May 21, 2024
PEP Screening

PEP Screening

Not long ago, corruption and bribery were not among the core focus of financial institutions. Unless by 2022, Bailiwick of Guernsey declared their relationship with foreign Politically Exposed Persons (PEPs) from a range of jurisdictions. Bailiwick’s National Risk Assessment (NRA) reported the total number of corruption cases linked with foreign PEPs is higher than any other type of PEP. This became evident when a foreign PEP was charged for laundering $10 million in Guernsey-structures. 

Thus, anti-money laundering screening has now become inevitable for managing growing cases of corruption and bribery. PEP screening solutions are most vital for people who are at increased risk of abusing their power and positions and, thus are recognized as the most vulnerable group in financial crime.

Regardless of the increased prevalence of PEPs enabling corrupt practices, international regulatory bodies (FATF, EU Directives, and more) are found to be inconsistent in their effort to revise the regulatory framework for enhanced protection.    

This blog will shed light on one of the most current case scenarios, identify gaps involved, and suggest AML solutions for improved risk management. Keep reading ahead to learn all about it. 

Compliance Gaps: An Analysis of Luxembourg’s Financial Sector 

Luxembourg is recognized for its highest quality of well-developed and reputed financial services. The country has been lucky enough to avoid tax evasion charges, even while many state-owned financial institutions heavily optimized taxes for foreign investors. Regardless of the Lux Leaks Scandal which emerged in November 2014, the state’s reputation suffered minimal loss, until the scandal of their non-compliance surged with found inconsistencies with FATF and EU regulatory mandates by a whistleblower, who has now been rewarded 55,000 Euros for his damages. 

Gaps (to be avoided) identified within their system encompasses:

  • PEP Coverage 

Being inconsistent with FATF guidelines about who to classify as PEP, led them to exclude public leaders, family, and close associates of PEP, depicting a gap in inefficient coverage of Politically Exposed Persons

  • AML Directive Implementation: 

Regardless of the new release of the 4th AML Directive, their definition of PEP didn’t include domestic and regional level PEPs, missing out on their enhanced due diligence on a significant role within the state that must be subject to the same scrutiny as level 1 PEP. 

  • Network Analysis: 

The lack of screening measures to uncover beneficial ownerships associated with PEPs didn’t align with the capabilities of screening software. This left gaps in assessing PEPs as beneficial owners which is critical in Anti-Money Laundering. 

  • Updates in PEP Profiles:

Despite maintaining the updated regimen in PEP profiles, their screening software was not embedded with distinct frequency and effectiveness of screening checks. 

Bridge Systematic Loopholes with Smart Solutions 

Implementation of AML screening measures in general is an ongoing process with ongoing loopholes and consistent efforts to overcome them. The credibility and efficiency of  PEP screening software heavily on the flexibility of the screening parameters to align with industry needs. 

An array of suggested solutions are discussed ahead!

  • Improved Compliance 

Expand beyond traditional measures to align with national and international regulatory, updated frameworks, especially FATF, EU, AML Directive, and more to converge on a single agreed upon definition of PEP, thus leaving no PEP going un-noticed. 

  • Expanded Coverage 

Once the definitions turn out to be aligned, global businesses must leverage broad categories of PEP data into their database. This expansion of the database enables significant roles to get detected and eliminates micro-level fraud cases as well. 

  • In-Depth Screening: 

Apart from wider coverage, in-depth background screening may unveil a lot about a PEP. Deploying a screening system with network analysis and natural language processing (NLP) mechanism, access the PEP compliance program which detects matches across multiple languages.  

  • Risk Management:

It would not be wrong to say that every PEP is seen as a risk regardless of how clear or complicated their background appears. State-owned and private entities must not feel shy to reject any applicant who feels too risky. 

Conclusion: 

In light of the discussed case study, the significant loopholes in the screening system call for smart PEP list screening which must also be aligned with the regulatory framework mandated by FATF and associating regulatory bodies. 

It is clear through multiple instances that the PEP screening method is an ongoing process and thus demands consistent effort to reach perfection. By leveraging the PEPs on an ongoing AML, you can expect to sit back and relax while AML screening software keeps your business updated with emerging risks, enabling risk management and mitigation easier than ever.

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