Politically Exposed Persons is a key concept in tackling Money Laundering. It is one of the most significant aspects of extended due diligence. Recommendation 12 laid down by the Financial Action Task Force (FATF) is key guidance.
FATF guidance explains how the PEP status should be identified. Politicians, their relatives and business aides are important elements of the financial system. While establishing a business relationship, Senior executives of the bank should be aware of the relationship.
Dealing with senior officials of a foreign government or other senior foreign political figures is challenging for financial institutions.
Any nexus with government officials or elected representatives can create the appearance of misconduct. By virtue of their position and influence, PEPs present a higher risk for potential involvement in bribery, corruption and other financial crimes. Typically, Politically Exposed Persons occupy prominent public functions. In India, heads of State (loosely termed as Ministers), heads of PSUs also fall under the definition of PEP.
Reserve Bank of India
The Reserve Bank of India (RBI), in its circular, dated 1 July 2014, on AML/KYC instructed banks and financial institutions regulated by RBI to identify the PEP and get the senior management approvals. “Banks should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer.
IRDAI
In 2015, the Insurance Regulatory and Development Authority of India (Irdai) also directed all insurers to ensure appropriate risk management procedures for identifying and applying advanced due diligence measures to Politically Exposed Persons.
Sanctions Checks are necessary to assess the risk of individuals, companies, and countries. The sanction checks include PEP screening, Adverse Media & Watch list Screening.
PEP List Checks
As India is not part of any significant sanctions, the sanction checks are different in the Indian context. Sanction checks help to identify individuals who appear in the actions taken lists of government. However, this is different from the identification of the PEP.
In India, so many elections are held at different levels. With new people getting elected, the database of PEP needs to be modified continuously and there is a need for an entity that will carry out this activity. Today, Riskpro is the only organisation that carries this curated database of politicians. It compiles this data and offers it as a service to financial institutions since 2013.
While the Election Commission can provide data for newly-elected representatives and the government can provide details of other categories of PEPs, it is difficult to identify the details of political party officials that keep on changing. The changing nature of a PEP’s business and political interests can make manual periodic reviews a challenging prospect for many firms.
An annual review of a PEP’s status may be unachievable for some firms or prove inadequate for high-risk PEPs. However, Real-time automated solutions offered by the companies like Riskpro can scan for material changes to PEP’s status.
Database of Politically Exposed Persons in India
In order to help the financial institutions to comply with the Indian regulations, the Riskpro database is crucial. Regtechtimes is the leading information provider on regulatory technologies. However, Riskpro has built India’s first curated database of heightened risk entities. This database consists of the high-risk individuals and entities classified into four main categories:
- Politically Exposed Persons (PEP List)
- Regulatory Sanctioned Entities
- Enforcement Sanctioned Entities
- Financial Defaulters
In its research on politically exposed persons, Regtechtimes estimated that trillions of rupees loans were sanctioned by the Indian banks to the companies owned directly or indirectly by the politicians and their relatives or their close business associates.
Legal Entities associated with the Politicians are not treated as PEP. However, they pose a bigger risk than the banks. Financial Institutions have to deal with the challenges in recovery of their dues from such politically motivated companies. Identification of the politically exposed persons helps the bankers to hedge the credit and reputation risks associated with the borrowers.
FATF excludes the low ranking politicians from its guidance, however, they pose significant risk. In many instances, the low ranking Indian politicians team up with the influential politicians involved in money laundering. Hence, in India, it is necessary to gather intelligence about members of Legislative Assemblies as well.
Riskpro compiles the PEP Lists for Indian financial institutions. It considers the legal entities associated with the Politicians defined in the FATF guidance as higher risk entities. Additionally, it also compiles the low ranking politically exposed individuals too.
It also provides the nexus data needed – delivered through APIs, batch, or online – for insights into corporate entities and individuals. That capability gives banks a transparent view of exactly who they’re doing business with, and it includes information on company hierarchy and complex beneficial ownership connections.
