How PEP Screening Works Behind the Scenes for Financial Integrity?
Politically Exposed Persons (PEP) screening focuses on scrutinizing influential individuals in the realms of power who may hold powerful public positions and have a certain circle of influence. Before starting off a business relationship with powerful potential clients, banks must have a risk based approach and must employ PEP screening software to screen their potential clients in order to avoid the cost of non-compliance. Close associates of Politically Exposed Persons are also included in the list of Politically Exposed Persons. This is because sometimes, the ultimate beneficial owners try to hide their assets to avoid taxation and declare some close associates as their beneficial owners or their benefit de facto.
Why Is PEP Screening Non-Negotiable?
Screening of Politically Exposed Persons is a non-negotiable requirement of Anti Money Laundering compliance as non compliance could lead to outrageous fines by the government agencies and regulatory authorities. More often than not, financial firms wind up having $4,005,116 every year due to negligence of AML compliance regulations. Thi negligence leads to severe consequences such as disruptions in the business activity, legal as well as non-legal settlement costs and reduction in business productivity.
Comprehensive PEP screening involves systematic assessment of a potential client to analyze their circle of influence and probability of committing any financial crimes such as bribery, corruption, embezzlement of government funds, money laundering, tax evasion, corporate fraud and so on. Compliance officers also monitor their financial activities, and take into account all considerations while evaluating the risks of initiating business with potential PEP clients. A robust PEP compliance program helps identify any potential risk.
Step 1: Initial Vetting
The first step in the screening of Politically Exposed Person (PEP) involves compiling basic and essential details about the potential client or client organizations engaged in business transactions or business partnerships. Compliance officers conduct an in-depth verification of clients’ official name and baseline information in all public data sources.
Step 2: Determining PEP Status:
Compliance officers analyze the socio-political influence of the potential client by scrutinizing their affiliations or circle of influence. Family connections are inspected as close relations and business associates of politically exposed persons tend to be as equally prone to committing financial crimes as the person holding the powerful position.
Step 3: Inspecting Financial Activities:
One of the most important steps of PEP screening is inspecting client’s financial ventures by reviewing their business dealings, financial investments and transactions. Compliance officers look for suspicious unusual patterns such as enormous amounts of transactions, or constant movement of funds. Such unusual behaviors help identify clients with suspicious financial history.
Step 4: Evaluation of Potential Risks:
Risk levels of potential clients are determined on the basis of their political influence and financial ventures. The identified risk is measured against the regulatory guidelines issued by government agencies.
Step 5: Drafting Final Report:
The final PEP report is prepared that summarizes the comprehensive screening process and documents detailed findings about the PEP check. The report also comprises the PEP status of the given client and discusses potential risks if the client is onboarded.
Step 6: Drawing Conclusion of Final Report:
After the PEP report is drafted, the final decision is made by the business directors or executives to determine whether to initiate a business relationship with a PEP client or not. Whatever their decision turns out to be, PEP screening measures are preventive actions and a smart proactive approach to counter the risks of financial crimes. In case the executives decide to establish a business relationship with a potential PEP client, then enhanced due diligence will be conducted to mitigate future risks.
7. Constant Surveillance:
Financial firms are advised to build a system of constant surveillance or monitoring of their Politically Exposed Persons clients and conduct frequent PEP list screenings. Staying vigilant is the key while dealing with the PEP clients. Ongoing surveillance of their financial transactions is essential to deter business risks. Staying updated with changes in regulations is critical.
Financial crimes are evolving faster than ever. The rising sophistication of money launderers has compelled the governments around the world to take strict action against the accomplices of financial crimes. Financial institutions such as banks stand as the most vulnerable institutions of facilitating financial crimes like money laundering and terrorist financing. Therefore, the government agencies and regulatory authorities are holding financial firms accountable for conducting business relationships with criminal entities. The wisest choice for businesses operating in today’s regulatory landscape is to employ PEP screening solutions and act in accordance with regulatory guidelines and avoid costly legal penalties.
