Critical Risk Assessment Criteria for PEPs
Critical Risk Assessment Criteria for PEPs
The UAE’s Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regulatory framework requires businesses to scrutinise and assess the Money Laundering (ML), Financing of Terrorism (FT), or Proliferation Financing (PF) risks posed by existing and potential customers who are classified as Politically Exposed Persons (PEPs). The PEP risk assessment forms part of Customer Due Diligence (CDD) measures.
To ensure compliance and effectively manage these ML/FT/PF, bribery, and corruption risks, businesses must establish clear criteria for assessing the customers identified as PEPs.
However, not all PEPs pose the same degree and extent of ML/FT/PF, corruption and bribery risk. Thus, businesses cannot deploy a blanket approach and need to adopt a risk-based approach, requiring to analyse each PEP customer on a case-to-case basis.
Businesses must implement risk assessment criteria to evaluate the ML/FT/PF risks associated with each PEP. This approach ensures businesses can tailor their risk management strategies effectively, addressing the varying degrees of risk posed by different PEPs and maintaining effective controls against financial crimes, including ML/FT/PF.
Here’s a criterion that businesses should consider while assessing ML/FT/PF risks related to PEPs:
1. Role and Position
As part of the risk assessment criteria for customers, businesses need to evaluate whether their existing or potential customer identified as PEP holds any highly influential position within the government or political system. Higher-ranking positions typically present higher risks due to greater influence and access to resources, such as a Prime Minister or Foreign Minister or Minister of Defense, or is the PEP merely a member of parliament or an important cabinet that advises higher-ranking PEPs. Assessing the ML/FT and PF risk posed by PEPs on the basis of their role and position in influencing public policy, government programs, and business transactions is an important component of risk assessment criteria for PEPs. Among the other factors, the regulated entities must consider:
- The nature of decisions controlled by PEP and the degree of autonomy PEP has in decision-making
- Whether the PEP has control over disbursements of funds
- The PEP’s rank within the government or international organisation
2. Public Profile
As part of the PEP’s risk assessment, businesses should evaluate the PEP’s public profile by examining its reputation and image in the public domain. PEPs, who are often in the media and under public scrutiny, may pose different and potentially higher risks compared to those with low profiles.
However, while high visibility can increase scrutiny, it does not necessarily correlate with higher ML/FT and PF risk.
Thus, to accurately analyse the potential risk associated with a PEP, businesses need to consider both public opinion and media coverage, depending on the context of information available about the PEP.
3. Jurisdictional Risk
The jurisdiction risk involves considering the political and economic stability and the rating of the AML framework of the country where the PEP belongs.
Foreign PEPs pose a higher amount of risks than local PEPs.
Countries with a high level of corruption, weak governance structure, or unstable political environments pose greater risks, and PEPs residing in these countries may pose significantly higher ML/FT/PF, corruption, and bribery risks.
Apart from this, as part of assessing jurisdictional risk, businesses should also evaluate whether the PEP operates in jurisdictions that conflict with the country where the businesses operate, as this can further impact the risk assessment criteria for PEPs.
4. Relatives and Close Associates
Knowing PEPs is essential, but businesses should also investigate the relationships and connections of the PEP, including relatives, close associates, and friends. These relationships can significantly impact the risk profile, as they may be involved in or benefit from illicit activities facilitated by the PEP’s position.
At the same time, potential and existing customers onboarded must be monitored on an ongoing basis to assess whether they are relatives, close associates, and friends of any PEP as it is highly possible that PEP, to avoid disclosing their identity, operate by proxy of their relatives, close associates, and friends.
Assessing the background and activities of these connected individuals is essential for understanding the broader network associated with the PEP.
5. Origin of Funds and Wealth
Businesses should also investigate the source of the PEP’s funds and accumulated wealth to assess the legitimacy of their transactions. When assessing the origins of funds and wealth, it is necessary for businesses to know if wealth and funds are aligned with their official income or business profits of such a PEP.
Unexplained wealth and funds inconsistent with the PEP’s known income or profit may indicate involvement in financial crimes, including ML/FT/PF, bribery, and corruption.
6. Transaction Patterns
Another critical risk assessment criterion is to analyse transaction patterns involving the PEP. Businesses should monitor the nature and frequency of transactions involving the PEP on an ongoing basis.
Unusual and suspicious transaction patterns, such as those involving unusually large numbers of transactions or involving high-risk jurisdictions, can signal involvement in potential illicit activities.
Thus, as part of the risk assessment of the PEP, businesses should ensure that transactions are consistent with the PEP’s known wealth, business, and financial activities.
7. Duration of Public Position
The length of time the PEP has held its position of power also impacts the risk assessment. Long-standing PEPs may have developed extensive networks and influence, impacting their risk profile.
Even after leaving office, former PEPs may still pose risks due to the established network and influence.
Evaluating the duration and impact of the PEP’s tenure helps in assessing potential risks associated with their involvement.
Conclusion
Assessing the risks associated with PEPs on a case-to-case basis is critical for businesses to ensure compliance with the UAE AML/CFT regulations. By carefully evaluating these criteria, businesses can make informed decisions and implement appropriate measures to manage and mitigate ML/FT/PF risks related to PEPs.
