The Sumsuber

Best practices for KYC/AML

3 min read

Working with PEPs: Red Flags and Indicators

PEPs or politically exposed persons are high-risk customers with more opportunities than ordinary citizens to gain assets through unlawful means like money laundering and bribe-taking.

Classifying a potential client as a PEP doesn’t mean a company can’t work with them at all. Discovering a client is a PEP just forms part of the process that allows financial institutions and DNFBPs (Designated Non-Financial Businesses and Professions) to make a wholesome assessment on risks.

With PEP check it is crucial to stay aware of the red flags. Sometimes matching just one of these politically exposed person indicators can link them to financial abuse.

PEP risk levels based on FATF red flags guidelines

Every regulated company has to fit the guidelines for working with a politically exposed person. After revealing that a client is a PEP, companies are responsible for ongoing due diligence that fits the client’s PEP status.

Financial Action Task Force or FATF is an intergovernmental AML/CFT institution that regulates financial crimes. It is also an essential reference for any other regulatory action.

All of our PEP screenings are performed in compliance with FATF guidelines that put PEPs into 4 categories, based on their risk level:

Have been thinking of implementing a better compliance solution? Sumsub AML screening complies with all global and local regulations such as FATF, FINMA and FCA, minimizing false positives. 

FATF PEP red flags that businesses have to watch out for 

Financial Action Task Force introduced several political exposed person red flags that help companies detect unlawful activities. Based on their information matching several of these indicators must raise some suspicions of illegal activity. In some cases, it may even lead directly to money laundering exposal. A particular country or region may also have their own PEP indicators for suspicion that should be considered equally as important.

It is important to remember that the FATF list itself is not exhaustive and these political exposed person indicators are only complementary examples of what is beneficial to pay attention to. Let’s look at some of them:

1. Shielding identity

As PEPs clearly aware of their risky status they sometimes try and conceal their identity or avoid being in the spotlight. For example:

  • Assign legal ownership to somebody else (a family member or a close associate);
  • Constantly or abnormally interacting with the use of intermediaries;
  • Using corporate vehicles with no valid business reason or to obscure involved industries and ownership.

2. Shady behavior 

Sometimes PEPs behavior gives them away:

  • Being uncomfortable or secretive about the source of wealth and funds;
  • Providing inaccurate, incomplete or simply false information;
  • PEPs information doesn’t correspond with other publicly available data;
  • Reluctance to explain the reason behind their business in the country of the financial institution or DNFBP;
  • PEP has been denied an entry visa;
  • The funds that belong to PEP repeatedly move from one country to another;
  • A substantial flow of cash or wire transfers into or out of the account of PEP;
  • No details or credible explanations for certain business relationships, account openings, or transactions;
  • In PEP’s country, it is forbidden to hold accounts or property in other countries.

3. Position in the company

PEP’s position can also be a reason for concern:

  • Authority, access, and control over funds, policies, and operations of the company;
  • Formal/informal ability to control mechanisms against ML/TF;
  • Control/influence over government or corporate accounts;
  • Owns or has control over financial institutions or DNFBPs.

4. The industry 

Industries that are considered high-risk depend on the place and vary from country to country. Examples of higher risk industries are:

  • Banking and finance;
  • Military and defense;
  • Businesses that work with government or state agencies;
  • Construction;
  • Mining and extraction;
  • Public goods provision.

5. Transactions

The way PEP uses or receives money can expose a lot about them:

  • PEPs account shows substantial activity in a short span of time after a long-dormant period;
  • Private banking;
  • Wire transfers with no economical explanation or that lack beneficiary information;
  • Anonymous transactions or payments received from an unknown third party;
  • Funds are constantly moved from one account to another or between financial institutions without a business rationale;
  • Substantial flows of cash, large international funds transfers or wire transfers in and out of the account;
  • Having and using multiple bank accounts for no clear reason.

6. Products and service 

FATF also deems some of the services and products more risk-prone and particularly vulnerable to be used by PEPs:

  • Businesses catering to foreign clients;
  • Trusts and service providers;
  • Correspondent/concentration accounts;
  • Real estate;
  • Dealers in high-value transport vehicles such as sports cars, ships, helicopters, and planes;
  • Dealers in precious metals, stones, and luxury goods.

7. Local indicators 

The FATF also explains how some countries are considered higher risk based on geographic risk factors. These indicators should also be taken into account when scanning a PEP if they are from:

  • Foreign or domestic higher risk country;
  • A country with a high risk of corruption;
  • Countries with mono-economies;
  • A country that has not signed a relevant anti-corruption convention such as the UNCAC and the OECD Anti-Bribery Convention.

Sumsub KYC/AML solution is a priceless tool that helps to protect the platform by constantly and automatically monitoring PEPs across all databases.