People who hold a powerful position within the country are more prone to money laundering and other financial crimes.
Therefore, businesses need to implement a robust AML system for better risk assessment while monitoring and screening the Politically exposed person.
The risk associated with Politically Exposed persons is very crucial for businesses when it comes to implementing robust AML compliance solutions.
What could be more easier way to detect the risk associated with such people if you already know the top red flags linked with the politically exposed person?
however, To effectively assess the risks associated with the politically exposed person, financial institutions need to identify key red flags that may indicate suspicious activity or misconduct.
In this blog, we will highlight the top 5 red flags that should trigger heightened security during a PEP risk assessment.
Unexplained Wealth or Sudden Increase in Assets
If you see a person, who is holding public office, suddenly accumulating wealth including luxury items, larger financial transactions, and deposits, this could be a red flag for people.
For example, if a person, who is a government official with a modest salary suddenly starts purchasing luxury properties or expensive assets, it means there is something suspicious in such transactions. It raises concerns about the activity the people are involved such as embezzlement, corruption, and bribes.
Therefore, the financial institution while risk assessment must thoroughly investigate the source of funds when a PEP’s financial behavior appears inconsistent with their legitimate earnings.
iness activities areas prone to Money Laundering
Another major red flag of a Politically exposed person is the person’s involvement with the people who are living in areas that are often involved in money laundering and other financial crimes.
Politically exposed persons who are running any business in areas that are sanctioned by the regulatory bodies because of their involvement in money laundering and other financial crimes due to weaker AML compliance programs. Any transaction by a politically exposed person to such destinations would be a sign of red flags.
PEPs conducting frequent transactions in or out of these jurisdictions should be monitored closely, especially if the funds are being transformed using multiple bank accounts and jurisdictions.
Therefore, businesses need to regularly screen the PEPs against PEP screening and sanctions lists and sanctioned countries to make sure their institutions are not being exploited for money laundering and other financial institutions.
Complex or Unusual Financial Transactions
Another red flag of PEPs’ involvement in financial crimes is when PEPs engage in complex financial arrangements that lack transparency or legitimate business purpose.
We can understand it by an example where the politically exposed person transfers funds through offshore accounts, as we all know offshore transactions are always seen as suspicious. So if a person makes a large transaction using a shell company, it is a sign of a red flag.
Because these structures are often employed to launder money or move funds illicitly across borders without detection.
Is there ana way businesses can avoid making business relations with such entities? Yes if the financial institution implements the advanced investigative approach while onboarding them for better risk assessment of politically exposed persons, there are higher chances of combating and mitigating money laundering and financial crimes.
Relationships with Sanctioned Entities or Known Criminals
Would you allow any person to make business relations with your business if you know he is associated with a person that was involved in money laundering, terrorist financing, and other financial crimes.
Therefore, if an organization sees a person Making connections with people who are already sanctioned by international regulatory bodies always raises serious concerns.
Therefore, there are higher chances that the person is engaged in criminal activities such as corruption, money laundering, and other financial crimes.
These associations could indicate that the PEP is facilitating money laundering or corruption by acting as a proxy for criminal enterprises.
nce to Provide Complete Information
People who often get involved in criminal activities show some reluctance to provide the basic information that could lead to a comprehensive investigation against them. Therefore, if any of your
A PEP’s refusal to provide full or accurate information during the due diligence process is a significant red flag.
PEPs involved in financial crime often try to obscure their real identities or the source of their funds which makes it harder for institutions to perform thorough assessments.
Summing It Up
Identifying and addressing these five key red flags during PEP risk assessments is critical to reducing the risk of financial crime and maintaining compliance with AML regulations.
By leveraging Enhanced Due Diligence, transaction monitoring, and sanctions screening, financial institutions can effectively manage the heightened risk associated with PEPs and protect themselves from potential reputational and financial damage.
Incorporating real-time screening tools like AML Watcher can streamline PEP monitoring and help businesses stay compliant with global regulations while ensuring they respond quickly to any emerging threats.
