Politically Exposed Persons (PEPs) are individuals who have close associations with high-ranking officials. Due to their influence and connections, PEPs are at a higher risk of being involved in financial crimes such as money laundering and bribery.

To mitigate the risk of dealing with PEPs, financial institutions are required to conduct a PEP risk assessment. They conduct it as part of their Anti-Money Laundering (AML) compliance program. This guide will provide a comprehensive overview of PEP and how it works.

What is PEP Risk Evaluation?

PEP risk evaluation is the process of identifying and managing the risks associated with dealing with PEPs. The purpose of this assessment is to identify whether a customer is a PEP or not. The customer may have any close associations with PEPs. To evaluate the risks associated with these relationships, PEP evaluation is important.

The Risk Assessment Process Involves The Following Steps

Identification of PEPs

To reduce PEP risk, financial institutions must have an effective system in place to identify PEPs. This can be achieved by conducting searches on reputable databases and other sources that list PEPs. The sources include political party members, public officials, and close associates.

Customer Due Diligence (CDD)

Once identified, financial institutions should conduct enhanced due diligence on PEPs. It helps to determine their source of wealth, the nature of their business, and any other relevant information. This process should also include identifying the beneficial owner of the account. Moreover, obtaining additional documentation to verify the identity of the PEP is important.

Risk Scoring

Financial institutions should determine the risk level of a customer based on various factors. For example, the customer's relationship with the PEP, & the nature of the business. The jurisdiction in which the customer operates is also important.

This risk-based approach allows financial institutions to allocate their resources. It also helps to focus their monitoring efforts on higher-risk customers.

Ongoing Monitoring

To reduce PEP risk, financial institutions should check PEPs' transactions regularly. It helps to detect any suspicious activities. This process should include conducting periodic reviews of the PEP's account activity. Monitoring for any changes in their financial behaviour, such as sudden increases in transactions.

Why is PEP Risk Evaluation Important?

PEP risk evaluation is essential because dealing with PEPs can expose financial institutions to a high level of risk. PEPs have access to significant funds and often use their influence to gain access to financial services. They can also use their connections to launder money, conceal the proceeds of crime, or facilitate bribery and corruption.

By conducting PEP risk evaluation, financial institutions can identify and mitigate the risks of dealing with PEPs. This process helps ensure that financial institutions comply with AML regulations. It also prevents them from becoming unwitting participants in financial crime.

How Sanction Screening Help To Reduce PEP Risk

The sanction screening process is used by organisations to identify and flag individuals on sanction lists. Sanction screening can help identify PEPs who are also listed on sanction lists. This can help organisations avoid the risks associated with doing business with PEPs. It also helps in complying with regulatory requirements related to anti-money laundering (AML).

By incorporating sanction screening into their due diligence, organisations can mitigate PEP risk. This can include conducting ongoing monitoring of PEPs and their associations. Also, implementing enhanced due diligence measures for higher-risk individuals or entities.

Conclusion

PEP risk assessment is an essential component of any effective AML compliance program. Financial institutions must have a robust system in place to identify PEPs. They should conduct enhanced due diligence and monitor their transactions regularly. By implementing effective processes, financial institutions can protect themselves from financial crime. This helps to maintain the integrity of the financial system.

Also Read: The Risks Of Failing To Conduct Ongoing KYC Monitoring: What You Need To Know