PEP COMPLIANCE OVERVIEW

World-Check, the leading global PEP database solution, provides an overview of the PEP compliance challenge faced by banks, accounting firms, lawyers and other financial service providers, and also explores the nature and origins of PEP compliance legislation.
PEPs: An introduction

Somewhat unfairly, a series of well publicised events and financial scandals involving highly placed governmental officials and a number of former political dictators earned PEPs worldwide a reputation as being ’risky‘ clients. Yet while dealing with this category of prospective clients certainly requires Enhanced Due Diligence (EDD) and ongoing transactional scrutiny, it would be incorrect to assume that the overwhelming majority of PEPs weren’t desirable clients.

There is nothing wrong with dealing with PEPs, provided that the source of their income is transparent and able to withstand scrutiny. Key to mitigating your organisation’s “PEP risk” is the ability to determine between PEPs who warrant enhanced risk management and those that don't.
What is PEP risk?

From an institutional perspective, the risks associated with a lack of PEP due diligence do not stop at regulatory fines for non-compliance. There is also the risk of severe reputational damage. To compound the PEP risk management challenge, a Politically Exposed Person can become compromised at any given point by just one transaction.

Institutions such as Riggs Bank or the Swiss financial houses indicted for their dealings with Augusta Pinochet, serve as a warning against a lack of PEP risk management practices and one that institutions cannot disregard. At the heart of the PEP issue lies risk management; but to understand the need for PEP risk management, the origins of PEP risk need to be examined.
Origins of PEP compliance

During the past couple of decades, several top financial institutions in the world learnt the value of PEP due diligence the hard way. Several Swiss banking houses suffered much public embarrassment relating to their dealings with Ferdinand Marcos, former president of the Philippines, and his family. When it emerged that the dictator and his wife had defrauded the Philippines government of millions of dollars and deposited the proceeds in Swiss bank accounts, the resultant financial scandal and lingering bad publicity illustrated the need for knowing who your customers are, and to be aware of what they are doing financially. The scandal is generally credited as the beginnings of PEP compliance legislation. The term ’Politically Exposed Person‘ has since been use in the Swiss banking community, and was originally created to define a category of high-profile clients whose business warranted a higher level of risk management. Within the financial services industry, PEP Due Diligence thus evolved.

Over time, emerging Anti Money Laundering and PEP-specific legislation would make PEP Due Diligence a legal requirement for most regulated financial service providers and, more recently. many other sectors and industries as well.

But what are the qualifying criteria for being a Politically Exposed Person?
What exactly is a PEP?

According to the Financial Action Task Force (FATF), an inter-governmental regulatory body spearheading the implementation of global Anti Money Laundering (AML) and Anti Terrorist Financing (ATF) legislation, PEPs are past or current officeholders, or individuals who are or were formerly entrusted with high-level public functions in a foreign country. Examples of these positions of trust and power include senior politicians, heads of state or of government, senior judicial or military officials, important officials of political parties as well as senior executives of state owned enterprises.
PEPs: More than just politicians

It is not just the primary officeholder that businesses need to assess for PEP risk, but their family and business networks as well.

Access to the banking system can being gained through connected individuals, shell companies or other legal entities, and as a result, existing PEP definitions also include family members and close associates of a primary PEP.

The Wolfsberg Group, an association of 12 leading international banks, broadened this definition to include individuals whose current or past official position can attract publicity beyond the borders of their home country, or whose financial actions or circumstances may be the subject of increased public scrutiny.
What is ‘Existing Client’ Risk?

During the period 2005 to 2007 alone, more than 310 elections and by-elections took place around the world – that’s an average of nearly 10 elections per month. (Source: ElectionGuide.org). This means that your existing clients may be elected to public office, and hence become PEPs, without your business knowing it. It may be that you only apply your Enhanced Due Diligence processes to new customers and so miss a whole category of individuals that do not meet your corporate risk appetite. As such, routine and ongoing PEP risk screening is not only considered best practice, but is also a legal requirement.

In practice, full compliance with PEP legislation has not come without major operational challenges. In the post-9/11 era, the proliferation of regulatory compliance laws, combined with the need to screen hundreds of thousands of users and accounts on a routine basis, has created a substantial administrative burden for businesses subject to PEP legislation.

The sheer magnitude of the due diligence challenge has subsequently led to the adoption of a risk-based approach to regulatory compliance, but nevertheless Enhanced Due Diligence and ongoing risk management is still required for PEPs.
What is the risk-based compliance approach?

Broadly speaking, the risk-based approach entails the identification of risks that exceed your business’ stated risk appetite (including the need for regulatory compliance), and then matching individuals and entities against these heightened risks during the preliminary stages of due diligence. Should a person fall into one or more of the specified heightened risk categories, additional due diligence ('Enhanced Due Diligence'/'EDD') is then required.

Many operational PEP definitions are based on the FATF PEP definition, yet the recent trend has seen also certain national and regional definitions becoming broader in their interpretation of what a Politically Exposed Person is. World-Check's PEP White Paper seeks to contribute to the refinement of the PEP definition and to provide businesses with guidance for dealing with PEPs – especially in jurisdictions where politics and business are closely related.
World-Check: A comprehensive PEP compliance solution

Featuring a database of hundreds of thousands of Politically Exposed Persons, robust data mining capabilities and the ability to bulk-filter entire client bases routinely, World-Check enables your business to meet its PEP compliance obligations with ease and on an ongoing basis. Significantly, it is not just the sheer number of profiles in our PEP database that counts, but also the system’s ability to identify and critically assess PEP risk.

About the World-Check PEP database

More than 70% of the Egmont Financial Intelligence Units (FIUs) have access to World-Check’s PEP risk intelligence. World-Check emphasises quality, rather than quantity, and sets out to aid organisations in identifying and mitigating actual PEP risk, rather than merely “ticking the boxes” and confirming the position of a Politically Exposed Person. Thousands of new profiles are added to the World-Check PEP database each month, whilst older ones are constantly updated as new public source data becomes available.

Widely recognised as industry pioneer and thought leader in the field of PEP due diligence and risk mitigation, World-Check CEO David Leppan is frequently called upon to address top-level industry conferences as a keynote speaker on PEP-related issues and challenges.