Highlighting the Need For Vigilant Inspection of PEP

The ongoing accountability trials for PEPs around the world have brought immense public attention to this concept. PEP in this blog would refer to any individual who has been entrusted with a prominent public position and owns the power to manipulate their position and flow illicit funds through financial institutions. 

According to research, it has been 25 years since global abuses from PEP have started to emerge. If put quantitatively, the proceeds of corrupt practices by PEP in developing countries have reached $20-$40 billion. 

Do you know what’s even more surprising? The amount of money being laundered equals the annual GDP of developing countries with a population spanning over 240 million people.

While the statistics confirm the magnitude of the problem PEP corruption can develop, this blog will be a walkthrough.

How Does The Lack Of Screening Impact The Global Landscape? 

Corruption and money laundering have diverse impacts on the global financial system. The damages cannot be attributed as “light” in nature. 

Instead, the damages are long-lasting and severely interfere with the progression of the country. Corruption and money laundering are not easy to catch and expand effortlessly across the country if initiated and not caught within the initial time frame. 

What’s even more difficult? The ways by which Politically Exposed Persons conduct their illicit practices have evolved and are consistently evolving to date. The techniques to conduct financial fraud via banking, purchasing or real estate assets, or investing in cryptocurrency are the ways to catch fraudulent actors always la in comparison to masterminds of committing these illicit acts. 

What Type of Risks a Politically Exposed Person Can Pose to the Society? 

The mitigation of financial crimes by the PEP compliance program has been the main focus of regulatory authorities and financial institutions. While regulatory fines and sanctions may coerce the course of action but cannot guarantee a fair alternative behavior. 

Then what are the possibilities to manage the risk? Before getting into details here is a quick overview of what sort of risks remain associated with Politically Exposed Persons. 

Money Laundering Risk: 

While there exist no lies to put forth that there is no mutually agreed upon, universal definition of money laundering, FATF (Financial Action Task Force) defines this as the deceptive processes in action to alter the illicit origin of financial assets. 

PEPs remain at the highest level of risk to exploit public funds for their subjective usage. A prominent example of this is the recent declaration by MACC ( Malaysian Anti-Corruption Commission) which has charged former prime minister Ismail Sabri with charge alleged RM700 million scandal regarding the promotion of the COVID-19 project known as Keluarga Malaysia. 

It would not be wrong to say that financial institutions or entities might not be directly involved in money laundering or corruption, but they might inadvertently facilitate the flow of transactions, credit wring sellers, debt dubious buyers, and ultimately end up losing their reputation in response to developing risky ties. 

Bribes and Corruption Risk: 

Bribery in simple terms stands for the offering of promising gifts, and luxury items to another person to influence their decision and approval to facilitate illegal acts of transfer of funds. 

Bribes and corruption risks are not linked to individuals alone, often time bribes are received by third parties to favor politically exposed persons, their relatives, or close associates mandating the strong need for PEP due diligence  Not certainly, but these favors might be influenced by the fear of influence PEP and RCA’s can practice over these third-party entities. 

What Should be Done to Counter the Adverse Effects of PEP Potential? 

A practical and risk-sensitive approach is the new reform required in the regulatory framework of the ongoing PEP screening process. The ongoing PEP list screening is the ultimate solution to balance the inspection of PEP and RCAs associated with them. Here’s a mapped-out, step-by-step guide to balancing PEP screening service in 2024. 

1. Comply with International Standards 

While FATF mandated 170 jurisdictions with regard to AML protocols, most are dedicated and committed to remaining aligned with the prescribed framework. However, the recent analysis by FATF and FSRB depicted that 80%  of these jurisdictions have not translated the guidelines into practical implementation. Compliance with international standards is the first step to managing PEP-related risks. 

2. Risk-Specific PEP Lists Screening 

Screening without any fixed parameters generates millions of results that are difficult to assess with respect to their niche and risk relevancy. Deploy risk-specific scoring which not only reduces noise but improves relevancy and minimizes chances of false positives as well. 

3. Reduced False Positives 

The chances of inefficient screening are highest with millions of hits generated against a search query. The PEP screening solution of AML Watcher reduces the hassle with the most updated and efficient insights into the background of Politically Exposed Individuals. 

Final Words: 

PEP risk can never cease to exist. Thus the smart strategy must be to keep AML measures strong and efficient enough to align with the growing complexity of the nature of crimes.