The investigation of this massive leak, consisting of 12 million documents, has been led by the International Consortium of International Journalists (ICIJ), a global network of 280 investigative journalists and more than 100 media outlets in over 100 countries. The findings revealed how some high-profile political figures used their power and wealth to illicitly conceal their funds in real estate deals, offshore accounts and shell companies.
Alas, the Pandora Papers leak was not the first wide-scale leak covered by the ICIJ, and it certainly will not be the last. In 2016, the Panama Papers exposed over 11.5 million files that revealed the offshore assets of politicians and their close associates, as well as many celebrities. The 2020 FinCEN Files covered more than 2,500 leaked documents that detailed over 2,000 suspicious activity reports (SARs).
Unfortunately, the discoveries made by the ICIJ underline how politically exposed persons (PEPs) are at higher risk of corruption. In the midst of a massive leak like the Pandora Papers, financial institutions must understand why it’s crucial to conduct ongoing PEP screenings in their risk assessment, as well as understand the consequences for failing to do so.
Below are key PEP screening protocol considerations and tips for how financial organizations can ensure they are taking proper precautions.
Transferring money to a foreign country is not considered illegal, therefore, the individuals involved in leaks like the Pandora Papers are not inherently at fault. In fact, there are many legitimate reasons one might move funds offshore, such as for safety and privacy protection purposes. However, many of the exposed individuals were indeed PEPs who moved funds offshore to evade taxes, or even hide proceeds from illegal activities like human trafficking and narcotics.
While these individuals are still acting in accordance with the written law from a financial handling perspective, they are still benefiting from criminal behavior. Due to this nuance, legislators are less likely to create and pass laws that will ensure transparency into beneficial owners and prevent them from hiding their assets. This places PEPs in a gray area in terms of risk and legal factors.
While exposed individuals deal with their own repercussions amid these types of leaks, financial institution affiliation with these transactions can and does massively impact brand perception, and can often deter current and prospective customers from engaging in business.
Brand perception isn’t the only thing at risk when proper precautions are not taken — there are also regulations in place to ensure financial organizations are taking proper measures during their onboarding process. Financial regulators, like the Federal Reserve Board, are tasked with holding financial institutions accountable for ensuring every customer is trustworthy.
Organizations that do not adhere to proper regulations risk facing large penalties. In 2020 alone, financial institutions paid a collective $10.6 billion in global penalties and fines for failing to comply with anti-money laundering (AML), Know Your Customer (KYC), Markets in Financial Instruments Directive (MiFID) and data privacy regulations. Organizations must ensure their PEP screening process is compliant with these regulations to avoid negative consequences.
Financial organizations already perform numerous KYC due diligence measures prior to entering a business relationship with a prospect. Due diligence refers to the careful investigation of a potential customer to analyze the risks they are associated with. This begins with verifying the customer’s identity during the onboarding process to ensure they are who they claim to be and assessing whether the individual is in fact a PEP.
PEPs are considered any individual that holds or has previously held a high-profile political position. Some PEPs are often easy to identify, like the president, secretary of state and former governors, in addition to their family members, but even close associates and senior executives who have business relationships with public officials are all considered PEPs. Because a PEP is more susceptible to financial crimes like bribery, money laundering and corruption, a thorough audit of the individual must be conducted to determine their risk profile.
While these regulatory procedures are critical during account creation, they must also be performed throughout the entire customer lifecycle. Ongoing monitoring is crucial to check customers’ PEP status and confirm their risk profile hasn’t changed. This process includes continuous customer monitoring and transaction monitoring to track changes in behavior and suspicious activity, in addition to the same screening checks executed during account creation. Institutions must also implement an advanced case management system to facilitate investigations during the ongoing monitoring process and help compliance teams identify suspicious patterns to make connections more seamlessly.
PEP screenings enable financial enterprises to take a risk-based approach and conduct enhanced due diligence on customers that are at higher risk of corruption. It is often recommended that organizations leverage a single comprehensive platform to automate the entire PEP screening process throughout the customer lifecycle and decrease any reputational or regulatory risk as a result. By truly knowing and trusting their customers, financial enterprises are not only protecting their business, but the financial system as a whole.