A significant benefit of conducting pre-employment screenings as a part of your routine hiring process is the opportunity to identify any potential risks – such as financial risks, fraud risks, or conflicts of interest – early on, before a candidate is hired. The scope and comprehensiveness of the background check should be tailored to the position you’re hiring for, your business, and your industry.
The background checks for a hotel receptionist, for example, should be vastly different from the background checks for a Chief Financial Officer of a global corporation. That’s because there are certain positions that are considered to be higher risk or more vulnerable to abuse than others.
Similarly, certain high-profile public servants – such as a member of Parliament, a High Court judge, or a high-ranking military officer – are considered more susceptible to risks such as bribery, corruption, or money laundering offenses. Because of this, individuals holding these positions are referred to as Politically Exposed Persons (PEPs).
Individuals who have left their powerful positions but still retain influence may also be flagged as PEPs. For instance, the Luanda Leaks in 2020 exposed how the daughter of Angola’s former president exploited her family ties to purchase large stakes in banks, and funnel millions from Chinese and European contractors to become a multi-billionaire and the richest woman in Africa.
PEPs are primarily a concern for banks and financial institutions, with many local and international financial authorities mandating PEP screening as part of standard Anti-Money Laundering (AML) programmes and Know Your Customer (KYC) processes. It is imperative to note that a PEP status is not an indication of criminal activity or involvement! Rather, it’s an indication of higher potential risk, and therefore a need for enhanced due diligence or care when scrutinising financial activity.
How do you determine who is a PEP?
When onboarding new customers, third-party vendors, or business partners, research is key to uncovering hidden risks. While there is no uniform global definition of what “politically exposed” means, the Financial Action Task Force (FATF), an intergovernmental organisation fighting money laundering and terrorist financing, defines a PEP as any individual who “is or has been entrusted with a prominent public function”. They also outline a set of recommendations for identifying PEPs:
- Domestic: Individuals who are elected to prominent political positions or are appointed public roles in their own countries are categorised as domestic PEPs. These include Heads of State, Members of Parliament, financial regulators, mayors, members of the military, and members of the judiciary.
- Foreign: Individuals who are appointed to prominent public roles or functions in a foreign country are categorised as foreign PEPs. These can be ambassadors and diplomats, important members of political parties, and even senior executives of state-owned enterprises.
- International organisation: This refers to individuals in senior management positions entrusted with prominent functions in international organisations, and includes company directors and board members of global corporations.
- Family members and close associates: Family members of, or people who have social or professional relationships with a PEP can themselves be considered PEPs.
PEP regulations vary based on jurisdiction. As a business leader, you need to be aware of which regulations apply to your organisation. For example, the US requires PEP screening for foreign and international PEPs but not domestic ones, while the UK requires screening for all PEP categories. The regulations in Asia and the Middle East are also extremely diverse, so you should never take for granted that what applies to one country will apply to another.
Why is PEP screening necessary?
Failure to identify and adequately monitor PEPs can lead to hefty fines and negative impacts on business reputation. One of the most infamous financial crimes in recent years is the 1Malaysia Development Berhad (1MDB) scandal, which had massive backlash for Goldman Sachs as prosecutors alleged that senior executives at the bank ignored warning signs of fraud.
Goldman Sachs was eventually issued a US$2.5 billion penalty by Malaysian regulators, and had to guarantee a return of US$1.4 billion worth of assets. Other international regulators also issued their own fines on the bank, resulting in a total of US$6.8 billion in enforcement action.
Deutsche Bank was similarly implicated in the Jeffrey Epstein scandal for failing to correctly identify him as a PEP and therefore neglecting to monitor his financial activity. The bank was fined US$150 million.
Research minimises risks
Like all forms of intelligence gathering, PEP screening is a key part of business risk mitigation. The FATF also recommends taking a risk-based approach to PEP screening – first conducting an internal risk assessment, for example, will more clearly define what does and doesn’t constitute “politically exposed” in accordance with your own organisation’s risk appetite.
But beyond being a compliance issue, screening your customers, high-profile hires, or business partners for political exposure is about knowing whether you need to pay closer attention to certain details. When conducting research, it’s important to ensure that the data you’re screening is comprehensive, up-to-date, and from high-quality and trusted data sources.
It’s also important to conduct ongoing monitoring of PEPs, which means regular risk assessments to ensure continued compliance with AML regulations, and to help detect any new risk issues that may emerge throughout the life cycle of the relationship.
This is all understandably a huge investment of time and human resources, especially as high-quality research requires specialised expertise, know-how and access to global databases. This is where relying on an external screening provider can make all the difference. As a trusted business intelligence partner for companies and institutions all over the world, RMI can step in to help provide the intelligence you need to effectively mitigate PEP-related risks.
Contact us to learn more about how we can help you conduct your due diligence legally, transparently and with a human touch.