The PEPs challenge: balancing risk and convenience in the age of immediacy

Andrew Davies, Global Head of Regulatory Affairs at ComplyAdvantage reveals the ABC of politically exposed persons (PEPs) and why this topic is relevant to FIs in 2024.

Throughout 2023, we saw headlines on both sides of the Atlantic demonstrating that unethical behaviour, bribery, and corruption remain serious threats to the financial system while undermining trust in government. Added to that is the immediacy of national elections in the US, UK, and 40 other countries worldwide, making screening and monitoring politically exposed persons (PEPs) an issue too important to ignore in 2024.

Financial services globally continue to transform by introducing more real-time payment mechanisms and the expanded eco-system of financial services companies through Open Banking and Embedded Finance. Money moves quicker than ever, and there is increased competition for customers, giving consumers a broader choice in where, when, and how they conduct their financial activities than ever before. With these changes to the financial services landscape come the expectations of speed and convenience. Customers expect to be onboarded instantly, and they want their payments made instantly. 

So, financial services companies must balance security and integrity with customer convenience. Add to this the multitude of new players in the industry at every phase of the customer journey, and there are numerous ways for bad actors to exploit the system.  Organisations must evaluate each relationship across multiple dimensions of risk using all available data. Historically, financial institutions have used different platforms for fraud vs. AML vs. bribery and corruption. Enterprise financial crime data sources and technology are addressing this weakness. For example, at ComplyAdvantage, we provide data mapped to money laundering predicate crimes as defined by the Financial Action Task Force (FATF). We also monitor, on a common platform, for these predicate crimes; hence, our customers get a complete picture of risk, which empowers them to manage exposure and minimise friction with the customer as they’re no longer operating with a blinkered view.

At a high level, a PEP is an individual with a high-profile political role or someone entrusted with a prominent public function. These individuals present a higher risk of involvement in money laundering and/or terrorist financing because of their position.

PEP classification is typically broken down into Foreign PEPs, Domestic PEPs, and International PEPs. We also need to factor in Relatives and Close Associates of PEPs (RCA), who may be used as proxies for PEP's financial activities.

If a client of a financial services company is a PEP or an RCA, then typically, they are subject to enhanced due diligence. The fact that a client is a PEP is also a factor used in client risk scoring. Looking at a client's overall score allows institutions to manage their risk with PEPs appropriately and, in fact, all customers. The fact that someone is a PEP can be used in ongoing transaction monitoring as, ultimately, a PEP may be vulnerable to bribery or corruption. Hence, institutions need to monitor and uncover these activities.

FATF has designated PEPs as people who should be more closely screened and monitored because they are at higher risk of bribery or corruption due to a prominent function they hold, be it legislative, judicial, tribal, or otherwise. The designation of PEP is not clearly defined simply because the ‘prominent function’ can vary depending on the country they are in or the role they play. 

Accordingly, there isn't a simple up-or-down approach when screening and managing the risk of working with PEPs. A politician holding national office from a bank's own country can hold one risk level, while a national politician from what is determined to be a country with a culture of corruption will have a much higher risk weighting. Then, there are the people who are related or associated with politicians who deserve additional scrutiny because of their proximity.

For regulated industries, the additional due diligence during the screening process is compounded when monitoring behaviour that doesn't fit the PEPs' peers. For many entities, these hurdles make having a PEP as a customer a compliance challenge.

As AI and machine learning continue to develop, they are proving to be a valuable tool in the screening and monitoring of PEPs. Additionally, natural language processing stands out as a critical technology to help understand the broader network at play when doing research such as adverse media screening. It isn't enough to know that a particular person is mentioned in an article; the context is crucial. Understanding that a PEP is mentioned in conjunction with a specific crime or has an association with a particular criminal helps banks and other organisations make the crucial decisions about whether or not to do business - or continue doing business - with a particular person or entity.

Integrity is the lynchpin to a functioning, successful financial system. By that, I mean both integrity in the sense of knowing that the person you choose to do business with is not a bad actor as well as integrity in the structural definition of the word. The fight against financial crime is everyone's responsibility, regardless of whether you are in a regulated industry. The more we collaborate to share information and identify new behaviours that might indicate crime, the stronger the financial system will be.

And, by working cooperatively to reinforce that system, we are doing more than simply preventing financial crime. We are helping to prevent the host of other criminal enterprises that money laundering perpetuates, such as drug- and human trafficking, child exploitation, and other heinous offenses.

Over the past ten years, financial services have been transformed. We live in a globally interconnected world. Money flows across borders more seamlessly than ever, digital channels continue to grow, and embedded finance is part of our daily lives. Through this period of transformation, criminals have constantly evolved to find the path of least resistance to perpetrate their crimes. At ComplyAdvantage, we have evolved to meet the threats. We have also seen increasing collaboration in the industry to address financial crime, particularly with outreach from regulators to understand available data and technology to fight financial crime.

ComplyAdvantage will continue to leverage the strength of our data, using AI and machine learning to provide a more accurate and comprehensive risk management solution to our customers. In the last year, we have invested heavily in our data team to ensure that the intelligence that we provide our clients is the best in the business.

Because, at the end of the day, we believe our strength lies in our team. ComplyAdvantage has a team of financial crime specialists whose experience working for leading institutions gives them both knowledge of the regulatory landscape and insight into the challenges our customers face. We use this expertise to work with our clients to help them solve their most significant compliance challenges. Every client is different, so we are so focused on providing them with the customised solutions they need.

About Andrew Davies

Andrew Davies is a financial crime risk management industry veteran and the Global Head of Regulatory Affairs at ComplyAdvantage. Based in New York, Andrew applies his decades of experience to support our products' development, help navigate customer challenges, and offer his strategic guidance to the wider compliance and financial services industry.

About ComplyAdvantage

ComplyAdvantage is the financial industry’s leading source of AI-driven financial crime risk data and fraud detection technology. ComplyAdvantage’s mission is to neutralise the risk of money laundering, terrorist financing, corruption, and other financial crimes. Enterprises in over 75 countries rely on ComplyAdvantage to understand the risk of who they’re doing business with through the world’s only global, real-time database of people and companies. Learn more at complyadvantage.com.