by Antony Bellingall
First published in Fintech Magazine on 14 November 2021, available here.
KYC (know your customer) and AML (anti-money laundering) compliance has become a fact of life for all financial institutions. On-boarding new customers and maintaining existing ones requires a cottage industry of continuous monitoring and reporting using sanction lists (for example HM Treasury list in the UK or OFAC in the US), developing a risk based approach, monitoring transactions and reporting suspicions to regulators.
One of the more challenging AML requirements is that of screening and identifying PEPs (politically exposed persons). Such monitoring needs to occur because regulators deem PEPs to be high risk and they therefore will be subject to higher degrees of due diligence and checking than other customers. Screening such customers correctly therefore is a major task.
This article will highlight the common challenges and potential solutions to screening PEPs.
What is a PEP and why should we care about them?
There is no single definitive agreement on who is a PEP, but regulators around the world have tended to converge on a reasonably settled position. Essentially a PEP is someone who has a high profile political role – they are in a position of some influence. This would therefore include politicians, senior civil servants, high court judges, senior members of political parties and senior ranks in the armed forces.
Where it gets slightly more nebulous is that regulators also require that relatives and close associates (RCAs) of the PEPs are also screened. Now how do we define these? Some regulators can be quite helpful here – the parents should be identified but not the grandparents, the siblings should be identified but not the cousins – or more simply put, we should look up to one degree of separation. But then what about sons-in-law and daughters-in-law or ex-wives and husbands? On the close associate side, how close is close? A fellow director in a company may be considered close, but what if they just happened to work in the same company? Or they acted as a personal accountant 10 years ago? Or they are members of the same club?
To help answer this, we need to understand why we should care about PEPs and RCAs in the first place. The simple answer is that due to the position they hold they present a higher money laundering risk. This can be understood using two examples. First, a politician or high court judge has greater access to the public money supply than a private citizen. The capacity and opportunity to perform criminal behaviour (even if in most cases they do not!) is there. Second, a high profile person like a politician can be subject to blackmail threats and other risks – and where there is blackmail, usually criminal money will be lurking beneath. Only relatives or close associates who are close enough to the politician to also face these opportunities or threats should also therefore be correspondingly monitored.
To conclude, as stated above PEPs need to be identified and subject to higher due diligence by financial institutions. This typically means greater checking into where their money (their source of wealth and source of funds) comes from as well as ensuring senior management sign off and approve their on-boarding.
What are the challenges with screening PEPs?
There is no single agreed global PEP list. This is not just because interpretations about them vary but also because they change so fast. Politicians come and go, generals and high court judges retire, marriages dissolve and older relatives die. Keeping it all in one up-to-date list is a thankless task. Moreover, PEPs themselves may be immediately difficult to identify if they don’t wish to disclose the fact that they are a PEP. Imagine if Elizabeth Alexandra Mary Windsor or Alexander Johnson wanted to open an account with your company. Are either of these PEPs? Well actually yes: the first is Queen Elizabeth II and the second is more commonly known by his middle name Boris. So a PEP list not only needs to be constantly up-to-date, but it needs to know these alias names too.
Moving on, while we may be able to identify a PEP, we then want to know what we should do with them if we find one. In most cases the PEP or the RCA may simply just be high profile and therefore we just want to monitor them – but what if they were actually guilty of some corruption or fraud – then we would want to prevent them from becoming our customer and indeed report them to the regulators. So our search now takes on an added dimension, not only must we find PEPs, we must particularly look for the bad apples among them too.
So how should we screen PEPs?
While the challenges are many, there are many factors which can help companies. First off, a risk based approach is desirable. A national politician or a general in the army should be screened. A local councillor or sergeant in the army need not be – the categorisation of PEPs at the start of this article is designed to assist here. It’s all down to the degree of influence they hold.
Second, tools exist which can collect and synthesise data and provide real time updates. This gets round the issues of out-of-date information highlighted above. Such tools will be trained to review certain databases of politicians and use AI such as natural language processing (NLP) to automatically hone the results.
And thirdly, such tools can be further tuned by additionally looking at words and phrases which may indicate fraud or corruption – immediately bringing adverse media or negative news to the forefront.
At my company Idenfo, we have developed a tool which utilises context based web parsing using NLP along with deep neural networks to not only identify PEPs and RCAs from around the world, but also understand something about the adverse media context in which they may be engaged. This provides a self-learning optimised set of results providing real value to any financial institution. In simple terms, we provide not only the results, but also the framework – this helps compliance teams make use of the data and make the appropriate decisions. Another small weapon to use in the fight against financial crime and corruption.
Antony Bellingall is Co-Founder and Director of Idenfo – Idenfo provides a full suite of compliance solutions and services to financial institutions around the world. To find out more, please visit us at https://www.idenfo.com/