Why PEP Screening Is A Must for Financial Transactions?

PEP Screening

Given the ever expanding and uncompromising nature of regulatory guidelines in today’s compliance landscape, businesses must employ a risk based approach while dealing with powerful clients and employ a PEP screening regulatory technologies to determine the risks associated with conducting business with influential clients or organizations. PEP clients, due to their wide social and political influence, tend to have a high probability of committing financial crimes such as money laundering, bribery, wire fraud, corruption, bank frauds, tax evasion, embezzlement of state funds, corporate frauds and so on. Politically Exposed Persons are usually the people operating in the corridors of power and hold prominent public offices. Given the natural tendency of human nature to abuse unchecked power, politically exposed persons are usually more prone to committing financial crimes. 

Why Is PEP Screening a Requisite For Financial Firms?

As for the financial firms, they can suffer significant losses for conducting business with Politically Exposed Persons (PEP). Financial crimes cause trillions of dollars of economic loss to the global economy every year. As per the World Bank, bribery alone causes a massive loss of $2.6 trillion every single year. This ends up around 5% of economic loss to the international economy. This trillions of dollars of bribery is done by the powerful influence of the people sitting in the corridors of power. People holding powerful public offices are more likely to commit financial crimes and therefore are categorized as Politically Exposed Persons for the financial institutions to distinguish them beforehand.  

Financial institutions are recommended to adopt a risk based approach and protect their businesses from the consequences of conducting business with powerful clients. The reason is that financial institutions will be legally held responsible to pay for the crimes of their clients by the law enforcement agencies and regulatory authorities. 

Compliance protocols like Politically Exposed Persons (PEP) list screening helps to deter financial crimes. It helps to detect risky clients who may be involved in shady criminal activities like money laundering, terrorist financing, tax evasion, bribery and corruption. To protect themselves from getting embroiled in the financial scandals of their customers such as money laundering scandals, financial firms are required to prioritize compliance regulations and monitor the financial activities of their PEP clients. 

PEP screening measures, more than helping the regulators to prevent financial crimes, helps financial institutions more to protect themselves from costly and unnecessary legal penalties that are caused by non compliance. Since the financial industry is more prone to financial crimes, therefore, they are bombarded with complex regulations by the regulatory authorities and law enforcement agencies, and failure to act in line with regulatory guidelines results in massive legal penalties. As per the Financial Times, the financial firms ended up paying $5 billion in legal penalties due to the breach of regulatory guidelines in the year 2022 alone. These staggering numbers provide enough reasons to get convinced why compliance is essential for the financial industry. 

PEP screening method first involves evaluating the potential client’s circle of influence. Generally, it is observed that if a client holds a powerful public office and has a prominent standing in the social and economic circle of society then he is more prone to committing financial crimes, therefore, financial institutions are recommended to employ effective PEP screening solutions and conduct thorough PEP screening procedure before initiating a business relationship with a politically exposed persons. Once the potential client is onboarded, periodic monitoring or Enhanced Due Diligence is essential to conduct to keep an eye on their risk levels and mitigate any possible future risk. 

Politically Exposed Persons (PEPs) are further classified into various categories such as international, foreign and domestic politically exposed persons. Generally, domestic politically exposed persons carry more risk of committing financial crimes like money laundering than international and foreign politically exposed persons. 

The Politically Exposed Persons (PEP) check process also involves determining the PEP status of existing customers and new PEP clients. This is because the risk level of a PEP client is directly proportional to the increase or decrease in their career growth. It can change anytime. A politician’s PEP status will be changed once he becomes a prime minister. That’s because now he carries way more power and influence, hence he is now more prone to committing financial crimes. Thence, proactivity and vigilance is the key for the financial firms.

Regulatory authorities recommend financial institutions to invest in  PEP compliance programs  and employ effective PEP screening software that offers a comprehensive PEP screening procedure because precaution is better than paying billions of dollars in legal penalties only because of non-compliance.

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