Why 2024 will be the year of the PEP

Major national elections occur every year - but 2024 will be of particular significance. Three of the world’s largest economies - the United States, the United Kingdom, and India - are among those set to hold votes to determine their countries’ leadership.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

This includes not just presidents and prime ministers but national legislatures, too, alongside some regional and state offices. Taking just national office holders in the US Congress, UK parliament, and India’s Lok Sabha alone, more than 1,600 seats will be contested.

As such, it’s unsurprising that managing politically exposed persons (PEPs) and their associated risks - including bribery and corruption - is a central theme of ComplyAdvantage’s annual State of Financial Crime report.

79 per cent of UK firms told us they will be reviewing management of PEPs in the next 12 months by, for example, applying greater due diligence at onboarding and through ongoing monitoring. This comes as UK firms face an additional complexity - an amendment to the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. It impacts the treatment of domestic politically exposed persons (PEPs). Specifically, the amendment states that domestic PEPs and their relatives must be treated as “inherently lower risk” than non-domestic PEPs.

In a challenging year, firms reviewing how they approach PEPs seems reasonable - but only if they have the people and technology to do this effectively. In our survey, 73 per cent of firms said they must reduce their reliance on manual processes to manage the changing volume of PEPs. Just one in four said their existing technology could reasonably handle the volume of PEP changes they’re expecting in 2024.

So, how can banks prepare for the coming PEP avalanche? Here are my four top tips:

1 Review and stress test approaches to corruption

Given the large number of PEP changes, the number of firms treating corruption as a major focus will likely rise through 2024. While there are a range of red flags related to corruption firms should be familiar with, several are notable for their increased risk around elections. These include using political contributions to influence official actions and attempting to obscure the nature of a political party’s relationship with a company it is doing business with.

2 Understand how relevant countries organise their political apparatus

Inevitably, compliance officers will be most familiar with their home country's political system and processes. But many often overlook how different systems, legislatures, and power distribution can be, even in countries that may share a common language or a large degree of regulatory alignment. The UK, for example, has a higher number of national and local PEPs but very few at the regional level. By contrast, the US system has significantly more local PEPs, reflecting its federal structure. But as a centre for many non-governmental organisations, it also has a greater proportion of international PEPs. In Singapore, national PEPs dominate, reflecting the highly centralised nature of government.

3 Ensure you have multiple technologies in place to conduct comprehensive monitoring

By the nature of their roles, PEPs are not simple individuals to screen and monitor, a challenge exacerbated by elections when individuals will take on different responsibilities that may create or eliminate risks. So, how do firms apply unified technology and systems worldwide while allowing for flexibility? A suite of technologies and artificial intelligence (AI) are critical.

This requires firms to use a range of information from multiple sources. These should include information directly from the customer, information gathered from a customer’s banking activity, adverse media identified through negative news screening, third-party sources, and other behavioural data.

4 Develop a comprehensive approach to de-classifying a PEP and offboarding

Many financial institutions neglect to develop comprehensive de-classification and offboarding policies, focusing their AML policies largely on onboarding alone. However, it is also essential to consider when - and how - a customer should be offboarded in alignment with a firm’s risk appetite. Regulators have, for example, criticised banks for not offboarding clients with dormant accounts, given the risk this creates for clients who should have been offboarded to process transactions. As a result, firms need a detailed process for when clients should be offboarded, including criteria based on risk, to ensure a uniform process across the organisation.

Download the State of Financial Crime 2024 to read more about PEP screening, monitoring, and associated risks in the year ahead.

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