Pandora Papers highlight the importance of PEP checks as part of AML armoury

By Barley Laing, UK managing director at ID verification and data quality firm Melissa

The Pandora Papers, published by the International Consortium of Investigative Journalists in early October and exposing the hidden offshore accounts of 35 world leaders and 300 public officials worldwide, have blown the lid off the sometimes murky world of the politically connected and super wealthy. Some of those named in these Papers are currently under investigation for corruption and fraud. Others have been convicted of such activity in the past.

Crucially for the financial services sector, the Papers also highlighted how important it is to have access to information on politically exposed persons (PEPs) as part of a company’s anti-money laundering (AML) checks. In the UK, banks have a legal requirement to undertake enhanced checks of both domestic and foreign PEPs. Doing so helps financial institutions avoid the possibility of hefty fines and brand damage resulting from the negative publicity associated with having a potentially well-known customer using their account for fraudulent purposes.

But due to the lack of a universally-agreed definition of what constitutes a PEP, it’s not easy to identify one. The Financial Action Task Force (FATF) defines a PEP as “an individual who is or has been entrusted with a prominent public function.” Generally speaking, PEPs are heads of state, government ministers, MPs, senior members of the judiciary, those on the boards of state-owned companies and central banks, and senior civil servants.

However, it is not enough to identify PEPs, as their relatives or close associates (RCAs) may also be involved in abetting possible fraudulent behaviour. Therefore, it is vital that organisations in financial services screen for RCAs too.

There are several best practices for monitoring PEPs and their RCAs:

• Use data from trusted global sources

Effectively screen for PEPs and RCAs using an automated tool that collects and synthesises data from a wide range of trusted sources worldwide – such as government and credit agencies – that also continually scans for updates. Such a solution will significantly streamline the PEP screening process and ensure that those with access to it are constantly updated on any changes to a customer’s status.

• Undertake adverse media checks

To stay abreast of any new information on the status of an existing PEP customer or prospect, supplement the standard PEP screening process with adverse-media and negative-news checks. This approach enables those in financial services to scan the global news media and source the names mentioned in the likes of the Pandora Papers, as well as news on those with new sanctions against them and where there’s legal cases pending.

• Take a risk-based approach to PEP screening

In an age when budgets and resources are particularly tight, it is essential to take a risk-based approach to screening PEPs and RCAs. Foreign PEPs are considered a greater risk than domestic ones because the financial institution is unlikely to understand their background and connections fully. Firms should also take into consideration that the level of corruption is higher in some states than others, and that the more senior the individual, the greater the scope for fraud. Therefore, it’s worth implementing enhanced due diligence measures for high-ranking PEPs and their RCAs in those territories where there’s a greater prevalence of corruption.

Some countries, like the US, do not require domestic PEP screening. However, it’s strongly recommended that financial services businesses headquartered in those markets undertake some level of domestic screening to mitigate their overall risk.

• Ongoing PEP monitoring

Monitoring of the level of risk posed by a PEP must never stop. To this end, invest in training within the organisation, particularly those in compliance who are charged with making decisions around risk and monitoring the business relationship once a PEP has been identified. To ensure a uniform and regulatory-sound risk-based approach, all employees must be adequately trained – and periodically refreshed – on internal processes, risk categories, and relevant regulations.

• Continue to evaluate risk when a PEP leaves office

“Once a PEP, always a PEP”. While this is a useful approach to vigilance, someone who has departed the political fray may not pose the same level of risk they once did. It may be appropriate to place them in a lower risk category with different alert thresholds. Once a PEP leaves office, consider risk factors such as their time in the post, the extent to which they are politically connected, their continuing degree of influence and their country’s level on a corruption index.

• Use an automated PEP solution as part of a wider automated AML approach

An automated PEP solution that identifies PEPs and RCAs in real time works well as part of a more comprehensive automated approach to AML. Use electronic identity verification (eIDV) that can cross-check – in real time – the details provided by the prospective customer against reputable data streams to ensure they are who they say they are. Also, when onboarding, document scanning with optical-character recognition (OCR) and machine-readable zone (MRZ) technology should be used to enable banks to instantaneously determine the authenticity of the ID documents provided online.

Overall, for those in the banking world the Pandora Papers have placed PEP concerns front and centre, making best-practice monitoring methods essential. This means, for example, that the PEP list sourced by a financial services company must have access to high-quality data sources at a global level, with PEP customers and their RCAs regularly evaluated to identify risk. The list should also have automated functionality so it can be easily used in conjunction with automated eIDV and document scanning technology for an accurate, fast, and cost-effective AML process.

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