Around 30 million financial transactions occur daily, and that’s just in Canada. The Bank of Canada has calculated that all those transactions added together come up to more than $210 billion. The Bank of England estimated £5 million transacted every second after they have added the financial activity between financial institutions and payments for bigger items, such as houses. We all rely on payment systems and financial institutions to keep the money going and our economy running, but do you even consider how safe it is? The truth is that this industry is in constant danger of malicious activities, which is why it is essential to recognize possible risks and stop them before causing any damage.
What challenges do financial institutions face?
One of the biggest challenges financial institutions face is onboarding potential customers who pose a risk of exploiting your business. SEON defines these potential clients as high-risk customers, separating them into four categories: politically exposed persons, people in sanctioned countries, identity thieves, and money service businesses (MSBs). While all four types of high-risk customers present a real danger for the industry, such as money laundering, there is a reason why politically exposed persons are first on the list. With tens of thousands of people in prominent political positions worldwide, a financial institution will inevitably have to deal with onboarding them. But while you should ensure you minimize the risk PEPs can pose for your business, it is essential they are not stigmatized or discriminated against based on their status. Maintaining this balance is incredibly challenging to get right for any financial institution, especially now as the financial landscape is changing toward more digital experience.
Who are Politically Exposed Persons (PEPs)?
A politically exposed person (PEP) is defined as someone with a high-profile political role or a prominent public function. Due to their position, influence, and level of access and control, they pose a higher risk of being involved in corruption, money laundering, and terrorist financing. While this might happen knowingly or unknowingly, the truth is that PEPs have greater access than regular citizens, and, therefore, are a greater risk to commit financial crime. Identifying them during the onboarding process, monitoring their behavior, and recognizing the patterns that might indicate suspicious behavior are all necessary precautions to take for the well-being of the business.
There are three types of politically exposed persons:
- Foreign PEP
- Domestic PEP
- International PEP
The most common positions with both foreign and domestic PEPs are Heads of State, senior politicians, government or military officials, judicial members, or executives from state-owned corporations. International PEPs are members of senior management as they are not determined by the country they reside in since they were put in their place by governments of several countries.
The main difference between foreign and domestic PEPs is determining which country has put them in this position of power. While knowing their country of residence will not in and of itself change their status from high to low risk, it does help. You can use this knowledge to determine how likely they are to pose a threat, as some countries have higher rates of corruption. For example, Denmark, Finland, and New Zealand are classified as the least corrupt nations in the world; while the situation is quite the opposite for South Sudan, Syria, and Somalia – which rank as the most corrupt according to the corruption perception index. The corruption index and country of residence of a PEP should never be taken as a guaranteed measure of security; they should all go through the same due diligence procedures and requirements as all who undergo the onboarding process to ensure the safety of the business.
In addition to these three categories of PEPs, relatives and close associates of the politically exposed persons can also be classified as high-risk. But this applies only to immediate family members or close social or professional associates.
What to do when faced with onboarding politically exposed persons?
When onboarding a politically exposed person remember that their status doesn’t necessarily mean they will engage in criminal behavior. While the risk is higher, it is not guaranteed, which is why all your security measures shouldn’t be discriminatory but preventive.
The first step you need to do is correctly identify whether a customer is a PEP, regardless if they are a new or existing customer. You should never presume the situation hasn’t changed, as an individual can become a PEP after becoming your client. You should ensure you have a continuous monitoring process that allows you to identify PEPs when they apply to become a client as well as undergo periodic reviews as an existing client.
Once you have identified a customer as a PEP, conduct a risk assessment to determine their risk level so you can quickly apply appropriate due diligence measures.
The onboarding process is not a one-and-done deal, but continues to monitor your clients throughout all their financial interactions. Norton Rose Fulbright explained that this allows you to determine their behavior patterns and ensure they comply with anti-money laundering (AML) regulations. Once you are aware of their usual patterns, you will be able to recognize transactions that are outside the norm and high-risk, thus allowing you to prevent them before there’s any damage done.
Onboarding PEPs can present challenges for financial institutions, but that is not a reason to avoid doing business with them. While it is essential to protect yourself from potential criminal behavior, you should do it by following standardized procedures. As long as you are performing due diligence on them, following PEP requirements, conducting regular checks, using the proper tools, and reacting accordingly, you can prevent damage to your business.
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