In the world of financial transactions and international trade, the concept of Politically Exposed Persons (PEPs) takes centre stage. PEPs encompass individuals occupying influential positions in society, including politicians, international organisation directors, bureaucrats, association leaders, and more. In addition to this, the family members and close associates of PEPs are also classified under this category.
The Financial Action Task Force (FATF) classifies PEPs into three categories: Foreign, Domestic, and International, each reflecting different risk levels associated with these individuals.
A staggering amount of money changes hands through bribes every year, presenting a significant challenge for nations worldwide. This highlights the importance of considering PEPs as high-risk individuals due to their potential involvement in bribery and corruption. However, it's important to note that financial institutions aren't prohibited from opening accounts for PEPs. Instead, anti-money laundering (AML) regulators mandate the identification of PEPs due to the risks tied to their potential involvement in high-profile crimes.
Foundation of Sanctions & PEP Controls: KYC and CDD Procedures
The foundation of sanctions and PEP controls lies in the Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures, which are cornerstones of AML regulations. These procedures play a vital role during customer onboarding, allowing the assessment of a customer's risk level. Within this process, PEP detection holds a significant place, making it essential for companies to conduct PEP screening as per AML regulations during onboarding. However, the nuances of PEP screening compliance can vary across different regions.
The United Kingdom boasts robust regulations aimed at tackling the risks tied to PEPs. Firms in the UK carry specific responsibilities for PEP screening and sanction screening within local and global lists.
In the UK, institutions are recommended to identify customers and conduct transactions automatically as part of the onboarding process. To comply with PEP screening regulations, these entities must conduct a thorough screening of foreign, domestic, and international PEPs.
Europe showcases comprehensive regulations addressing PEP risks. PEP screening here extends beyond identification, encompassing investment screening, high-risk country screening, and Ultimate Beneficial Ownership (UBO) screening. This comprehensive approach helps assess and mitigate risks tied to PEPs and high-risk individuals.
Within the EU's risk-based AML/CFT* approach, identification of a PEP or a customer originating from a high-risk third country triggers Enhanced Due Diligence (EDD) procedures. These procedures involve thorough investigations and additional measures to ensure transaction integrity. * (CFT) Combating the Financing of Terrorism
The Middle East and North Africa Financial Action Task Force (MENAFATF) plays a pivotal role in shaping AML/CFT standards in the region. Countries such as Oman, UAE, Saudi Arabia, and more, have implemented PEP screening regulations that cover foreign, local, and international PEPs, recognising the importance of screening individuals in influential positions.
However, variations in requirements are apparent. For example, Iran requires mandatory screening for foreign and international PEPs, while Syria focuses on foreign and local PEPs. Countries linked to Iran have been flagged as high-risk for AML/CFT due to rampant government corruption, necessitating robust PEP screening measures.
While not bound by EU regulations, Turkey has adapted its laws to align with the EU's fourth anti-money laundering regulations, indicating a commitment to global standards. Turkish Financial Crimes Investigation Board (Masak) oversees the determination of PEPs and related obligations.
Diverse Landscape and AML Challenges African states have diverse regulations governing PEP screening, with many members of FATF (Financial Action Task Force) implementing screening requirements for foreign, local, and international PEPs. Nonetheless, the landscape varies significantly, with countries like Zimbabwe, Uganda, and Botswana facing challenges related to corruption and financial crime.
In the U.S., reporting suspicious activities involving PEPs is mandatory, aiding in the prevention and detection of financial crimes. Canada's Proceeds of Crime and Terrorist Financing Act (PCMLTFA) mandates PEP screening for local PEPs and aligns with AML/CTF programs.
Vigilance and Region-Specific Screening PEP screening in Asia varies across jurisdictions, demanding awareness and compliance. Challenges persist in some Asian countries due to government and institutional corruption. Various countries, such as the Philippines, Cambodia, China, and more, have diverse requirements for PEP screening.
Navigating the complexities of PEP screening compliance across different regions is a crucial endeavour for financial institutions and businesses engaged in international trade. As regulations vary and risks differ, it's imperative to adopt a robust and tailored approach to PEP screening. By aligning with local regulations and international standards, companies contribute to safeguarding financial systems, mitigating risks, and upholding ethical business practices on a global scale.
If you are a financial institution, insurance business, travel agent, or estate agent it is vitally important that you are aware of your legal obligations under the requirements set out not just in your own country but in those of your customers.
It can be difficult to know what you need to be checking, which is why the consultants at RRCA are on hand to help you with expert advice.