Financial services providers handle vast amounts of money from people all over the world every day. With these high transactions, it becomes imperative that banks and other financial services entities get to know exactly who they are dealing with. One of the critical steps in this process is the due diligence of politically exposed persons (PEPs). Due diligence on PEPs encompasses the processes financial institutions must adhere to lower risks associated with them and remain compliant with the law.
PEPs are defined as public officials who hold or have held high-level public positions, as well as their first-degree relatives and known close associates. These people are most likely to be exposed to opportunities to undertake corrupt activities because of their position of influence.
Conducting PEP verification is crucial in those processes that establish and maintain trust with customers while guarding the integrity of the financial system.
Why Conduct PEP Due Diligence on Financial Transactions?
One estimate suggests that hundreds of billions of dollars are laundered all over the world every year. A significant part of these funds is generated through corrupt practices and criminal activities involving PEPs. With effective PEP due diligence, a financial institution can avoid incurring heavy monetary fines and reputational loss due to non-compliance with anti-money laundering laws. Proper PEP due diligence would prevent high-risk relationships with clients and place the firm on the right side of regulations.
The Risks of Not Doing Proper PEP Due Diligence
For significant banks and other large-scale financial players, fines for failure to follow PEP due diligence requirements can go into the million-dollar range. Also, non-compliance with proper scrutiny of PEP customers may even go to the extent of revocation of your regulatory license to operate. The risk of severe reputational damage resulting from the scandal is the most serious. Customers stay away from banks embroiled in money-laundering scandals. A robust PEP due diligence process helps to manage these risks in compliance, legal, and PR for financial institutions.
Establish a Strong PEP Due Diligence Process
The full PEP screening process involves:
- Checking the identity of customers
- Screening all parties associated with any transaction against such PEP databases
- Monitoring existing accounts for any connection to PEPs
Use PEP Databases and Screening Tools
Good PEP databases include records of millions of individuals from all over the world who hold or have held senior public positions. The information on PEPs needs to be current, as approximately 150,000 new PEPs are added every year. It is very efficient to deal with this check quickly, and such PEP-screening tools make use of many PEP databases at the time of customer onboarding in a financial institution. Automating PEP screening through PEP screening tools would serve as a giant step for any institution in PEP due diligence. The institution saves time when more high-risk matches against PEP data are caught.
Conduct Complete Identity Checks on Customers
This is relevant in the identity verification procedure during PEP due diligence because corrupt officials may be trying to hide under a different name. Financial firms should ensure that they use only certified identification documents and digital verification technologies that can cross-check customer identities against regulatory standards for Know Your Customer. A comparison of identities will be made across several PEP databases as part of customer screening, giving up potential matches that would otherwise have been missed. This will ensure that there is no discrepancy between the ID provided by the customer and the PEP data.
Monitor Existing Customer Accounts PEP Risk
As soon as customers are screened, new ones are expected to have the same potential, while established clients may assume the status of politically exposed persons well after an account has been opened. Financial institutions should have ongoing monitoring programs that rescreen all customers, and related parties with new PEP information. This continuous PEP screening allows financial institutions to check whether their existing relationships may be regarded as compromised and to address the emerging risks of money laundering to stay compliant with regulations.
Stay Compliant with Anti-Money Laundering Regulations
Financial institutions must follow strict rules because they play an essential role in the world’s money system. Every year, laws that are more stringent against money laundering and terrorism financing are introduced in many places to stop financial crimes. For instance, the US Bank Secrecy Act demands that financial companies thoroughly check their customers and keep watching their activities. The EU also requires companies to have a system for checking if people are politically exposed (PEP) based on their risk levels as part of their compliance programs. Having a top-notch system for screening PEPs, which includes using the latest PEP information, is crucial for showing that a company is following the rules. This not only reduces risks but also helps protect the company’s good name by sticking to worldwide anti-corruption standards.
Strong PEP Controls
As corruption remains a global issue, using detailed PEP databases, screening tools, and regular monitoring helps companies improve their defenses against money laundering. Setting up vigorous PEP check takes resources, but the costs of not following the rules, like fines and damage to the company’s reputation, are much higher than the initial money spent on staff and technology. A thorough PEP due diligence process shows a financial institution’s dedication to honesty, following regulations, and making sure that all money involved in transactions is clean.