PEP Screening - Vital Defence Against Money Laundering

PEP Screening - Vital Defence Against Money Laundering

December 21, 2023

Why Compliance Protocols like PEP Screening Are Mandatory?

Money laundering is unethical and indictable all around the globe since it enables the corrupt elite to make huge profits out of their illegal activities like tax evasion, drug smuggling, bribery, embezzlement of government funds, human trafficking, and so on. At the same time, it helps them to stay away from the radar of the regulatory authorities. Financial crimes like money laundering expand the already widened wealth gap between the 1% filthy rich and the rest of the working population. Money laundering in simple terms, is hiding your source of money obtained illegally, and making it appear legal by entering it into the legitimate financial system, making it difficult for law enforcement agencies to trace the root of the illicit source, and avoid getting caught by the financial regulators.

Therefore, international regulatory authorities like the Financial Action Task Force FATF, EU Directives, and the Financial Conduct Authority in the UK have placed various compliance protocols like PEP Screening to fight money laundering and curb rising financial crimes. The United Nations Office on Drugs and Crime has reported the loss of $800 billion - $2 trillion US dollars every single year by the global economy due to the money laundered by the filthy rich taking advantage of lax regulations and loopholes in the regulatory systems. 

How PEPs Can Be Identified?

The Financial Action Task Force has stipulated some of the indicators or warning signs to help law enforcement agencies and financial regulators to PEP check clients who are exploiting legitimate financial systems in the course of their business relationship with a financial firm. FATF PEP list provides insights into those potential PEPs who are more likely to commit financial crimes like money laundering. Context plays a big role in interpreting these PEP lists. One or two warning signs could alert a firm of pretty high risks of having a business relationship with that specific client since the alert is based on PEP data generated by the various credible sources of FATF. Whereas every so often, one or more red flags pointed out by the FATF PEP list could result in identifying individuals involved in alarming levels of money laundering. Nevertheless, the results are always subject to a particular context or specific circumstances. 

Why Does PEP Try To Cover Their Identity?

Even PEPs themselves are pretty aware that their powerful positions can get them land in PEP status by law enforcement agencies and regulatory authorities which can help them to easily trace and identify if they are involved in any illegal activity. Therefore, sometimes they try to cover their PEP identity in order to avoid getting exposed by the regulatory authorities. They do it in certain ways like:

  • Using different legal entities and employing various legal arrangements to conceal their identity as beneficial owners of their assets. 
  • Using different layers of shell companies or employing complex financial mechanisms to hide their business activities further enables them to commit other financial crimes like tax evasion. 
  • Using close associates and blood relatives to declare legal owners and hide assets.

PEP’s Activities That Could Be Suspicious

Financial institutions must be vigilant and have PEP screening solutions to keep an eye on their PEP client’s behavior and suspicious activities. These red flag behaviors could be:

  • Using shell companies to hide beneficial ownership and assets
  • Having offshore accounts.
  • Hesitancy to cooperate in revealing the source of their assets during the due diligence process. 
  • Providing inaccurate or inconsistent data in terms of their wealth which may contradict other official documents like bank statements, and asset declarations provided in other public forums. 
  • In some cases, they may have visa denials for suspicious reasons from one or more embassies. 
  • International PEP belongs to a country where having an offshore account is illegal. This means they are breaking the law of their land, which raises question marks on their code of conduct. 
  • They unusually move their money frequently in foreign accounts. 

High-Risk Industries For Financial Firms

Just as there are high-risk individuals who are more prone to financial crimes and hence more risky to develop a business relationship for financial firms. There also exist high-risk industries that are more prone to commit financial crimes. Financial firms and Designated Non-Financial Businesses and Professions (DNFBPs) must be vigilant and take PEP screening measures while dealing with clients coming from high-risk industries. 

Recommendation 1 by the Financial Action Task Force (FATF) suggests all financial firms including Designated Non-Financial Businesses and Professions (DNFBPs) must do their homework by determining the nature of the industry their clients belong to and seek national guidance in terms of risk assessment. The high-risk industries could be: 

  1. Banking & Finance sector
  2. Mining and Extraction manufacturing
  3. Big construction corporations
  4. Human health services
  5. Development and other services
  6. Defense manufacturing and arms trade.
  7. Private companies
  8. Public utilities and goods services.

Financial firms must employ effective PEP compliance programs that offer PEP screening softwares to mitigate the risks associated with having business relationships with high risk PEP clients. Or else they may have to face the dire consequences of non-compliance in the form of legal penalties. 

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