Politically Exposed Persons (PEPs) have been a longstanding concern in the world of banking and finance, with their identification being a crucial element of anti-money laundering (AML) regulatory requirements for over two decades. Recent events, such as Russia’s invasion of Ukraine, have propelled PEPs into the spotlight, as even prominent figures in British politics found themselves denied access to their bank accounts due to their PEP status, as Moody’s Analytics discussed in their recent whitepaper.
The Financial Action Task Force (FATF) defines a PEP as an individual who has held a significant public role in a government body or international organisation. While there isn’t a single global definition, PEPs typically wield influence over government spending, state development approvals, infrastructure projects, and international trade policies. They include heads of state, government ministers, senior government executives, judges, military officers, central bank governors, and international organisation board members.
It is well-known that PEPs’ positions can be exploited for money laundering, corruption, bribery, and activities related to terrorist or proliferation financing. Even family members and close associates can be classified as PEPs by association, further complicating the risk landscape.
The FATF classifies PEPs into five main categories: foreign, domestic, international organisation, family members, and close associates. Families and close associates of PEPs undergo stricter anti-money laundering and counter-terrorist financing monitoring because their accounts can be used to hold the proceeds of corruption or money laundering. This necessitates regular monitoring of their transactions and risk factors.
Managing PEP risk
Following the guidelines set out by the Financial Action Task Force (FATF), particularly in Recommendation 12, PEP transactions are subjected to heightened scrutiny through a Risk-Based Approach (RBA). The depth of this scrutiny is contingent upon the risk assessment policy of the respective bank. When dealing with PEPs from high-risk jurisdictions, the intensity in which they need to be monitored is amplified further still.
Interestingly, the World Bank asserts that domestic and foreign PEPs present an equivalent risk. As a result of this, the majority of international banks and financial institutions have already embraced the practice of enhanced due diligence for both domestic and foreign PEPs.
To adhere to the FATF recommendations and meet national regulations concerning PEPs, banks and financial institutions must execute Know Your Customer (KYC) activities. As part of this process, enhanced due diligence is carried out during onboarding. This entails the classification of customers or suppliers who occupy prominent positions in local or foreign governments, or even international organisations, such as sporting governing bodies.
In the context of anti-money laundering standards, banks, financial institutions, and designated non-financial businesses and professions (DNFBPs) are required to adopt a risk-based approach to ascertain whether their customers can be classified as PEPs before initiating any new business relationship.
In most cases, institutions conform to this requirement by posing necessary KYC questions and cross-referencing external PEP databases, including resources like Moody’s Grid. Additionally, a Risk-Based Approach (RBA) is applied, featuring several key indicators. These indicators include an evaluation of the risk associated with particular jurisdictions, the seniority of a public official, and the specific area of business.
Recognising the possibility of existing customers acquiring PEP status after the initial onboarding, businesses are advised to establish an ongoing process. This process involves conducting continuous checks, aptly known as perpetual KYC.
How Moody’s Analytics can help
Companies like Moody’s Analytics plays a vital role in assisting banks and institutions in complying with AML/CTF regulations by providing risk intelligence data from independent sources.
Moody’s Analytics’ PEP database sets specific standards for inclusion, covering a broad spectrum of role categories. These categories encompass government officials, military personnel, members of the judiciary, diplomats, affiliates of political parties, representatives of religious organizations, and individuals associated with international organizations. Each of these categories is further subdivided into four distinct levels, each level serving a specific function within its category. For example, the Diplomate category, which includes four levels: Ambassador, Consulate, Attaché, and Counselor.
What distinguishes Moody’s Analytics is the adoption of an innovative and holistic scoring system, crafted in accordance with industry best practices. This scoring system takes into account various factors, such as the PEP’s relative seniority level, the risk associated with their position, the risk level of their home country, their corruption rating, and the relevant adverse media risk categories. This comprehensive approach ensures a thorough and nuanced assessment of each individual’s PEP status and associated risks.
The firm offers a substantial dataset for screening adverse media and negative news. This dataset contains a wealth of structured data, making it highly effective in identifying concealed PEPs associated with negative news linked to possible criminal activities or heightened risk factors. This service is driven by advanced AI and machine learning technology, ensuring a consistent and accurate process for alerts and reducing false positives by up to 70%.
As the number of PEPs continues to rise, each with their unique risk profiles, Moody’s Analytics provides an efficient PEP Risk-Based Approach (RBA). This approach empowers institutions to channel their attention and resources toward PEPs with higher risk levels within their business network.
Simultaneously, institutions can adopt a more relaxed approach for PEPs categorised as lower risk, taking into account their behavior, negative news footprint, jurisdiction, and the nature of their business activities. This tailored approach allows for effective management of PEP-related risks, ensuring financial institutions remain vigilant in a dynamic landscape.
You can read the full whitepaper from Moody’s Analytics here.
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