Why Are Financial Firms Required To Conduct PEP Screening?
In the world of finance, power is always exploited. If the history of fraud cases teaches us something, it’s that humans have a natural tendency to abuse unchecked power, and be selfish with it. Just as the saying goes, “(unchecked) power corrupts people and absolute power corrupts absolutely”. The rising financial crimes have proved this point time and again. Therefore, regulatory bodies are forced to mandate pep screening compliance procedures to monitor the financial activities of individuals possessing immense social and political standing.
The Financial Action Task Force (FATF) recommendation 12 and 22 defines politically Exposed Person (PEP) as individuals holding prominent public offices. There is no universal definition of politically exposed persons. Broadly speaking, PEPs are usually individuals operating in the corridors of power, and they tend to establish massive social, economic and political influence. Politically exposed persons are 9 out of 10 times more prone to exploit their high influence and commit financial crimes.
For the financial firms, they are a risk to conduct business with. The reason is, financial firms in today’s compliance landscape, end up suffering the consequences of the criminal activities of their clients. They are held accountable by government agencies, regulatory bodies and law enforcement organizations all around the world for providing financial services to criminal clients and facilitating their criminal operations. As a financial firm, being accomplice in the criminal activities of your customer is a crime. There is no excuse for knowing your client is involved in criminal activities and still continuing to do business with them.
Who Exactly Are Politically Exposed Persons (PEP)?
To give you more clarity, politically exposed persons could be:
- World leaders, cabinet ministers and government officials.
- Top executives of multinational corporations like Apple, Facebook, Amazon
- General Secretary of UNO, IMF, World Bank, International Court Of Justice and other such international organizations.
- The supreme leadership in the judiciary branch like chief justices, judges etc.
- Directors, board members and senior executives of big companies.
- Top military officials and policy makers.
Earlier on, only the people holding powerful public offices were classified as Politically Exposed Persons (PEPs) by the regulatory bodies. However, the United Nations Convention Against Corruption (UNCAC) has now mandated that the close circle of relatives and close business associates of politically exposed persons be categorized as PEP and hence, risky to conduct business with.
How PEP Screening Prevents Financial Crimes?
Background pep screening is a preventive measure against financial crimes such as money laundering, corporate frauds, embezzlement of public funds, terrorist financing, corruption, bribery, and so on and so forth.
All the corporations operating the regulated sector need to conduct the screening of politically exposed persons and determine their risk levels. Classification of customers as Politically Exposed Persons also involved determining their PEP status keeping in mind their risk they can cause to the firm.
Either knowingly or by mistake, facilitating the illicit flow of black money and letting your clients involved in criminal activities use the legitimate international monetary system has massive and damaging consequences for any firm. Big or small, all firms face the music of non-compliance with Anti-Money Laundering regulatory guidelines. ‘Too big to fail’ is no longer applicable for any large financial corporation operating in the regulated sector. Failing to conduct PEP checks of your client and deliberately letting them bypass the compliance loopholes is no longer excusable.
Consequences of Being Accomplice In Financial Crimes
Financial crimes wreak havoc on the economies of each and every country. It equally hurts the domestic as well as global monetary system. Therefore, countries have come together to fight the uncontrollable pandemic of financial crimes damaging their economies and causing massive political instability. Terrorist financing alone ends up causing destruction of pricey infrastructure, displacement of millions of innocents (as in the case of Syria), killing of priceless human lives, heart wrenching poverty levels and eventually leads to a failing economy.
As a rule, there is no specific requirement on how often a financial firm must screen its existing clients against Politically Exposed Person risks published by government agencies and international regulatory bodies. However it is suggested to periodically screen your clients against the updated lists issued by the domestic and international regulatory agencies and governments organizations.
Periodic screening is necessary as a risk based approach since careers and influence of powerful persons never stays stuck in one phase. It keeps on evolving. Their influence remains even when they leave their influential public offices. Therefore, just because a pep is no longer in position of power, does not mean they can never pose a threat to your business.