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Optimising Customer Risk Rating Methodologies (Part 2)

Welcome back, avid readers! We hope you had a wonderful weekend, and welcome to Part 2 of ‘Optimising Customer Risk-Rating Methodologies’ (CRRM). Today, we discuss ‘Politically Exposed Person (PEP) Risk’ – an important factor in an optimal CRRM.


Optimal CRRM Considerations


PEP Risk


The risk associated with an identified PEP must be assessed outside the initial risk assessment. The primary consideration would be to ascertain if the person identified is a

  • Direct PEP v indirect PEP; and/or

  • High-risk PEP.


Based on the precepts of the updated Money Laundering Regulations, 2017, and the guidance on PEPs produced by the Financial Conduct Authority (FCA), firms are expected to adopt a risk-based approach to their categorisation of PEP risk. A ‘one-size-fits-all’ approach to PEP risk classification is inappropriate, and the risk posed by PEPs is expected to be determined on a case-by-case basis.


Not all PEPs pose the same risk from a financial crime perspective, and the risk of corruption differs between different PEPs. In its July 2017 publication, The FCA in its guidance on PEPs (FG 17/6 “Treatment of Politically Exposed Persons for Anti-Money Laundering Purposes”)[1] expects financial institutions to assess the risks of individual PEPs based on a consideration of the following factors:

  • The prominent public functions the PEP holds;

  • The nature of the proposed business relationship;

  • The potential for the product to be misused for corruption purposes; and

  • Any other relevant factors the firm has considered in its risk assessment.


In addition to the latter, the UK financial services regulator also iterated that PEPs are likely to pose a greater risk if they are entrusted with a prominent public function in a higher risk country, as such a country is deemed to be associated with a higher degree of corruption.


Process of PEP Identification


Proceed as follows:


  1. Identify that the customer or related party satisfies the definition of a PEP (or family member or known close associate of a PEP) in line with internal policy interpretations;

  2. Assess the level of risk associated with that customer because of the associated PEP risk; and

  3. Determine whether the level of risk associated with the customer falls within the risk appetite of the firm, and ensure that the risk is sufficiently mitigated, EDD performed and the reasoning for the decision recorded.


Check out Part 3 later this week for further information!



 

Lauren Parmenter

Consultant



[1] https://www.fca.org.uk/publications/finalised-guidance/fg17-6-treatment-politically-exposed-persons-peps-money-laundering


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