International Regulations – Money laundering is mainly seen as a criminal offense in the niche of anti-money laundering. While this is true to some extent, quite simply money laundering is the process by which the origin of money remains concealed from government oversight. Turning this money and source of funds into legitimate is what constitutes money laundering.
According to a new report, a total of US$2.3 billion has been laundered from the real estate sector in the UK alone. Building on the crucial need to develop AML regulations, the UK was the first state to step up with an anti-corruption summit in May 2016. The summit talked about three three-step strategies to counter corruption among people with the power to foster the illicit flow of money. The three-step strategy included: expose, pursue, and punish.
This blog will address the role of international organizations specifically FATF in managing the risks associated with Politically Exposed Persons, PEP data, and PEP check. Keep reading ahead to know more about it.
Overseeing the dangers related with Politically Exposed Individuals (PEPs) is an essential part of monetary direction universally. PEPs allude to individuals who are trusted with significant open capacities, both inside or outside their nation, and their near relatives. Because of their compelling positions, they present higher dangers for inclusion in debasement, cash laundering, or different unlawful exercises which could compromise the uprightness of the monetary framework. Global guidelines expect to diminish these dangers and guarantee the trustworthiness of the budgetary framework. Here are a couple key worldwide guidelines in overseeing the dangers related with PEPs, which intend to give more setting and clarification on this significant issue:
- Financial Action Task Force (FATF)
- The Wolfsberg Group
- European Union Directives
- US Patriot Act
- International Compliance Association (ICA)
- Basel Committee on Banking Supervision
Role of Politically Exposed Persons in Money Laundering
While there is no universally agreed-upon definition of PEP, many institutions have converged on considering individuals with a high degree of position that gives them the power to influence the course and direction of events.
Common financial problems including corruption, embezzlement, and extortion are carried out by politically exposed persons with public offices. Such individuals happen to be more often involved in illicit financial and nonfinancial activities due to their functions and positions.
To fight this issue, the anti-money laundering framework provides guidelines for screening and prevention of politically exposed persons to alter the origin of funds leading to complex issues for business and the entire financial landscape, on the whole.
International Regulations about Dealing with PEPs
The international regulations about dealing with politically exposed persons in relation to AML/CFT requirements of the world mandate several measures to control the negative impact PEP and lack of PEP due diligence may have on your business.
Recommendation 6 issued by FATF states some parameters for financial institutions to deal with politically exposed persons in a way that doesn’t hamper the security and integrity of the system in any way.
- Financial institutions should go beyond conducting normal due diligence to developing a risk-sensitive system for more specific and relevant analysis of politically exposed persons.
- They should also obtain permission from higher institutional authority before proceeding or initiating official ties with a customer who is also identified as a politically exposed person
While anyone can be a PEP, not every PEP is a potential threat, thus PEP databases are crucial. However, it is still mandated to:
- Deploy reasonable measures to explore sources of wealth and sources of funds.
- Undergo enhanced ongoing monitoring of every business relationship to proceed with.
However, it is worth noticing that recommendation 6 doesn’t imply financial institutions alone, rather DNFBPs(Designated Non-Financial Businesses and Professions) are also mandated to comply with these regulations.
Other Recommendations by FATF in Dealing with PEPs
The above-mentioned recommendations are just preventive measures in dealing with politically exposed persons. It is important to note that these recommendations should never be the reason to stigmatize PEP or treatment against them to exclude them from every part of your dealing.
Refusing to do business with PEP must always be backed by some evidence, business-specific risk threshold, and subjective decision in coordination with the higher authority of your institution.
In 2003, FATF marked foreign PEPs and RCAs included in the PEP category. However, by 2102, the policy was revised and it included domestic PEPs and leaders of international organizations as PEPs as well.
The core reason behind this revision was to cover the categories of PEP to strengthen the fight against money laundering and its associated offenses.
For revised additions of domestic PEPs and PEPs in international organizations, FI’s must take into consideration the relevant measures to detect customers, and UBOs to assess the risk of business relationships.
For a business with higher risk, financial institutions must make consistent AML measures to comply with regional, domestic, and international regulations of AML/CFT compliance.
To sum it up
PEPs stand at the top of the hierarchy when it comes to financial crimes such as money laundering, corruption, and embezzlement. PEPs alone have the highest risk of influencing the FI and superiors by misusing their power and influence for personal gain or that of their family and close associates.
PEP’s due diligence process is the ultimate solution to combat the reputational, monetary, and financial loss they may pose to the business. Leverage AML screening software that categorizes PEP into four distinct levels and fosters an efficient PEP screening process.
