In our previous blog, we explored the complexities of identifying, screening, and assessing the risks associated with Politically Exposed Persons (PEPs). Continuing on that we will look into red flags indicative of PEP-related risks.
When dealing with PEPs, financial institutions and designated non-financial businesses and professions (DNFBPs) must remain vigilant against various red flags that may signal potential illicit activities.
Here are some key indicators to watch out for:
1. PEP Behavior and Activities:
- Transactions with no clear justification for doing business or are opaque, in which the third-party intermediaries may also be used to hide the identities of PEPs.
- PEPs showing a keen interest in the institution’s AML (Anti-money Laundering) policies or policies relating to Politically Exposed Persons (PEPs).
- PEPs who refuse to disclose their financial background full details.
- Inconsistent / Discrepancies on asset declarations, official salaries, and other related information provided.
- PEPs trying to access institutions typically restricted only to local customers or with lower risk profiles.
2. PEPs Transactions and Account Patterns:
- Frequent funds transfers into countries with no business relationships or personal links.
- Rounded-off transactions which cannot be explained on legitimate business needs.
- Large cash deposits/withdrawals without proper source details validating their legality.
- Unusual activity in accounts, such as large and frequent transactions having moderate activity or shortly after its opening.
- Mixing personal and business transactions to make it complex to analyze.
3. Business Relationships with PEP
- Using positions and influence in financial institutions or DNFBP for personal gain or to share insider secrets.
- Direct or indirect involvement in arms trade, defense industry, procurement, construction, infrastructure, etc.
- Utilizing government relaxation/ higher vulnerabilities sector to money laundering and terrorist financing.
- Ownership/interference in decisions of entities involved in precious metals/stones or luxurious goods trading.
- Employing legal entities or arrangements that hide the true ownership identity of assets or funds.
- Corporate vehicles are utilized without a valid business reason, as PEP’s official vehicles are less likely to undergo inspection, potentially facilitating the transportation of illegal arms, etc.
4. Legal and Regulatory Factors:
- Refusing to share essential details that are necessary for the CDD.
- Receiving large international funds as donations, gifts, gambling, or gaming activities, then followed by withdrawals or transfers to other accounts.
- Maintaining and using multiple accounts without proper reason or explanation.
- PEPs from countries with a high risk of corruption or insufficiently implemented anti-corruption conventions.
- The PEP is or has been denied entry to the country (visa denial). Being denied entrance into a nation could be driven by concerns about the person’s background, relationships, etc.
5. Other Indicators:
- The PEP negates the importance of his/her public function, or the public function related to him/her.
- The PEP does not reveal all positions (including those that are ex officio).
- Engaging in financial transactions that lack a clear business purpose/reasoning.
- Transactions between non-client corporate vehicles and the PEP’s accounts:
- Conducting transactions between legal entities not directly associated with the PEP and the PEP’s accounts.
Even detecting these simple red flags in real-life scenarios can pose a challenge when relying on traditional approaches, and the complexity further escalates when real-time detection is necessary. To overcome this, compliance officers must transition from traditional human-based screenings to embracing advanced smart solutions that harness the power of AI capabilities.