Know your customer (KYC) and anti-money-laundering (AML)
compliance have 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 to screen
and identify politically exposed persons (PEPs). Such monitoring needs to occur
because regulators deem PEPs to be high risk, and they will be subject to
higher degrees of due diligence and checking than other customers. Screening
such customers correctly, therefore, is a significant task.
This article will highlight the common challenges and
potential solutions to screening PEPs.
What are politically exposed persons (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 has a high profile political role – they are in a
position of some influence. Therefore, this would include politicians, senior
civil servants, high court judges, senior members of political parties, and
senior ranks in the armed forces.
It gets slightly more nebulous as regulators also require
the relatives and close associates (RCAs) of the PEPs to also be 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 did they act as a personal accountant
ten 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 they present a
higher money laundering risk due to the position they hold. This notion 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,
criminal money will usually lurk 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.
As a result, PEPs need to be identified and subject to
higher due diligence by financial institutions. This rule of thumb typically
means deeper checking into where their money (source of wealth and source of
funds) comes from as well as ensuring senior management sign off and approve
What are the challenges with screening PEPs?
There is no single agreed global PEP list. This reality 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. Is either of these PEPs? 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. Though Her Majesty need not go through screening in the
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. Therefore, we just want to monitor
them – but what if they were actually guilty of some corruption or fraud? We
would like to prevent them from becoming our customers and report them to the
regulators. So our search now takes on an added dimension; not only must we
find PEPs, we must especially look for the bad apples among them too.
So how should we screen PEPs?
While the challenges are many, there are many factors that
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 form of analysis gets around the issues of
out-of-date information highlighted above. Developers will train such tools to
review specific databases of politicians and use AI such as natural language
processing (NLP) to hone the results automatically.
And thirdly, such tools can be further tuned by looking at
words and phrases that may indicate fraud or corruption – immediately bringing
adverse media or negative news to the forefront.
At my company Idenfo, we have developed a tool to utilise
context-based web parsing using NLP and deep neural networks to identify PEPs
and RCAs from around the world and understand something about the adverse media
context in which they may be engaged.
This development provides a self-learning optimised set of
results providing real value to any financial institution. In simple terms, we
deliver the results and the framework – this helps compliance teams use the
data and make the appropriate decisions—another small weapon to use in the
fight against financial crime and corruption.
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