“Once a PEP Always a PEP”, does it really apply in all cases?

15 Apr “Once a PEP Always a PEP”, does it really apply in all cases?

As per anti-money laundering regulations (AML), financial institutions should take all rational steps to ensure that they do not knowingly or unconsciously help in hiding or transferring the proceeds of corruption and bribery by political figures, their families and associates.

This is because the risks presented by politically exposed persons (PEPs) will vary according to the client, product, service, country, and industry, hence identifying, monitoring, and designing controls for these accounts and transactions should be risk-based. It is important to adhere to not only the local requirements for PEP due diligence but also any international ones to which the firm may be exposed.

There is a profound view in the world of Know Your Customer (KYC) and AML that “Once a PEP, always a PEP” but does really apply in all scenarios when a potential PEP is identified during the KYC process?

Its agreed that current and or former PEPs might bring with them a considerable amount of risk, but if we were to strictly implement a risk-based program then this approach would not work in all cases. In some parts of the world, there may be time limits on how long someone is to be treated as a PEP after leaving office.

For example, in places in Europe, banks continue to monitor the risks posed for 18 months after the person ceases to be a PEP. Other organizations, however, recommend that a person who is no longer a PEP should be assessed according to risk and not on prescribed time limits.

Although the influence may considerably depreciate as soon as they leave office, a PEP may have been in a position to acquire his or her wealth illicitly, so that a high level of scrutiny with regard to such individuals may be warranted even after they have left office.

But a blanket statement – ‘Once a PEP, always a PEP’ – will not be a holistic approach in all cases, the risk-based approach could be more appropriate. So now comes the million dollar question, how to risk rate a customer who is a former PEP?

Financial Institutions should evaluate the below scenarios before coming to a conclusion:

1. The time spent in the public office

2. The position held in the public office and its inclination to corruption

3. The Corruption Index of the country in which the public office is held

4. Any visible links the political figure might have with any high-risk industries

5. The level of transparency in the source of wealth and the documents provided to substantiate it

6. Any adverse news on the political figure that can cause substantial damage

7. Whether they are still politically connected after leaving office. Thorough research must be performed in the public domain to see if the person in question has recently been involved in any sort of political meetings/rallies or talking on behalf of any other politician etc.

Where a PEP is deceased but has accumulated a source of wealth, a risk-based evaluation for his or her close family members or associates will need to be conducted in order to decide whether those relationships require EDD or declassification as a PEP.

It should be noted that any declassification of a PEP should be subject to an appropriate level of senior management review and approval, and all the factors that are taken into consideration for declassification must be documented for future regulatory inquires if any.

To conclude, managing PEPs risk is clearly an area that financial institutions cannot afford to ignore, and it has to be done in accordance with regulatory requirements, including a risk-based policy which clearly outlines the criteria for classifying an individual as a PEP.