If you’re a fintech operating in South Africa, your business relationships with a Politically Exposed Person (PEP) could lead to a very serious misstep within your business without the proper due diligence.
That’s because screening for PEPs and Prominent Influential Persons (PIPs) is an increasingly important aspect of Anti-Money Laundering (AML).
South Africa’s Financial Intelligence Centre Amendment (FICA) Act calls for increased due diligence when it comes to screening PIPs and PEPs as a means to identify and prevent money laundering, corruption, bribery, and other crimes.
Failure to properly screen clients could be an expensive oversight, leading to reputational damage, the erosion of public confidence and even fines that could potentially bankrupt your business.
Fortunately, as Vaughn Hechter of Altron FinTech, explains, PIP and PEP screening doesn’t need to be an administrative headache. “There are databases of PEPs and PIPs,” he says. “It’s akin to doing a credit bureau enquiry where you enter details of the individual and then search for those individuals.”
What are PEPs and PIPs?
The concept of Prominent Influential Persons (PIPs) and Politically Exposed Persons (PEPs) was introduced by the Wolfsberg Group, the association of twelve global banks which develops financial services industry standards for Know Your Customer (KYC), Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) policies.
To understand why PIP and PEP screening has become important, it’s worth noting that regulatory environments are becoming more stringent over time. Given the Financial Action Task Force’s (FATF) greylisting of South Africa in 2023, the increasing need for local fintechs to screen PIPs and PEPs is obvious.
Examples of PEPs and PIPs include:
- Heads of State, Heads of Government, and cabinet ministers;
- Influential functionaries in SEOs and government;
- Senior judges;
- Senior political party functionaries;
- Military leaders;
- Members of ruling or royal families; and
- An immediate family member or close personal associate of the individuals defined above.
Hechter explains that PIP and PEP databases are composed of media articles, criminal convictions, whether someone was accused of a crime, and other factors.
“We’ve automated the entire process from ID verifications through to credit bureau reporting and PEP and PIP screening. If there is nothing that holds you back, we move to the next step, while keeping record of the AML screening that was concluded. You can always look back at your records and see what screenings were done.”
He adds that there’s no reason that a fintech can’t keep a PEP as a client, provided that no red flags are found. If a person is found to be a PEP once in their life, then they will always remain a PEP, and you never need to screen that individual for PEP again.” You are however required to report on the matter. Sanctions screening for terrorism is a different matter, however.
“If a person is flagged, you don’t continue with the credit checks and you report. Your compliance officer should be trained and this and will know how to handle this.”
Keeping up with regulatory changes
Fintechs can prevent illicit financial activity through strong AML and risk management practices, but the constantly changing landscape presents a challenge, particularly for small teams. In a digital-first world, the borderless nature of fintech means that not only do these types of Financial Service Providers (FSPs) need to take local regulations into account, and they also need to be on top of developments elsewhere in the world.
Even though great strides have been made since the days of manually checking for PEPs and PIPs, complexities remain, particularly when it comes to navigating different jurisdictional requirements and handling false positives in screening. But new developments, such as enhanced AI-driven risk analysis, biometric verification, and blockchain can make tracking PEPs and PIPs much less labour intensive or prone to errors. AI in particular can speed up checks and also reduce false positives by including a contextual analysis that makes risk assessment much more nuanced.