How Can Effective PEP Risk Management Strengthen AML Compliance?
Financial crime is a global scourge which is costing the world economy between $800 billion and $2 trillion annually, according to the UNODC. Politically Exposed Persons (PEPs) are misusing their power and influence and becoming high risk individuals who are often involved in financial crime.
According to the estimation of The World Bank, almost $1 trillion in bribes are paid globally each year, with many high-risk PEPs implicated.
The global watchdog like FATF further highlights the issue by indicating that PEPs are five times more likely to engage in corruption related crimes if compared to a normal person.
Breaking down PEP Risk Management in AML Compliance
When it comes to explaining Politically Exposed Persons (PEPs), these are heads of state, politicians, and high-ranking officials who hold positions of power and influence and make them susceptible to corruption and illegal financial activities. Financial institutions are busy implementing the strong PEP screening processes as part of their AML compliance framework. This process further involves identifying and verifying PEPs which help in assessing their risk levels, and implementing ongoing monitoring.
What are Key Components of PEP Risk Management?
PEP Screening
Feature of PEP screening is the first in the line of defense against potential financial crime as it involves cross checking clients against a global network of PEP databases to identify individuals who are in positions of power.
It becomes easier for the institutions to stay ahead of the curve and protect their reputation by conducting this screening at onboarding and periodically throughout the client relationship.
PEP Risk Assessment
The person who once gets identified as a PEPs undergoes a rigorous risk assessment which makes a risk profile to how much of an extent they can be involved in corruption if it happened.
Such a process considers factors like political influence, position, and exposure to corruption beside taking them into account regional variations in corruption levels.
This process of assessment allows institutions to prioritize Enhanced Due Diligence (EDD) for higher-risk PEPs that helps in ensuring a targeted approach to risk management.
PEP Risk Scoring
The process of PEP risk scoring ranks individuals on the basis of their likelihood of involvement in suspicious activities by assigning values to factors like political position, jurisdiction, and adverse media exposure into the risk profile.
Enhanced Due Diligence (EDD)
High risk PEPs are quite subjected to the process of Enhanced Due Diligence with a strong process that involves continuous monitoring of financial activities and tracking significant transactions. Slutons like Real-time monitoring helps in alerting compliance teams to any changes in a PEP’s status that ensures that institutions stay ahead of potential risks.
Ongoing Monitoring and Review
PEP risk management is a continuous and ongoing process of its nature that requires institutions to monitor PEP profiles regularly and adjust risk strategies as needed. As far as the regulatory standards are concerned, continuous reviews ensure accuracy and alignment with evolving regulatory standards which can be a great help for institutions to stay compliant with the latest requirements.
Real-World Case Studies: The Impact of PEP Risk Management
HSBC’s Enhanced PEP Screening Success
In the past, HSBC implemented an advanced PEP screening program following regulatory scrutiny over AML weaknesses in its operations. HSBC managed to enhance its ability to detect high-risk individuals by investing in automated PEP screening and risk scoring tools , specifically in complex international markets as well.
Standard Chartered’s Fines for Weak PEP Controls
Standard Chartered paid a hefty fine of nearly $1 billion to multiple regulatory bodies that included the U.S. DFS and U.K.’s FCA in 2019 as it caused by failing to identify suspicious transactions linked to high-risk PEPs from corruption-prone regions. PEP screening and risk assessment of the bank was quite inefficient as processes allowed these transactions to slip through the cracks. Example of this case shows a reminder for financial institutions to prioritize the process of continuous PEP screening and risk assessments which will effectively monitor high-risk clients and safeguard against financial crime.
Odebrecht Scandal and the Importance of PEP Risk Management in Corruption Cases
The Brazilian conglomerate Odebrecht was at the center of a major corruption scandal involving bribes to high-profile PEPs across Latin America to secure lucrative contracts. Several banks associated with the scandal faced substantial fines and reputational damage for failing to identify and monitor high-risk PEPs linked to Odebrecht.
Secure your business by integrating AML Watcher
AML Watcher’s PEP risk management offers global coverage, real-time profiling, and continuous monitoring through 100,000+ data sources and 1,300+ watchlists. With enhanced risk scoring and multi-language support, institutions can efficiently identify and prioritize high-risk PEPs, ensuring compliance and proactive risk management against financial crime.
Protect your institution with AML Watcher and have peace of mind!