The Challenge of PEPs State of Financial Crime 2024

The Challenge of PEPs

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A comprehensive and practical look at the PEP landscape and how UK firms should navigate it.

The Challenge of PEPs: A Comprehensive Guide

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of UK firms in our survey indicated that detecting and preventing corruption is a strategic priority for their organization’s financial crime compliance function.

99%

Additionally,

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The Challenge of PEPs: A Comprehensive Guide

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Britain's Prime Minister Rishi Sunak leaves number 10, Downing Street ahead of the weekly PMQ session in the House of Commons, on March 20, 2024 in London, England.

Despite being a core component of any risk management program, politically exposed persons (PEPs) remain inconsistently defined and difficult to screen for effectively. Given the sheer volume of elections happening worldwide in 2024, the manual processes that many financial institutions (FIs) currently rely on will become overwhelmed, calling for a more sustainable approach to PEP risk management.

In December 2023, the UK government announced changes to the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs), which came into force on January 10th, 2024. These changes encourage regulated firms to take a risk-based approach when dealing with domestic PEPs. Under the new regulations, banks and other regulated firms must apply lower levels of enhanced due diligence (EDD) to domestic PEPs than non-domestic PEPs unless other higher risk factors are present.

2024: The year of the PEP

How are firms reacting?

Given these regulatory updates and the influx of PEP status changes worldwide, firms are bracing for a year of uncertainty. In our 2024 global compliance survey, we asked 600 senior compliance professionals how they expected their organization’s risk appetite related to PEPs to change in the next 12 months. The results showed that UK firms plan to be more risk-averse than the global average.

UK, London, Bank, low angle view of city financial district skyline illuminated at sunset

of UK firms in our survey indicated that detecting and preventing corruption is a strategic priority for their organization’s financial crime compliance function.

99%

Additionally,

However, adopting a more risk-averse stance towards PEPs to combat customer screening pressure can lead to de-risking challenges. The Financial Conduct Authority (FCA) is reviewing this practice, with a report to be published by June 2024. In the meantime, compliance staff will benefit from a rigorous understanding of the definitions, policies, and processes they have in place for PEP screening to avoid unnecessarily terminating or restricting commercial relationships.

Risk-averse ≠ de-risking

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A new approach to PEP management is needed

of UK firms said they need to reduce their reliance on manual processes to reassess the volume of PEPs. Utilizing quality PEP data and technology can assist in achieving this goal.

78%

In addition to updating customer risk assessments to ensure the appropriate levels of due diligence are consistently conducted,

Accurate and reliable information is the bedrock of effective PEP risk management, as misidentifications or omissions can have severe legal and reputational consequences. Ensuring PEP data is reliable and current can mitigate de-risking and facilitate appropriate due diligence based on PEP classification and status.

What quality PEP data looks like

At ComplyAdvantage, once our data analysts collect information on PEP-relevant positions and ensure it is regularly updated, our researchers complete a background search on the governmental structure of the jurisdiction and map it according to the ComplyAdvantage taxonomy. Our taxonomy is structured in four main PEP-classes based on the FATF definition and recommendations:

Click the arrows to learn more

However, mapping a standardized taxonomy like the example above to PEP data in countries worldwide shows that a one-size-fits-all approach to PEP detection is not a sustainable option. What works in a firm’s home country may not apply overseas in jurisdictions with different political and judicial systems. To illustrate this, see how ComplyAdvantage’s proprietary UK PEP data compares to two other jurisdictions below.

Managing PEP data by country

How to manage PEP risk levels. Red flags and risks associated with PEPs. Time limits on PEP status. How ComplyAdvantage classifies PEPs.

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PEP Class 1

The first PEP class contains all taxonomies with national-level PEPs such as:

National legislatures. National cabinets. Central banks. Armed forces, police, fire service, and intelligence agencies.

PEP Class 2

The second PEP class includes:

Members of regional governments, parliaments, and judiciary. Senior officials and functionaries of international and supranational organizations and diplomatic missions.

PEP Class 3

The third PEP class relates to:

National level state-owned enterprises. Public sector institutions under regional level administration (eg regional agency, regional state-owned enterprises).

PEP Class 4

The fourth PEP class contains:

Mayors and members of local, county, city, and district assemblies. Senior executives of local governmental bodies (agencies, state-owned businesses). Judges of local courts.

Hover to learn more

Insights from our database

Singapore

International Level PEP

National Level PEP

Regional Level PEP

Local Level PEP

Entities:

4.88%

Entities:

14.85%

Entities:

3.15%

Entities:

64.54%

Entities:

94.31%

Entities:

19.43%

Entities:

4.04%

Entities:

1.03%

Entities:

60.33%

Entities:

26.54%

Entities:

1.52%

Entities:

5.4%

PEP classifications in the UK

Cabinet secretaries Central bank Executive Head of state Judiciary Legislature National agencies / regulatory authorities Political parties board members State security Vice ministers / deputy ministers / shadow cabinet

National level – Class 1

State-owned enterprises

National level – Class 3

PEP classifications in the UK

Intergovernmental organizations International representatives

International level – Class 2

PEP classifications in the UK

Executive power Legislative power

Local level – Class 4

PEP classifications in the UK

Judiciary power

Regional level – Class 2

PEP classifications in the US

National level – Class 1

State-owned enterprises

National level – Class 3

PEP classifications in the US

Intergovernmental organizations International representatives

International level – Class 2

PEP classifications in the US

Executive power Legislative power

Local level – Class 4

PEP classifications in the US

Executive power Judiciary power Legislative power

Regional level – Class 2

PEP classifications in Singapore

Cabinet secretaries Central bank Executive Judiciary Legislature National agencies / regulatory authorities

National level – Class 1

State-owned enterprises

National level – Class 3

PEP classifications in Singapore

International representatives

International level – Class 2

PEP classifications in Singapore

Executive power Legislative power

Local level – Class 4

RegTech Solutions

RegTech Solutions (formerly SQA Consulting) has rated ComplyAdvantage's PEP data coverage as 'Excellent.' Our benchmarking shows ComplyAdvantage's name-matching efficiency and effectiveness are market-leading, with name-matching rates of close to 100%. This is very good, almost exceptionally good, a little higher than we often see for exact name tests.

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More risk-averse (e.g. greater due dilligence at onboarding and ongoing monitoring)

79%

61%

Global

No change

12%

19%

12%

19%

Global

Less risk-averse (e.g. reduced due dilligence requirements)

19%

Global

We are not accepting PEP clients

Global

PEP classifications in Singapore

Judiciary power

Regional level – Class 2

A comprehensive and practical look at the PEP landscape and how UK firms should navigate it.

Download the report

of UK firms said they need to reduce their reliance on manual processes to reassess the volume of PEPs. Utilizing quality PEP data and technology can assist in achieving this goal.

78%

In addition to updating customer risk assessments to ensure the appropriate levels of due diligence are consistently conducted,

A new approach to PEP management is needed

Click the bars to learn more

PEP classifications in Singapore

Political party board members Ruling royal family State security Vice ministers / deputy ministers / shadow cabinet

PEP classifications in Singapore

Political party board members Ruling royal family State security Vice ministers / deputy ministers / shadow cabinet

Cabinet secretaries Central bank Executive Head of state Judiciary Legislature

National agencies / regulatory authorities Political parties board members State security Vice ministers / deputy ministers / shadow cabinet

Cabinet secretaries Central bank Executive Head of state Judiciary Legislature

Tom Keatinge I Director, Centre for Finance and Security, RUSI

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There is another risk dimension to the PEP community that is increasingly emerging and which, in 2024’s fiesta of democracy across the globe, poses perhaps an even greater risk. In these days of significant geopolitical stress, finance has emerged as a frontline in the growing confrontation between democracies and authoritarian states. Consider the inducements and other forms of influence payment revealed, for example, to be allegedly offered to MEPs in Brussels. These payments are not made to win lucrative contracts or confound legislation a business might find unhelpful. They are made to secure favourable treatment of states – or worse, co-opt a politician in a position of power to work in another state’s interest. State threats are on the rise, and democracy is under attack. The risks posed by PEPs for the private sector are only going get higher.

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There is another risk dimension to the PEP community that is increasingly emerging and which, in 2024’s fiesta of democracy across the globe, pose perhaps an even greater risk. In these days of significant geopolitical stress, finance has emerged as a frontline in the growing confrontation between democracies and authoritarian states. Consider the inducements and other forms of influence payment revealed, for example, to be allegedly offered to MEPs in Brussels. These payments are not made to win lucrative contracts or confound legislation a business might find unhelpful. They are made to secure favourable treatment of States – or worse, co-opt a politician in a position of power to work in another State’s interest. State threats are on the rise, and democracy is under attack. This risks posed by PEPs for the private sector is only going get higher.

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Tom Keatinge I Director, Centre for Finance and Security, RUSI