Screening and monitoring for Politically Exposed Persons (PEPs) is crucial in the fight against money laundering and terrorism financing or corruption. Although PEP status screening is a strict requirement in Anti-Money Laundering (AML) compliance, different regions may have differing rules regarding the treatment of PEP status. Some jurisdictions may consider it a perpetual requirement, while others might implement a time limit or certain conditions under which an individual ceases to be classified as a PEP. So the question is simple: Once a PEP, always a PEP?
How Long is a Person Considered a PEP for?
Currently, there isn’t a fixed timeframe universally defining the duration of PEP status. Prominent and high-risk PEPs might retain this classification indefinitely, whereas others may be declassified after a certain period. There are three main timeframes:
|12 to 18 months
|Minimum of 12 months
Many countries generally concur that this period should be a minimum of 12 to 18 months following their departure from the public office.
While no singular regulation exists, some regulatory bodies do apply certain rules. For example, according to Article 22 of Directive 2015/849 from the European Parliament and the Council, entities are required to assess the persistent risk associated with a politically exposed persons for a minimum of 12 months following the termination of their entrusted role in a significant public capacity by a Member State, a third country, or an international organisation.
However, this raises the question of whether 12 months is enough time for a PEP to completely lose the influence they once had.
The philosophy encapsulated by “once a PEP, always a PEP” entails designating individuals as politically exposed persons even post their public service roles. The underlying rationale behind this perspective is rooted in the consideration that former PEPs may still wield power, retain privileges, or possess funds obtained illicitly, warranting a thorough and continuous scrutiny throughout their entire association with a business.
According to recommendation 12 on the handling of PEPs, published by the Financial Action Task Force (FATF), no set time-limit should be applied and instead companies should handle these matters on a case by case basis. With this information, we need to discuss the risk-based approach.
A Risk-based Approach to PEP status
The best AML software implement a risk-based approach. This involves tailoring due diligence measures based on the perceived risk associated with a particular client, transaction, or business relationship. When it comes to PEPs, this approach recognises that not all politically exposed individuals pose the same level of risk. By assessing the specific circumstances surrounding each PEP, financial institutions can allocate resources more efficiently while maintaining effective compliance.
The risk-based scoring necessitates that financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) evaluate the money laundering/terrorist financing (ML/TF) risk associated with a politically exposed person who no longer holds a prominent political position. Subsequently, they must implement effective measures to mitigate this risk. Potential risk factors include:
- The extent of (informal) influence that the individual may still exert.
- The seniority of the position previously held by the individual as a PEP.
- Whether there is any connection between the individual’s former and current roles (e.g., formally through the appointment of the PEP’s successor or informally through ongoing involvement in the same substantive matters).
PEP Screening and Monitoring
Overlooking the identification of a politically exposed person in a timely manner poses a potential threat to any business relationship. Hence, it is crucial for all financial institutions to allocate resources to an effective PEP screening process. Adopting this risk-based approach safeguards the company, preventing entanglements with law enforcement agencies. Recognising the dynamic nature of PEP status, regulatory authorities mandate continuous risk assessment and monitoring of such individuals.
An optimal strategy for businesses frequently involves investing in an automated PEP screening process. Utilising Ondato, your company can ensure real-time monitoring of PEP status, eliminating the need for additional resources and minimising the risk of human error.
To sum up, it can be said that there is no unanimous opinion that “Once a PEP, always a PEP”. However, AML practices and regulations indicate that financial institutions must prevent money laundering and PEP, even after public service, must be considered higher-risk clients, and additional enhanced due diligence (EDD) must be performed.