With the rising sophistication of criminals to bypass compliance regulations, financial firms are now more prone than ever to get entangled in the criminal scandals of their customers for their significant role in moving their dirty money and facilitating them in hiding the source of their illicit gains. Thence, financial firms such as banks, investment firms, insurance companies, retail and commercial banks, brokerage firms, savings and loan associations, mortgage corporations, credit unions, and beyond are all held responsible in case of their failure to play the responsible role in the prevention of financial crimes such as bank frauds, money laundering, securities frauds, tax evasion, corruption & bribery, terrorist financing, identity theft, forgery & counterfeiting, market abuse, insider trading, embezzlement of state funds and beyond.
Therefore, PEP databases and sanctions lists are released and updated by the regulatory authorities to facilitate the financial institutions to trace and track down clients engaged in criminal activities and avoid providing any financial services to them.
Countries around the world have realized the growing complexity and implications of illicit financial flows (IFFs) and have built government-funded organizations, financial regulatory bodies, and law enforcement agencies to trace the sources of illicit money, seize those criminal and unethical financial gains, and reduce the rate of financial crimes to build peaceful societies.
The United Nations 2030 Sustainable Development Goal (SDG) includes its objective and target 16.4. to notably decrease the circulation of dirty money and arms flow, making sure the stolen assets are recovered as well as returned and overcoming transnational financial crimes. In order to disrupt the illicit flow of dirty money and prevent financial crimes, the international regulatory bodies have mandated the financial industry to employ PEP screening solutions and devise an effective strategy of PEP risk assessment (challenges in dealing with PEPs) in order to play their important role in the prevention of organized criminal activities. Firms must stay vigilant and comply with domestic, regional, and global PEP lists to minimize the risk of getting ensnared in the financial crimes of their client.
Compliance protocols like the screening of politically exposed persons using PEP lists, screening against watchlists, and sanction lists are mandated to employ risk-based approaches to protect businesses from regulatory fines.
Why Politically Exposed Persons Pose a Threat to Financial Institutions?
Given the nature of unchecked power, it brings out the instinctively selfish impulses of human nature. Humans are prone to exploit unchecked power. The historical study of financial crimes has substantiated this point time and again. People sitting in the corridors of power have been able to get away with their crimes as demonstrated by the United Nations Office on Drugs and Crime that most of the criminals get away with their crimes as 1% of dirty money circulating in the legitimate financial systems is ever caught by the regulatory agencies, government institutions and law enforcement bodies.
Financial firms are prohibited from conducting any business with criminal clients. It is illegal in international law as well as in the AML Watchlist across all the countries to provide financial services to clients (be it an organization, a firm, a brand, or an individual) secretly involved in criminal activities.
Challenges in Dealing With Politically Exposed Persons
Identifying Politically Exposed Persons and Tracing Ultimate Beneficial Owners
One of the major challenges in dealing with politically exposed persons is to determine the ultimate beneficial owners and conduct a PEP risk assessment before enrolling them for further business relationships. Complex corporate hierarchical structures make it difficult to assess who is the Ultimate Beneficial Owner of a financial asset given the challenges caused by paper-based silos, and manual procedures.
On the other hand, digital onboarding solutions are readily available in the regtech markets to smoothen the process of enrolling a customer for providing financial business services. New reg tech solutions like digital onboarding solutions provide visual map structures in the form of graph data visualization to trace the ultimate beneficial owners, controllers, and other individuals in the complex corporate hierarchies that ambiguate the tracing of ultimate beneficial owners.
Consequences of Non-Compliance With PEP Screening Requirements
Neglecting the risks associated with conducting business with a powerful client that may be involved in criminal activities could strike back the financial firm itself. The financial firm may find itself in the money laundering and other financial scandals of its clients. All kinds of financial crimes involving money laundering, such as stolen funds or gained from dirty sources like human trafficking, corruption, etc, will have to be laundered at one point or another. This is one major reason why money laundering is such a pervasive topic in the world of regulatory compliance. Getting embroiled in a client’s criminal scandal usually results in severe reputational damage, loss in revenue, loss of business partners and investors, and in some extreme cases, it leads to insolvency. An effective PEP Screening method will enable the firms to identify PEPs and avoid the risks associated with conducting business with a person holding prominent public office.
