Best Practices for PEP Screening in the InsurTech Industry

Why Is InsurTech at Risk?

Life insurance products are popular mechanisms for laundering money as criminals can quickly transform large amounts of money quickly, especially in companies where customer due diligence requirements are far less stringent than other financial services. Insurance companies also tend to build greater flexibility into their products so that funds can be withdrawn without a significant financial loss. More than $1 trillion has been paid in bribes every year, which leaves corrupt PEPs with a significant amount of money that needs to be laundered. Banks and financial institutions, including insurance companies, must remain on high alert. 

To combat the risk of politically exposed people (PEP) exploiting these systems, a number of new regulations have been introduced, including the European Union’s Fourth Anti-Money Laundering Directive, which expanded the definition of domestic PEPs and included the family members of PEPs. The directive also indicated that PEPs must maintain their designation for at least 12 months after leaving their position of political influence. 

Best PEP Screening Practices for InsurTech Companies

It’s of course not illegal to conduct businesses with PEPs, but it’s important for InsurTech companies to protect themselves against potential money laundering risks. This includes: 

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1. Adopting a risk-based approach

InsurTech companies should take a risk-based approach to each phase of the process, including taking the necessary initial customer due diligence steps during onboarding, establishing appropriate risk management systems to identify PEPs, including screening, and enhanced, continued monitoring of identified PEPs, their family members and close associates. Customers should be identified and verified using risk-based methods designed to detect PEPs. Once a client has been identified as either a foreign or domestic PEP, a risk-scoring model must be applied to determine the appropriate level of enhanced due diligence. (For example, foreign PEPs are generally considered higher risk than their domestic counterparts). Every risk posed by each PEP must be considered and weighed so that the compliance team can devote more time to higher-risk individuals. 

2. Gather sufficient information 

It can be difficult to establish someone’s status as a politically exposed person or as a family member or associate of a politically exposed person. The information must be gathered from a number of sources to make the determination, including up-to-date customer due diligence information gathered directly from the customer, internet and media searches, databases and government PEP lists.

Existing clients can become PEPs during the course of their relationship with the company, which is why it’s important to continually monitor all client accounts for changes in status, profile, activity and information, with more frequent checks conducted for higher-risk customer accounts. 

Information from the Internet is not always reliable; however, many AML websites and tools, as well as country-specific social media websites, may reveal important information. There are several research databases that offer additional information that may identify someone as a PEP or as being connected to a PEP. Some of these databases are continually updated and thorough; others may be outdated. Databases and watchlists should be tested regularly to ensure that they are relevant to the business and up-to-date. Companies should maintain their own in-house database as an additional tool and should, in the best interest of the industry, share information related to foreign PEPs among one another as much as data protection and privacy laws allow. Government-issued PEP lists, employee analyses, asset disclosure systems, self-declaration statements and other information may be shared and reviewed among stakeholders as well.

3. Enhanced Due Diligence (EDD) 

Enhanced Due Diligence measures should be taken when customers are considered high-risk, including taking reasonable measures to establish a client’s source of funds and wealth and enhanced going monitoring. PEP customers’ profile details, transactions and activities should be reviewed annually, and even more often for higher-risk individuals. 

4. Running More Effective Searches and Using More Effective Tools

Manual PEP screening checks are not only time-consuming but less accurate as well. To reduce the administrative burden on staff, firms should implement technology to mitigate the risks, including segmenting customers into low, medium and high-risk groups and pulling in information from transaction monitoring, regulatory reporting and onboarding processes to identify PEPs.

Where possible, look for a screening solution with native character searching to reduce transliteration issues that can lead to false positives. Determine which countries are at lower risk to reduce the amount of time spent reviewing associates and relatives and reduce the number of hits by using data like date of birth and age to refine the search. 

It’s important to build a PEP risk-scoring model that works within a specific business. For low-risk PEPs, consider low-frequency screening or limiting screening to sanctions only. For high-risk PEPs, update your KYC information regularly by requesting direct information from customers and screening and monitoring against different data sources with a higher frequency. 

Conclusion

PEP screening processes should evolve as regulations do. By adopting best practices, firms can identify and monitor high-risk PEPs and steer clear of possible fines and penalties associated with the failure to sufficiently protect against money laundering.

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