regulatory bodies.

PEP Screening Process

 

PEP Screening in Different Sectors

1. Financial Institutions

Banks and other financial institutions are at the forefront of PEP screening, given their significant exposure to financial transactions. They must implement rigorous PEP checks to prevent money laundering and comply with regulatory requirements.

2. Real Estate

The real estate sector is vulnerable to money laundering activities involving PEPs. Real estate companies must conduct thorough PEP screenings to ensure the legitimacy of transactions and avoid legal and reputational risks.

3. Legal and Accounting Firms

Legal and accounting firms often handle sensitive financial information and transactions on behalf of clients. Implementing PEP screening helps these firms identify and mitigate risks associated with high-profile clients.

4. E-commerce and Online Businesses

With the rise of digital transactions, e-commerce platforms and online businesses must also conduct PEP screenings to prevent fraud and maintain compliance with AML and CTF regulations.

PEP Screening in Different Sectors

1. Financial Institutions

Banks and other financial institutions are at the forefront of PEP screening, given their significant exposure to financial transactions. They must implement rigorous PEP checks to prevent money laundering and comply with regulatory requirements.

2. Real Estate

The real estate sector is vulnerable to money laundering activities involving PEPs. Real estate companies must conduct thorough PEP screenings to ensure the legitimacy of transactions and avoid legal and reputational risks.

3. Legal and Accounting Firms

Legal and accounting firms often handle sensitive financial information and transactions on behalf of clients. Implementing PEP screening helps these firms identify and mitigate risks associated with high-profile clients.

4. E-commerce and Online Businesses

With the rise of digital transactions, e-commerce platforms and online businesses must also conduct PEP screenings to prevent fraud and maintain compliance with AML and CTF regulations.

Practical Measures for Identifying and Monitoring PEPs:

• Risk Assessment:
• Reporting entities must conduct a risk assessment to determine the risk associated with a customer. PEPs should be considered high-risk customers and subject to additional scrutiny.
• Enhanced Due Diligence (EDD):
• Reporting entities should apply enhanced due diligence measures for PEPs.
• As part of this process, we gather additional information about the customer, such as their source of funds, the nature of their business relationship, and the reason for the transaction.
• Screening:
• Reporting entities should screen their customers against a PEP list.
• PEP lists can be obtained from regulatory authorities or other reliable sources.
• Any matches found should be further investigated.
• Ongoing Monitoring:
• Reporting entities should continuously monitor the transactions and activities of PEPs.
• This includes reviewing the customer’s account activity, transactions, and the source of funds.
• Training:
• For reporting entities to understand PEPs and their risks better, they should provide regular training to their staff.
• Training should cover identifying PEPs, conducting enhanced due diligence, and monitoring PEP-related transactions.

By implementing these practical measures, reporting entities can effectively identify and monitor PEPs, thereby mitigating the risks of money laundering and terrorist financing. Such measures contribute to the overall integrity and security of the financial system.

Happy Reading

Those who read this, also read:

1. RBI Guidance on CDD for Specific Category of Customers

2. Beneficial Owner : PMLA 2002