What is a PEP, and why is it important for banking and finance? The former US President once said that sunshine is the best disinfectant.
This best emphasizes how often there is pressure on any person in a highly visible position to be open and scrutinize their actions. These persons are referred to as Politically Exposed Persons (PEPs).
They are individuals who exercise state powers or other authoritative powers, that is, officials and politicians or those who are close to them.
Knowledge PEP meaning in banking and how banks deal with such opportunities is useful to any stakeholder in banking and finance.
Definition of Politically Exposed Persons
Politically exposed persons can have a lot of influence or means of accomplishment and can become prone to issues like corruption or economic criminality, such as money laundering.
The politicians, government officials, employees, and business persons who are labeled as PEPs should not be trusted blindly. They can be involved in banks and financial institutions’ transactions to avoid illegal dealings.
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Importance of PEP Identification in Banking
Special attention should be paid to the PEPs because they have higher risks of planning and participating in money laundering, corruption, or other unlawful activity.
That is why banks need to have regulations in position on how to recognize PEPs both at the registration stage and later throughout business relations.
A banking practice known as PEP screening enables a bank to implement customer due diligence procedures and closely monitor any related PEP checks in banking.
PEP Screening and Due Diligence Processes
To avoid problems in relation to politically exposed persons, the banks should have appropriate scrutiny and identification procedures.
This entails spending a considerable amount of time conducting background checks on a client to establish if he is a PEP.
Searching public records and other databases for signs that may put light on the client as a PEP and close and unending scrutiny of the account for signs of improper business dealings.
Banks have to be very careful not to be used as alibis for these unlawful activities they may not be aware of. The fines for weak PEP screening jumped to $2.1 billion internationally in 2023.
Regulatory Requirements for PEP Monitoring
Governments across the globe have made guidelines very clear regarding how the banks must treat politically exposed persons or PEPs.
During the PEP screening in banking, clients must be identified as PEPs, and banks are also obliged to follow appropriate procedures.
They also require that they keep an eye on these accounts, conducting what can be referred to as ‘chemical checks in banking’ to rule out any enigmatic activities or sales.
Currently, financial institutions across the world annually invest $1.3 billion in PEP compliance and monitoring procedures.
Risks Associated with Politically Exposed Persons
PEPs are defined as high-risk clients for banks due to the risk of misuse of authority. They may be involved in some form of money laundering or corruption.
Banks vary when handling funds belonging or transacted by politically exposed persons for the risk of being a conduit to funding illicit business that may harm the institution’s reputation.
In 2023, there was a 75% rise in checking on accounts linked to PEPs due to the enhancement of rules.
Ongoing Monitoring of PEP Accounts and Transactions:
Whether banking institutions do an introductory PEP screening in banking, they must recognize it. Over time, they have to monitor the accounts and transactions of so-called PEPs.
This is done through PEP checks in banking, which require one to scan for any improper activity or change periodically.
According to the 2023 survey, 60% of banks have adjusted their monitoring frequency of PEPs.
Banks must be very cautious not to be used as a channel through which PEPs conduct their money laundering or other unlawful activities.
Identify Close Associates of PEPs
When dealing with politically exposed persons, it is not only the main account holders that a bank needs to consider.
They also ought to know any relatives or persons close to the PEP as they can also be deemed to be at a higher risk.
These banks must also apply the PEP screening in banking and PEP checks in banking features to these related parties for the entire network to be protected.
According to the survey conducted among the banks in 2023, their expenses for PEP compliance have also increased.
PEP Compliance and Anti-Money Laundering Efforts:
Banks pay a lot of attention to the handling of PEPs. They maintain high standards of compliance to flag, follow, and report on any questionable PEP-related activity.
According to new statistics, more than 60% of the world’s financial organizations have increased their PEP due diligence.
It is part of another measure that a bank can use to combat money laundering. If banks are keen on such phrases as “PEP meaning in banking,” they would be in a good position to reduce their services being used for unlawful activities.
Go to our website for best practices in PEP identification and management in banking organizations.
