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How PEP Risk Management Can Save Financial Firms Millions of Regulatory Fines?

In today’s world of regulatory compliance, the increasing complexity of compliance regulations and the rising sophistication of financial crimes like money laundering, tax evasion, terrorist financing, corporate frauds, securities frauds, bribery, corruption, embezzlement of state funds and beyond, has compelled the financial businesses to become more vigilant, adaptable, and adopt a risk based approach. Managing the risk posed by the people sitting in the corridors of power has always been complex. Therefore, financial firms are recommended to have PEP Screening service and mitigate the threats caused by the politically exposed individuals. 

Why Should the  PEP Status Be Reviewed Regularly?

The landscape involving politically exposed individuals is changing and evolving all the time. Their positions and circle of influence may continue to widen or grow smaller. With elections happening after every four to five years, new appointments, resignations, sacking, retirements, birth, deaths and marriages happening around the clock, the status of the politically exposed persons keep on switching too. 

Compliance officers should also have a hands-on approach to the evolving nature of the status of politically exposed individuals that may be retiring from their position. For instance, in a country like Egypt  identifying PEPs is essential and understanding the everlasting influence of military officials should always be taken into account as the military establishment exerts massive political influence, a retired military leader will still have influence over the decisions involving political power and state owned enterprises. 

Compliance With Global Regulatory Guidelines

There are different compliance regulations issued by the government organizations like European Union directives, and the UK Modern Slavery Act  & the UK Bribery Act, international regulatory bodies such United Nations conventions on drugs and crime and law enforcement agencies, which all financial firms are mandated to act in accordance with. These organizations also made publicly accessible online PEP data for the financial industry to follow. 

These PEP issuing agencies tend to have varying requirements depending on the country, region and jurisdictions. For instance, some regions make it mandatory to screen politically exposed persons classified into all kinds of categories whereas other regulatory guidelines emphasize the screening of foreign politically exposed individuals alone. 

There is no hard and fast or clear cut definition of politically exposed persons as indicated by the Financial Action Task Force (FATF). All powerful people holding influential public office and having high social standing are prone to committing financial crimes like money laundering, tax evasion, corruption, and hence considered a high-risk client for the financial world.

How PEP Risk Management Helps Financial Firms Save Millions of Regulatory Fines?

Allowing money launderers, and other financial criminals to access the international financial system is considered irresponsible and clearly declared illegal by the international regulatory bodies, government institutions and law enforcement organizations all around the world. Letting the criminals access the legitimate financial systems can cause financial institutions to face massive consequences. Financial firms that facilitate the financial crimes of money launderers and criminals are held responsible for the criminal activities of their clients (be it an organization, a brand, or an individual). 

Therefore, a financial corporation must employ PEP and Sanction Screening to avoid getting embroiled in the criminal activities of their customers. They must protect their business by staying vigilant and screening the business associates and close PEP relationships by assessing the risks associated with a prospective politically exposed individual client. 

Not complying with regulatory guidelines could result in astronomical financial penalties. A firm found negligent of following regulatory guidelines and facilitating the dirty money of criminals is faced with damaging lawsuits, reputational damage (that costs a firm millions of dollars monetary revenue) and millions in regulatory fines. 

Why Are Financial Firms Held Responsible For the Financial Wrongdoings of Their Client?

Financial crimes such as money laundering causes instability in the international financial systems. For a financial firm, there is a loss of foreign investors. It undermines the integrity of financial institutions, regulatory bodies, and law enforcement agencies. It hurts economies across the nations and its domino effect causes massive income inequality as well as extreme poverty. 

Allowing the financial criminals to get away with their crimes disrupts communities, erodes the trust in good governance, and leads to political as well as economic instability.This forces the governments and institutions to impose stringent regulatory guidelines and curb crimes. Since, a financial firm is the first choice of any criminal to save their money, move around their money and get access into the legitimate financial system, therefore, they are held accountable to follow compliance protocols and play their significant role in curbing financial crimes. 
Facilitating the dirty money of criminals and accessing the legitimate global financial systems also helps them hide the source of their illicit gains, and eventually give rise to the financial crimes. Transnational and organized criminal groups thrive when they can access the legitimate financial systems. This is why, financial firms are held responsible for the financial wrongdoings of their clients and are recommended to employ effective PEP and Sanction Screening systems.