Have you ever thought how helpful the close relatives and business partners are for PEPs to move illegally obtained money from one place to another? Using the RCAs isn’t a new technique to legalize their corrupted incomes because these individuals are often considered lower-risk entities.
However, in the latest development to combat and mitigate the money laundering chances, the EU declared that the RCAs must also be considered as the PEPs making it essential for businesses to treat them just like politically exposed persons.
Why was there a need to implement such a strict regulation even for those who do not hold any public offices?
Recent incidents have shown the intensive involvement in smurfing, structuring, and layering techniques for money laundering on behalf of politically exposed persons.
RCA’s in PEP screening has been made essential by many regulatory bodies to ensure Financial Institutions are implementing the AML regulations obligated by international regulatory bodies.
In this blog, we will further highlight why strict scrutiny of Relatives and Close Associates of PEPs is essential, and how screening against RCAs is beneficial for financial institutions.
So, why is strict scrutiny of RCAs essential? Let’s break down the key reasons why financial institutions must keep a close eye on these individuals to safeguard their operations and maintain compliance.
Understanding RCAs and Their Role in Financial Systems
Any individual or entity who has blood relations, is a close friend, business partner or personal lawyer falls under the category of relatives and close associates.
Though these persons do not hold any public office, they could be used as proxies to commit financial crimes like money laundering, and financing of terrorism on behalf of the PEPs.
This is why, Regulatory bodies make it essential for financial institutions to strictly screen them on global watchlists, pep lists, and other sanctioned lists to prevent money laundering, corruption, and other financial crimes.
What Risks are Associated with Relative and Close associates of PEP?
As not all the PEPs are criminals, so are their relatives and close associates. However, due to their high-risk profiles, they could be involved in the following criminal activities by using the influencing power of PEPs.
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Involvement in Money Laundering and Corruption:
The RCAs don’t need to always use the influential power on behalf of Public office holders, they can use this power for their purposes, to commit corruption or move money from one place to another without drawing attention to the PEPs.
This is one of the major reasons to consider them as the higher risk individuals. They must be closely monitored, and screened by financial institutions before making any business deal.
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Regulatory Violations and Fines
Another major risk they can pose to any financial institution is hefty fines by the regulatory bodies.
Firms are required to screen them, and comprehensively perform customer due diligence and you’re your customer process before onboarding them.
However, if the business fails to scrutinize them properly and they successfully do money laundering by exploiting the business platform, the Financial institution can face millions of dollars in fines and reputational damage as well.
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Fraud and Financial Crimes
Would not these culprits try to do something different because some of their known people are in the government and have a strong influence over all the financial institutes? There are higher chances of such individual involvement in fraudulent activities such as tax evasion, establishment of offshore companies just to move his illegal money to such accounts, and many other crimes.
But if strictly scrutinize these people, the risk of getting involved in such criminal activities be mitigated.
Are There any Benefits FIs get BY screening RCAs?
Complying with AML rules and Regulations isn’t a choice for the financial institutions but an obligation to perform customer due diligence, know your customers and monitor and screen all of their transactions for better compliance efforts. So, yes, obviously, the benefits are always there to follow the AML regulations.
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Improved Compliance Efforts
Comprehensive EDD, monitoring, and screening of politically exposed persons and their close associates not only ensure that the organization is following the AML compliance checklist but also improve compliance efforts.
Knowing the organization following the rigorous monitoring process always attracts the new potential clients, because they know they will not make any business relation with oranziaiton who supports money laundering and other financial crimes.
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Decrease the Chances of Financial Crime:
If there are two Financial institutions in the town, one has implemented rigorous AML compliance checks and regulations, while the other does not follow or implement the old and conservative ways to combat money laundering. Who will criminals choose to launder their money? The second one is because of weaker compliance efforts.
Therefore, RCAs in PEP screening are essential to not only decrease the chances of financial crimes but to ensure any suspicious transaction goes unnoticed.
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Enhanced Due Diligence
Enhanced Due diligence provides a complete picture of RCA and the level of risk he/she can pose to attempt money laundering or other financial crimes. This practice keeps the compliance time alert about the transactions that are made by RCAs or those close associates who have a higher risk of involvement in financial crimes.
Summing It Up
RCAs are the reality and the real threats for financial institutions. Therefore, to halt them at the first stage businesses need to implement robust PEP screening.
