Importance of Adverse Media and PEP Screening in
Combatting Money Laundering in 2024

The threat of money laundering continues to impact the global financial system, and with advanced technology and professional money launderers growing increasingly sophisticated, it’s only getting more difficult to detect and prevent these crimes. According to estimates[i] by Nasdaq Verafin in their 2024 Global Financial Crime Report, a whopping USD 3.1 trillion in illicit funds have been funnelled into the global financial system. With financial crimes on the rise, both nations and organisations have been strengthening their defences against them.

But are the risks associated with money laundering spread equally everywhere?

The Financial Action Task Force (FATF), an intergovernmental organisation dedicated to establishing global standards for fighting financial crimes such as money laundering and terrorist financing, doesn’t think so. In fact, the FATF’s very first recommendation[ii] for combating money laundering and terrorism financing is to follow a “risk-based approach.”

Resources are limited, no matter the size of an economy or an organisation. Therefore, it is absolutely necessary to prioritise efforts where they are most needed. FATF’s first recommendation asks not only countries but also financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) to “identify, assess, and take effective action to mitigate their money laundering, terrorist financing, and proliferation financing risks.”

Needless to say, the steps that precede mitigating risks are identifying and assessing them.

But how does a company identify and assess risks?

This varies depending on several factors, including the nature of the business itself. For an organisation, risks can also come from the customers and their geographic location, the supply chain, the nature of transactions, and the delivery channels used. Therefore, categorising risks based on the specific needs of the business is essential.

One of the most prominent risks impacting a business is from Politically Exposed Persons (PEPs). According to FATF, a PEP is someone who has been “entrusted with a prominent public function.” FATF Recommendations 12 and 22[iii] highlight the importance of PEP screening, requiring countries to ensure that financial institutions and DNFBPs implement measures to prevent misuse by PEPs and detect any potential abuse if it occurs.

In this blog, we will explore who PEPs are and the importance of PEP screening for FIs and DNFBPs to mitigate money laundering risks in the United Arab Emirates (UAE). We’ll also look into the importance of adverse media screening within a company’s anti-money laundering/combatting the financing of terrorism (AML/CFT) framework.

Politically Exposed Persons, or PEPs, are individuals who, because of their position of power, pose a higher risk for financial crimes such as money laundering. Anyone who is powerful and has access to state resources is inherently risky for businesses, as the access itself can be exploited to launder criminal proceeds. This highlights the importance of PEP screening to identify them before establishing a business relationship. FIs and DNFBPs operating in the UAE are required to apply Enhanced Due Diligence (EDD) measures on their business relationship involving PEPs.

PEPs are categorised based on the nature of their public functions. Under [iv]Cabinet Decision No. 10 of 2019 on Anti-Money Laundering and Counter Financing of Terrorism, PEPs include:

It’s important to remember that PEPs can be categorised as foreign or domestic, depending on their location. Also, the definition of PEP extends beyond the individual in the position of power. Direct family members, such as spouses, children, spouses of children, and parents, are also considered PEPs because of their close ties to the primary PEP. Close associates—people with personal or business connections to the PEP—are also included in this category, as they may hold sway or be involved in activities that reflect the PEP’s influence. The importance of PEP screening and identifying them is absolutely essential for combatting money laundering crimes.

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In 2009, a bank in Malaysia set up a state fund [v]to promote national development and attract foreign investment. The fund was intended to support large-scale projects that would drive economic growth.

But there was more to the story.

Over time, the fund became a symbol of state corruption. The U.S. Department of Justice estimated that more than $4.5 billion[vi] had been stolen from the fund and laundered from it. Huge sums of money, raised through government bonds, were quietly moved into private bank accounts in Switzerland, Singapore, and the United States.

From a $35 million private jet and a $260 million yacht to a $3.2 million Picasso painting gifted to a Hollywood actor, all were reportedly funded with the diverted money. Tens of millions of dollars also allegedly went toward producing a film that ironically depicted financial corruption. At the centre of this case was Malaysia’s Prime Minister at the time, who had control over the fund, and individuals close to him were in positions to influence its use. On 28 July 2020, the Prime Minister was found guilty of corruption and money laundering for illegally receiving about $10 million from the bank and was sentenced to 12 years in prison.

More than anything, this incident shows the profound risks that PEPs pose to financial systems because of their power and access, underscoring the importance of PEP screening in protecting businesses.

Under Article 15 of Cabinet Decision No. 10 of 2019, FIs and DNFBPs are required to follow these steps when managing relationships with PEPs in addition to conducting regular Customer Due Diligence:

For Foreign PEPs:

• Establishing effective risk management systems to identify if a customer or Beneficial Owner is a PEP.
• Obtaining senior management approval before initiating or maintaining any business relationship with a PEP.
• Taking reasonable steps to confirm the financial resources and actual beneficiaries for any PEP-related customer or Beneficial Owner.
• Applying enhanced, ongoing monitoring of the relationship with identified PEPs.

For Domestic PEPs and persons who had occupied a prominent position in international organisations:

Following the same steps as for Foreign PEPs enumerated earlier including—senior management approval, source of funds verification, and enhanced ongoing monitoring—in cases of high-risk business relationships.

Implementing measures to check if a customer or Beneficial Owner is a PEP.

Adverse media screening has become an important tool in the arsenal of FIs and DNFBPs for strengthening their AML/CFT frameworks. One of the primary objectives of any AML framework is to identify risks that could impact the institution. Traditional screening methods might not identify all potential threats, especially when individuals aren’t listed on official sanctions lists.

Imagine a scenario where a potential client isn’t on any sanctions list, but recent news reports suggest involvement in fraudulent activities or connections to criminal networks related to money laundering predicate crimes. Such important information might slip under the radar without adverse media screening, making FIs and DNFBPs vulnerable to considerable risks.

But what exactly is adverse media? The concept of “adverse” can be subjective. In the context of financial crime, such as money laundering, adverse media linked to a customer’s involvement in civil disputes cannot be the same with adverse media related to his involvement in drug trafficking. The Wolfsberg Group, an association of 12 global banks that develops frameworks and guidance for the management of financial crime risks, defines “negative news”[vii] in the context of AML/CFT as “information available in the public domain that financial institutions would consider relevant to the management of financial crime risk.” They also recommend that financial crime-related adverse media be distinguished from other negative news that isn’t considered relevant.

The importance of adverse media screening also depends on the availability of information and the credibility of media sources in the public domain. What makes adverse media screening especially valuable is its real-time monitoring capability, which promptly brings adverse information to an organisation’s risk assessment system.

The UAE’s Guidance for Licenced Financial Institutions[viii] also suggests adverse media screening as one of the ways to identify suspicious activity. The importance of accurate client risk assessment through adverse media screening is gradually becoming recognised worldwide. FATF’s Guidance for the Banking Sector mentions[ix] the use of “verifiable adverse media searches” for individual client risk assessments, highlighting its value as an essential part of an institution’s risk management toolkit.

When it comes to mitigating the risks of money laundering and the financing of terrorism, very few things are as important as having a robust risk assessment framework. For both FIs and DNFBPs, the importance of PEP screening and adverse media screening processes and their effective implementation cannot be overstated. However, identifying and assessing risks associated with PEPs and adverse media can be challenging—especially for small businesses—as it requires analysing substantial volumes of data and accurately recording the results. Even when the businesses understand the importance of PEP screening and adverse media screening, resource constraints may limit their ability to implement thorough monitoring processes and maintain compliance effectively.

To avoid such burdens, businesses can manage their AML compliance requirements by outsourcing to expert consultants with extensive experience and access to advanced screening technology, ensuring that their businesses remain compliant with all regulatory obligations as well as take proactive measures to mitigate risks.

Discover how AKW Consultants’ AML Compliance Solutions, using cutting-edge technology in PEP and adverse media screening, help you remain compliant with the UAE’s AML/CFT law and international best practises.

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References:

[i] Nasdaq Verafin- 2024 Global Financial Crime Report

[ii] The FATF Recommendations

[iii] FATF Guidance on Politically Exposed Persons

[iv] Cabinet Decision No. 10 of 2019

[v] Newspaper Article- The Guardian

[vi] Newspaper Article- Reuters

[vii] The Wolfsberg Group- FAQ

[viii] Guidance for Licenced Financial Institutions on Suspicious Transaction Reporting

[ix] FATF Risk-Based Approach Guidance for the Banking Sector