PEP Talk: The Importance and Delicacies of PEP Risk Assessments
September 11th, 2020
Risk analysis as part of customer due diligence has been continuously evolving over the past two decades. As technology, data sources and the sophistication of potential money launderers evolves, so has regulation. One of the risk assessment indicators used already in early times is the “Political Exposed Person” also known as PEP.
At first, it was enough to just indicate if a person is PEP. It was usually a binary indication of true or false indicating if a person is a PEP or not. If a person was a PEP, a certain score was added to their overall risk score. This score would naturally change from one financial services organization (FSO) to another based on internal policy, but it was a one-dimensional risk factor, based on this YES / NO kind of indication.
But, as with other risk indicators and the growing ties between capital and political power, it became clear that a simple flag for PEP status is insufficient. Additional parameters were needed to indicate the level of impact of one’s PEP status. Regulation has provided some guidelines, but they are somewhat flexible and are open to interpretation by the FSOs.
Varying AML PEP Risk
The first step was indicating that a person’s PEP risk should vary based on the person’s political position. There is a difference in the level of influence between a head of state (i.e. the President of the United States), a member of the parliament (i.e. a senator or congressman) and a county leader (i.e. a state governor). Each has a different kind of impact on legislation, regulation, taxes or sanctions. Thus, it makes no sense to treat all PEPs the same. A U.S. President has more influence as a PEP than a U.S. Senator, and therefore should receive a higher score when assessed for overall risk.
The next dimension the regulator added, is the fact that people may still retain some political exposure after they end their term. Thus, a person filling a political position may retain that status for good, but an adjustment should be made to reduce the overall PEP risk based on how much time has gone since that person has been an active PEP. While Bill Clinton has not been the president for the past two decades, it is fair to assume that he still retains a certain level of influence in the political arena, and thus some PEP risk should still be add to his overall assessment.
The regulator has gone one step further and indicated that PEPs may impact their close environment, and therefore generally guided that entities should be credited as PEPs if their beneficial owners or close associates are identified as PEPs. Thus, while Chelsea Clinton is not a PEP herself, nor has she ever been one, her mother Hillary Clinton has held multiple political roles including a seat in the U.S. Senate and the position of Secretary of State, and her father is a former U.S. President. Her family pedigree puts her at risk, and it should be accounted for when risk assessed, as she may serve as a channel to make political influences using her parents’ political ties. By the way, we say ‘entities’, because according to regulation, a business may also be credited for PEP risk, if its beneficial owners (one or more), are identified as PEPs and may obtain the power to impact that business, thanks to their political ties.
This is as far as the regulator has gone, and left an open grounds for compliance officers to debate on how to calculate all kinds of complicated scenarios. While the NICE Actimize team has naturally made the necessary improvements to support all the regulator’s requirements, we also took it a few steps further to help compliance officers refine this calculation.
First, we acknowledge the fact that one should differ between assessing a person who is an active PEP and assessing a person who only has a RCA (relative or close associate) of a PEP. So NICE Actimize provides a coefficient that can help reduce the impact the RCA PEPs have on the overall risk. If President Obama and Michelle Obama each open an account at the same bank, they will still get both risk for PEP. Compliance officers can use that coefficient to have Michelle Obama’s risk reduced slightly, as we can’t assume they both share the same level of PEP risk.
Another vague definition by the regulator is if we should only account to a single PEP identity or all that are relevant. While for a person’s PEP position it makes sense to use a single title, NICE Actimize provides FSOs with the option to associate multiple RCAs to the same entity. Then it provides users the ability to decide if to SUM up all risk attributes or choose only a MAX. This way while the FSO can feed all the political ties of a person or a business, they can choose if the overall risk will be the total of all PEP risk indicators, or only take the highest PEP indicator from that list and use it for PEP score.
Lastly, to allow maximum control and make sure these calculations are not skewing the overall risk assessment, Actimize also provides, the ability to define a CAP value to the entire calculation and thus limit the amount of impact the Enhanced PEP risk factor can have on the overall risk assessment.
All the above, together with NICE Actimize segmentation capabilities, provide FSOs with the ultimate flexibility to not only meet all the regulation requirements for PEP assessment, but to also fine tune it to achieve maximum aspired precision.