PEP Checks: Safeguarding Your Business from Conflicts of Interest and High-Risk Business Relations
Examination of Politically Exposed Persons (PEP) is an important step for companies in avoiding conflicts of interest and identifying high-risk employees, partners, and even clients.
What is a PEP? The definition and criteria for PEPs can vary among organizations, institutions, and countries. However, there are some commonalities in the definition of PEPs across various legal frameworks and international guidelines. Generally, PEPs refer to individuals holding important political positions. PEPs can include high-level government officials such as heads of state or government, ministers, high-level legislators, members of political parties, high-ranking military officials, and so on.
Due to their strategic positions, PEPs have the potential to engage in fund misappropriation (corruption) or larger abuses of power, such as mobilizing masses, shaping public opinion, or even engaging in massive unlawful movements.
How PEPs can put your business at risk
Expanding beyond employees, PEPs can also arise from clients, business partners, or companies within the supply chain.
Hiring employees or collaborating with clients who are considered PEPs carries various risks, including the following:
- Reputational Risk. Businesses that engage with PEPs can be seen as complicit in any wrongdoing that these individuals may engage in. This can damage the business’s reputation and lead to negative media attention, loss of customers, and other reputational risks.
- Financial Risk. PEPs may engage in financial crimes such as money laundering, fraud, or embezzlement, which can result in significant financial losses for businesses.
- Security Risk. PEPs may be the target of threats or attacks due to their prominent public positions, which can result in security risks for businesses that engage with them.
- Conflicts of Interest. PEPs may have conflicts of interest with their business dealings that could create ethical or legal issues for the business.
To minimize the risks, there are numerous regulations that require organizations, primarily high-risk ones, to perform PEP checks, such as the Foreign Account Tax Compliance Act (FATCA), the EU Anti-Money Laundering (AML) Directive, and the Financial Action Task Force (FATF) Recommendations. In Indonesia, it is the Bank Indonesia Regulation No. 13/1/PBI/2011 and the Financial Services Authority (OJK) Regulation No. 12/POJK.01/2017.
PEP checks
Barack Obama once said, “Money is the original sin in politics”. The cost of participating in the world of politics can be steep. This compels individuals involved in it to resort to various—sometimes drastic—means to meet the “political costs.”
The close connection between political activities and the accompanying expenses makes the focus of examining PEPs primarily centered around their finances, although other factors must be considered. Many cases of financial misconduct occur, both within government agencies and in the private sector, due to their association with politics.
To minimize risks, the primary step that can be taken is to conduct examinations of individuals and entities. As a legal umbrella, there are numerous regulations that require organizations, especially those at high risk, to conduct PEP examinations.
In Indonesia, for example, there is the Central Reporting and Analysis of Financial Transactions Regulation (PPATK) Number 11 of 2020 regarding the Procedures for the Utilization of Politically Exposed Person Application, aimed at enhancing the effectiveness of monitoring financial transactions conducted by PEPs. In Indonesia, there is the Bank Indonesia Regulation Number 13/1/PBI/2011 and the Financial Services Authority (OJK) Regulation Number 12/POJK.01/2017.
Methods of PEP Examination
The methods of examining PEPs can vary depending on the subject being examined, the industry associated with the PEP, and the depth of the examination. As a third-party entity appointed by clients to conduct such examinations, Integrity Asia combines both extensive desktop investigations and field visits to achieve better results.
A case in point was an examination of a prospective employee of an oil and gas company who was suspected of being actively involved in a political party.
After conducting a comprehensive media search, it was uncovered that the subject was a political party member. To verify this finding, a field visit was conducted, from which party officials confirmed that the subject was an active member.
Oil and gas companies, amongst others, are often targeted by individuals and organizations seeking to exploit their financial resources. Therefore, conducting PEP examinations on prospective employees can assist organizations in identifying individuals with high-risk profiles, mitigating potential risks, and protecting their reputations.
PEP checks can aid organizations in identifying high-risk individuals who potentially pose a threat to their operations, reputations, or financial stability. Moreover, in conducting PEP checks, organizations further exhibit their commitment to regulatory compliance.
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