PEP screening is crucial to AML/CFT programs around the world since it helps to identify individuals who are vulnerable to money laundering activities and to protect both financial systems and their institutions. However, once an individual steps down from their prominent political office or public role, it may be possible to declassify them as a PEP to reflect the reduced level of AML/CFT risk that they present. While some AML/CFT approaches hold that PEP classification should be permanently maintained, others reject the “once a PEP, always a PEP” philosophy and suggest that PEPs can be declassified safely if certain criteria are met.
The declassification of PEPs offers certain business advantages but must take place without compromising AML/CFT compliance. Accordingly, financial institutions should understand the contexts in which customers may be declassified as PEPs, along with the risks and advantages of doing so.
Many financial institutions choose to attribute PEP status to their customers even when they have left their political or public roles. This approach suggests that, while the PEP may not have the direct power and authority they held while in office, they may have retained levels of influence and access or accumulated illegal funds that now need to be laundered. Maintaining PEP classification, regardless of a change in status, ensures that customers are subject to an ongoing high level of scrutiny throughout the business relationship.
However, while this approach minimizes a firm’s immediate compliance risk, it is not necessarily consistent with the risk-based approach (RBA) to AML/CFT recommended by the Financial Action Task Force (FATF) and implemented in most jurisdictions. Under a risk-based approach, firms adjust their AML/CFT response to reflect the level of risk presented by individual customers, applying more scrutiny to PEPs given their implied vulnerability to money laundering.
With that in mind, although some very high-risk PEPs should retain their classification on a permanent (or at least indefinite) basis after they leave office, others may be declassified based on a holistic consideration of certain factors.
PEP declassification is based on the understanding that the money laundering risk that PEPs present will reduce progressively from the point at which they leave office, but the declassification process should also consider the following factors:
- The level of corruption inherent in the country in which the customer is politically exposed.
- The customer’s links to industries at a high risk of money laundering.
- The specific risk associated with the customer’s previous political position, i.e., its susceptibility to corruption.
- How long the customer held their political position and the likelihood that they will hold office again in the future.
- The source of the customer’s wealth and the source of wealth acquired while they held their political position.
- The plausibility of the customer’s risk profile and net worth.
- The transparency of transactions associated with the customer’s account.
- Adverse media stories involving the customer.
- The customer’s ongoing connections to the political establishment.
In addition to the considerations above, PEP declassification should also involve a review by senior management employees, on a case-by-case basis, and be documented internally. Prior PEP classification should be recorded in case suspicious activity reports (SARs) concerning the customer are subsequently submitted to financial authorities.
There is no globally accepted process for PEP declassification, and regulations vary by jurisdiction. Most countries impose a statutory time limit from the point at which the customer leaves political office from 12 to 18 months. If a firm chooses to implement a declassification process, any time limit imposed is ultimately arbitrary and should be applied in conjunction with ongoing risk assessment.
If implemented appropriately, PEP declassification offers both business and compliance advantages. From the customer’s perspective, PEP declassification removes friction at onboarding, specifically during the customer due diligence (CDD) and enhanced due diligence (EDD) processes that help financial institutions establish and verify customer identities. Similarly, declassification allows firms to engage with a broader customer demographic and create new, potentially lucrative business relationships.
From a compliance perspective, PEP declassification also brings cost and efficiency benefits for AML/CFT teams. By reducing the compliance burden associated with customers who used to be PEPs, commensurate with their new risk profile, firms can satisfy their AML/CFT obligations quicker and divert important CDD and EDD resources towards high-risk customers that better warrant the scrutiny.
Firms should carefully consider the way they manage their PEP risk liabilities and how they might be able to adjust their approach to accommodate PEPs that have left their political roles. In implementing the AML standards set out by FATF, PEP declassification is a way for firms to maintain the letter and spirit of jurisdictional AML laws, while applying their risk-based compliance obligations more consistently, and more efficiently, for every customer they serve.