Huge investments in businesses always carry financial risks. Apart from proper planning, no business can predict favorable outcomes. Sometimes, things are simply beyond control. Financial risks are primarily associated with suspected PEPs, and the need for PEP screening arises when they use power and influence for bribery and corruption. A PEP screening method is then employed to mitigate financial and reputational risks associated with political influence or access to public funds.
Financial Crimes Enforcement Network penalized Capital One for $390 million for violating Bank Secrecy Act. The BSA law requires financial institutions to report FinCEN for any suspicious activity. The $390 million is the largest ever imposed by FinCEN. A Strengthened AML program prevents money laundering and protects the financial system.
What is Financial risk?
“Investing or starting a business involves financial risks that may result in losing money.”
Money laundering scandals involving PEPs have become common in recent years. The world’s most influential and wealthiest individuals are involved in illegal financial activities. Financial institutions and governments should take PEP screening measures to prevent money laundering. PEP screening laws and regulations improve business transparency.
Some of the common examples include
Pandora Papers
These confidential documents revealed that PEPs use many offshore companies to hide taxes and wealth.
1MDB scandal
It involves the money laundering of billions of dollars from an investment fund of the Malaysian government.
Russian Oligarchs
Many Russian oligarchs masked the ownership and source of funds after moving out of Russia's capital to avoid sanctions.
Panama Papers
Panama documents reveal that many individuals hide their money using offshore companies.
PEP Screening Risk Management Approach
Financial institutions follow the PEP compliance program to identify and manage PEP relationships. Different PEP screening software are used to save time and enhance efficiency.
New customers are screened for PEP check before and after account opening. If a customer is identified as a PEP, the institution takes appropriate due diligence measures.
Verify existing individuals for PEP; risk-based due diligence applies after confirmation.
Determine risk level by conducting a risk assessment for PEP customers to apply appropriate due diligence and monitoring.
Senior management approves PEP on an ongoing AML and assesses financial crime risks.
PEP customers and their close associates are monitored continuously for any suspicious activity.
Financial institutions conduct employee training on PEP screening, risk assessment, policies, procedures, and processes.
How effective PEP Screening is to mitigate Financial risk
Vendor risk management
PEP screening manages risks associated with vendors and third parties. A new supplier can be involved in illegal activities, although superficially seems trustworthy superficially, like corruption or money laundering. Ignoring PEPs in business relationships poses great threats. PEP screens company bosses and directors for PEPs and evaluates new vendors.
Client Onboarding and FIFA Scandal
Businesses use PEP screening while onboarding new customers. It's not the only approach for PEP screening but a part of “Know Your Customer (KYC)” process. Standard filters are used to perform a PEP check for client onboarding.
Client location
Client profession
Service or Product Information
Regulatory requirements
The US Department of Justice 2019 charged Switzerland's Bank Julius Baer with money laundering for bribing $36 million through the United States to FIFA officials. Julius Baer Bank paid more than $79 million as a fine.
A robust PEP Screening solution identifies and prevents illicit financial activities.
key takeaways
Identify potential risks by conducting PEP screening.
Compliance teams should have the authority and tools to interrogate any suspicious activity.
A robust PEP compliance program can prevent financial crime.
Train all employees for PEP screening.
PEP Due Diligence and UAB case
PEP screening ensures the monitoring of existing clients according to PEPs on an ongoing AML compliance. The status of individuals changes with time. Any individual is suspected to be a PEP even after successfully completing the onboarding process.
“Lithuania's central bank in 2023 took action against electronic payment platforms in disregarding anti-money laundering and terrorism financing regulations. This resulted in license revocation and hefty penalties.”
Conclusion
PEP screening violations create growth opportunities for PEPs, ultimately leading to economic instability. With PEP screening software, risks can be assessed before taking action. Financial institutions monitor existing PEPs for risk management. PEP screening is necessary to maintain long-term sustainability to protect business reputation.
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