The Pandora Papers: The Importance of Enhanced Customer Due Diligence for PEPs

Anti-money laundering (AML) – stopping criminals from generating income through illegal actions – starts with knowing your customer to ensure they are who they say they are.

Jackie Wheeler is the senior director of technical content at Jumioa provider of identity verification and transaction monitoring powered by artifical intelligence. She is a professional writer since 1991 specializing in open source, enterprise, compliance and developer content.

Here Wheeler outlines the importance of screening for politically exposed persons in your risk assessment and why you need to screen throughout the customer lifecycle, not just at onboarding.

Jackie Wheeler, senior director of technical content, Jumio

Multiple leaks, such as the Panama Papers, Paradise Papers and most recently the Pandora Papers show that politically exposed persons (PEPs) are at higher risk for corruption. PEP screening is critical for ensuring your business takes a risk-based approach and performs enhanced due diligence on high-risk customers to protect your company and the financial system.

But although PEP screening is a requirement for regulated financial institutions in many jurisdictions, some firms only have sanctions enabled. Even in jurisdictions where it is not explicitly required, it is an important part of a risk-based AML program as explained in FinCEN’s statement on PEPs.

What is a politically exposed person?

A PEP is an individual who holds a position of power as a current or former public official. These political figures are often a target for bribery, corruption, money laundering and other financial crimes.

From a risk management perspective, close associates and immediate family members who might influence their decisions may also be treated as PEPs. Senior executives who have a business relationship with those serving in prominent public functions may be considered by a company’s senior management to be included in the PEP definition.

Why Is PEP Screening Important?

The Financial Action Task Force (FATF) recommends that companies apply rigorous AML checks to their customers who are politically exposed persons. In the FATF recommendations on PEPs, they are quick to clarify that these extra checks are not intended to stigmatise or assume criminal activity by PEPs. Unlike sanctions screening, the goal is not to avoid doing business with PEPs but to take extra steps to ensure they have not been compromised and are not engaging in financial crimes. The FATF recommends having checks in place for both domestic and foreign PEPs.

PEP screening supports a risk-based approach to customer due diligence. This approach looks for more than a yes/no decision and assigns a risk score to each customer so you can apply the proper level of customer due diligence in your onboarding and ongoing monitoring processes.

What are the Pandora Papers, and how do they relate to PEP screening?

The Pandora Papers refers to the massive leak of documents in the fall of 2021 that led to a global investigation of financial crimes. At the center of the investigation are hundreds of politicians who used their wealth and influence to hide money in foreign accounts, real estate deals and shell companies. According to the International Consortium of Investigative Journalists (ICIJ): “The Pandora Papers reveal the inner workings of a shadow economy that benefits the wealthy and well-connected at the expense of everyone else.”

Investors may move money to a foreign country to avoid taxes, but it can also be used to hide funds from illicit activities and proceeds from corruption. As the BBC pointed out in its article on the Pandora Papers, even if the PEPs involved acted within the letter of the law, they are still benefiting from a practice that is also used by criminals. Because of that benefit, the very people who can actually pass laws to make it harder to hide assets and to increase transparency into beneficial owners, source of funds and source of wealth are less likely to do so.

This means that the PEPs who were involved in the Pandora Papers are in a gray area when it comes to risk factors. “It’s possible that those who acted within legal limits may still be considered accomplices to financial crime as the investigations unfold,” says Simon Winchester, VP of advanced technologies at Jumio.

“A risk-based approach requires that businesses monitor this type of activity in order to truly know their customers.”

What are best practices for PEP screening?

The goal of PEP screening is to determine a customer’s risk profile but it’s not enough to do it once when opening their account. Screening customers against PEP lists along with sanctions, adverse media and other watchlists must be done throughout the customer lifecycle.

Onboarding

Before you do business with a potential customer, there are many know your customer (KYC) due diligence measures you must perform. These include identity verification during account opening to ensure they are who they say they are, as well as screening to determine their risk profile.

Ongoing monitoring

Your regulatory responsibilities don’t end with onboarding. You must also perform ongoing monitoring to check their PEP status and ensure their risk profile doesn’t change. This should include the same screening checks you ran during the onboarding phase, plus transaction monitoring and customer monitoring to look for suspicious activity and changes in behaviour.

And because ongoing monitoring can involve many more variables than onboarding, it’s important to have an advanced case management system that streamlines investigation and helps your compliance team easily navigate suspicious transactions and spot patterns and connections.

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