Politically Exposed Person (PEP) & Relatives-Close Associates (RCA)
What is Politically Exposed Person (PEP)?
Politically Exposed Person (PEP) is an individual holding an important public function and therefore having a risky position for being vulnerable to corruption and to get involved in criminal financial activities such as money laundering, bribery and terrorist financing. Politically Exposed Persons (PEPs) can influence the decision-making processes of the businesses as they also have access to governmental accounts and funds in most cases. Therefore, they are prone to be abused and they are posing high-risk for crimes. Acknowledging the importance of PEPs, the regulatory authorities give special attention to the PEPs, the definition of a Politically Exposed Person (PEP) and how to recognize a PEP for the checks and screenings of financial institutions. PEP screening is an essential part of an effective Customer Due Diligence (CDD) process. Financial institutions need to make sure that they are operating PEP screening regularly and their AML related checks include PEP sanctions as well.
How to check PEP lists?
A PEP list is simply a database of politically exposed persons (PEPs) who hold a crucial position in public and vulnerable to financial crime which include government ministers, high-ranking military officials, world leaders, or senior executives. In carrying out effective anti-money laundering (AML) checks, PEP lists have a critical role. There are two types of PEP lists:
- Database of named or documented PEPs: Anyone included in this list is a confirmed politically exposed person (PEP) but if the potential customer is not on this list, it does not necessarily mean that the customer is not a PEP.
- Database of functions, positions and roles: The features included in this list are the ones that would qualify an individual as a politically exposed person (PEP) who is more vulnerable to be potentially involved in financial crimes.
When checking the PEP lists, financial institutions can use the public sources as one option; however, according to the Financial Action Task Force (FATF) 2013 recommendations, these lists have potential to miss some data such as names, identifiers or relatives as well as they are quickly outdated. Additionally, only a few countries create and publish a list of their domestic PEPs. Therefore, it is essential for financial institutions to get the support of a third-party risk data provider for an effective risk-based PEP screening.
What are the risk criteria for a Politically Exposed Person (PEP)?
Politically exposed persons (PEPs) have sub-classes within themselves depending on the risks they are posing such as domestic or international organization PEPs and foreign PEPs. Domestic PEP is an individual holding a prominent public function domestically such as heads of government, senior politicians etc. International organization PEP is an individual who are entitled with an important function in an international organization. Family members and close associates of the PEPs are also taken as the risk-posing group. Although they are not as risky as the PEPs, they are still vulnerable for getting involved in criminal activities because of their connection with the PEPs.
What does Relatives and Close Associates (RCA) stand for?
Relatives and Close Associates (RCA) are the individuals or businesses in some cases which have a close connection with or somehow related to a Politically Exposed Person (PEP). The Relatives and Close Associates (RCA) are considered to pose risks in terms of criminal activity as they might abuse their relationship with a PEP and get involved in corruption bribery, money laundering or other crimes. Therefore, RCA screening is also an essential part of CDD and AML checks for the financial institutions in addition to the PEP screening.