Once a PEP, always a PEP?

As per anti-money laundering regulations, financial institutions should take all rational steps to ensure that they do not knowingly or unconsciously help in hiding or passing the proceeds of corruption by political figures, their families and associates.

This is because the risks presented by politically exposed persons (PEPs) will vary according to the client, product, service, country and industry, hence identifying, monitoring, and designing controls for these accounts and transactions may need to be risk-based.

It is important to adhere to not only the local requirements for PEP due diligence but also any international ones to which the firm may be exposed.

There is a view or approach in the world of Know Your Customer (KYC) – and I have seen a lot of my colleagues over the years follow this – “Once a PEP, always a PEP.”

I agree that current and or former PEPs might bring with them a considerable amount of risk, but if we were to strictly implement a risk-based program then I am sorry to say that this approach would not work in all cases.

In some parts of the world there may be time limits on how long someone is to be treated as a PEP after leaving office.

For example, in some places in Europe, banks can continue to monitor the risks posed for 18 months after the person ceases to be a PEP. Other organisations, however, recommend that a person who is no longer a PEP should be assessed according to risk and not on prescribed time limits.

Although the influence may considerably depreciate as soon as they leave office, a PEP may have been in a position to acquire his or her wealth illicitly, so that a high level of scrutiny with regard to such individuals may be warranted even after they have left office.

But a blanket statement – ‘Once a PEP, always a PEP’ – will not be a holistic approach in all cases, the risk-based approach could be more appropriate. So now comes the million dollar question, how to risk rate a customer who is a former PEP?

I personally believe that one should evaluate the below scenarios before coming to a conclusion:

1. The time spent in the public function

2. The position held in the public function and its perceptivity to corruption

3. The Corruption Index of the country in which the public function is held

4. Any visible links the political figure might have with any high-risk industries

5. The level of transparency in the source of wealth and the documents provided to substantiate it

6. Any adverse news on the political figure that can cause substantial damage

7. Whether they are still politically connected after leaving office. Thorough research must be performed in the public domain to see if the person in question has recently been involved in any sort of political meetings/rallies or talking on behalf of any other politician etc.

Where a PEP is deceased but has accumulated a source of wealth, a risk-based evaluation for his or her close family members or associates will need to be conducted in order to decide whether those relationships require EDD or decalcification as a PEP.

It should be noted that any declassification of a PEP should be subject to an appropriate level of senior management review and approval.

All the factors that are taken into consideration for declassification must be documented for future regulatory inquires if any.

To conclude I would say that, managing PEPs risk is clearly an area that financial institutions cannot afford to ignore, and it has to be done in accordance with regulatory requirements, including a risk-based policy which clearly outlines the criteria for classifying an individual as a PEP.

About the author: Suresh Chavali is a subject matter expert in the risk and compliance sector, focusing on know your customer (KYC), risk management, money laundering and terrorist financing schemes and trends. He has worked for various firms, including Barclays and Deutsche Bank.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.