Part of performing proper list screening and customer due diligence is to ensure your financial institution screens for politically exposed persons (PEP). At Alessa, our compliance software experts explain how, and why, these individuals need to be identified prior to performing business with them.
Who/What is a Politically Exposed Person?
The definition of a politically exposed person is an individual who is or has been entrusted with a prominent public function. Due to their position and influence, PEPs are at higher risk to be involved in money laundering and related predicate offences, including corruption and bribery.
Before you can check if someone is a PEP, you first need to define who qualifies as one. FATF defines PEPs as the following:
- Foreign PEPs includes Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials in a foreign country.
- Domestic PEPs, like foreign PEPs, are individuals who are or have been entrusted domestically with prominent public functions.
- International organization PEPs are persons who are or have been entrusted with a prominent position by an international organization. This may be directors, deputy directors and members of the board or equivalent functions.
- PEP family members are individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership.
- Close associates are individuals who are closely connected to a PEP, either socially or professionally.
While there is overall agreement to the above, there can be some regional definitions that are worth noting. Regulatory obligations and due diligence recommendations may also vary by jurisdictions. This interactive map from Dow Jones provides an easy way to view how regulations vary by countries.
Compliance should consult with their legal team and/or country Financial Intelligence Unit (FIU) to confirm their obligations around politically exposed persons.
Using Free Lists for PEPs Screening
Compliance teams often ask us if there are free PEP lists and the answer is “Not really”. A few organizations do publish free information but almost all lack coverage necessary to meet country regulations. Here are a few examples:
- CIA World Leaders List – This online directory of Chiefs of State and Cabinet Members of Foreign Governments is updated weekly by this U.S. Federal agency. The spelling of the personal names follows transliteration systems generally agreed upon by U.S. Government agencies, except in the cases in which officials have stated a preference for alternate spellings of their names.
- Rulers.org – This site contains lists of heads of state and heads of government of select countries and territories going back to 1700.
- Central Bank of Uruguay PEP List – The list includes people who hold or have held public functions of importance in Uruguay. It is not updated regularly and the last published list was April 2019.
As you can see from the descriptions, most of these free lists do not include local governments, international organization PEPs, family members or close associates, to name a few. When posed the question about using free data for PEP list screening, the risk experts at Dow Jones said the following:
Relying on free PEP lists can pose problems for PEP identification and screening in that the lists often do not provide the full name of the individual, names in original script, any identifying information (such as a date of birth), focus on top level roles only and specific countries only and do not update promptly.
Countries themselves can publish two types of PEP lists: a list of politically exposed positions or a list of the names of individuals holding PEP roles. These lists, together with other international and national regulations, have been considered when drawing up the Dow Jones PEP definition.
However, as the Financial Action Task Force (FATF) 2013 recommendations mention, these lists have potential shortcomings as they may not be complete (lacking names, identifiers, relatives), and are quickly outdated. We also find that very few countries publish a list of domestic PEPs.
Based on these observations and our experience, we do not recommend that organizations solely rely on public sources for an effective risk-based approach.
With this in mind, financial institutions should seriously consult with third-party risk data providers to help them screen for PEPs.
Using Third-Party Data for Politically Exposed Persons Lists
As outlined in our white paper, Tips for Testing Sanctions and Watchlist Screening Software, when engaging with third-party risk data providers to gain access to their PEPs lists, there are a few things that you should inquire about. Here are some sample questions:
- What is the geographic reach and jurisdictions covered by the data?
- Does the data go beyond world leaders?
- How many PEPs of each type to they have?
- How do they handle election results?
- How are impeachments, resignations and deaths tagged?
- How is information from non-democratic countries collected and updated?
- How are names from foreign countries stored? Native characters? Transliteration? Translated?
- How is information validated?
- How deep does the data go?
- How often is data updated?
- How is updated data sent?
- What information is collected about the PEP?
You will want to speak to a number of providers and compare their data sets to ensure proper coverage for your institution.
Minimum Data Quality Standards Required for Effective PEP Screening
According to the Wolfsberg Group, financial institutions should have complete and accurate customer data records and the PEP database used for screening should contain sufficient unique identifying data.
Having good customer records and a PEP database that can be screened using unique identifying data will reduce the number of false positives and the overall burden on compliance teams.
Unique identifying data should include the following:
- Name (all known names and aliases)
- Date of Birth, and where this isn’t available, Year of Birth
- Country of political exposure
- Gender (where available)
- Politically exposed role(s), and date(s) or year(s) of appointment
- Date or year that the PEP left their position (where applicable)
- Where applicable, if the PEP is deceased.
Advice on Screening for PEPs
- Where possible, use native character searching. Searching for names in their native language greatly reduces false positives by limiting transliteration issues.
- Use geography to help determine risks—not all countries pose the same risk. Lower risk countries present the opportunity to reduce the amount of time spent reviewing close associates and relatives.
- Reduce the number of hits you receive by using date of birth and age to refine your search.
- Utilizing a defined set of risk factors, build a PEP risk-scoring model that works for your organization. For each risk category, weigh the risk factors and then build a defensible risk-scoring process.
- Consider changing screening levels by risk levels. For low-risk PEPs, consider screening and monitoring for sanctions only; for medium-risk, PEPs, screening and monitoring for sanctions and regulatory actions only; and for high-risk PEPs, screening and monitoring against an entire database.
How Long is a PEP Considered a PEP?
When looking to see if you need to screen someone for being a politically exposed person, it is important to consider when and for how long they were in office.
According to the Wolfsberg Group, there is no agreed method for determining the time period that an individual should be regarded as a PEP after they have left the public function.
They go on to says that,
- The risk associated with a PEP is closely related to the political situation and the inherent corruption risk in their country, the office or function they held and the influence associated with that post.
- Influence may substantially reduce as soon as they have left office, but a PEP may have been in a position to acquire their wealth illicitly. For this reason, a high level of scrutiny may be warranted even after they have left office.
The Wolfsberg Group does not subscribe to the “once a PEP, always a PEP” as it is not consistent with a risk-based approach. When considering when a PEP should be de-classified, the group suggests that you should consider the following:
- The level of inherent corruption risk in their country of political exposure
- The position held and its susceptibility to corruption or misappropriation of state funds or assets
- Length of time in office and likelihood of return to office in future
- The level of transparency about the source of wealth and origin of funds, in particular those funds generated as a consequence of office held
- Links to any industries that are high risk for corruption
- The overall plausibility of the stated customer profile and their net worth
- The level of transparency and plausibility of transactions processed through the account
- Whether there is relevant adverse information about the customer widely published in reputable sources
- How politically connected they remain once they have left office
Any declassification of a PEP should be reviewed/approved by senior management and documented. In addition, prior PEP status should be noted, in the event of a suspicious activity reporting (SAR).