Politically Exposed Persons (PEPs) and How Nigerian Fintech Can Mitigate The Risks Around Them

In July 2016, a prominent Nigerian government official, linked to several international financial scandals, transferred millions of dollars through a local bank using multiple shell companies. This high-profile case, widely reported, highlighted the risks associated with Politically Exposed Persons (PEPs) and the importance of due diligence by financial institutions. For Nigerian fintechs operating in a digital-first environment, these challenges are magnified, requiring robust strategies to manage the risks posed by PEPs.

Who Are PEPs?

The Financial Action Task Force (FATF) defines PEPs as individuals entrusted with prominent public functions, such as government officials, military leaders, senior executives of state-owned enterprises, and their close associates or family members. In Nigeria, this includes governors, senators, and high-ranking executives in ministries.

PEPs are considered high-risk customers because of their access to public resources and the potential for misuse of power. Their involvement in financial crimes such as corruption, bribery, and embezzlement are not uncommon, as seen in the infamous Malabu Oil case, where politically connected figures were implicated in a $1.1 billion corruption scandal.

For Nigerian fintechs operating in a fast-paced, digitally-driven environment, identifying and managing PEP-related risks is a critical component of compliance.

Real-Life Instances of PEP Risks in Nigeria

1. Malabu Oil Scandal (2011): In this case, high-level Nigerian officials funneled public funds into private accounts under the guise of legitimate transactions. The complexity of the financial flows involved exposed significant lapses in due diligence among financial institutions.
2. Diezani Alison-Madueke Case (2015): The former petroleum minister was accused of laundering over $115 million through Nigerian banks to influence electoral outcomes. Weak transaction monitoring systems in the banks facilitated the movement of these funds without immediate detection.

These examples underscore the potential liabilities for fintechs that fail to implement robust controls against PEP-related risks.

Key Risks Posed by PEPs for Fintech

1. Regulatory Non-Compliance: Regulatory bodies like the Nigerian Financial Intelligence Unit (NFIU) and Central Bank of Nigeria (CBN) enforce stringent AML laws. Failing to detect and report suspicious activities linked to PEPs can result in hefty fines, as in the case of Barclays, which was fined £72 million for PEP-related lapses in 2015.
2. Reputational Damage: Public association with scandals erodes consumer trust. In the digital age, fintechs cannot afford negative press that may deter customers or investors.
3. Operational and Financial Risks: Illicit funds linked to PEPs can lead to frozen accounts, loss of operational licenses, or even criminal investigations, severely disrupting operations.

The Challenges of Managing PEP Lists

Politically Exposed Persons (PEPs) lists is a critical aspect of Anti-Money Laundering (AML) compliance that comes with several challenges.

Here are some of the key challenges that your business may face when conducting PEP checks:

1. Constantly changing PEP lists: PEP lists are frequently updated to reflect the political status of individuals. fintechs must ensure they are using the most recent lists to identify and manage PEP-related risks accurately.
2. Inconsistent PEP lists: Different sources may have different PEP lists, leading to inconsistencies and confusion. Cross-referencing PEP lists from various sources is crucial to ensure all relevant PEPs are captured.
3. High volume of PEPs: The number of PEPs on the lists can be overwhelming, making it challenging to screen and manage all PEP-related risks effectively.
4. Manual screening processes: Manually researching, analyzing and processing the large amount of information from PEP screening is time-consuming and resource-intensive, requiring significant human resources, expertise, time and money, particularly considering third-party business dealings.
5. False positives and false negatives: Screening processes can result in false positives and false negatives, leading to unnecessary costs, delays, and potential reputational damage.
6. Lack of access to information: Lack of transparency and access to information in Nigeria or other countries can make it difficult for businesses to obtain reliable information about PEPs.

Despite the challenges, your business can leverage various resources to mitigate PEP risk effectively.

How Nigerian Fintech Can Mitigate PEP Risks

The identification and management of Politically Exposed Persons (PEPs) is a crucial aspect of Anti-Money Laundering (AML) compliance for fintech operating in Nigeria. The risks and costs associated with unidentified PEPs and their activities can be significant and detrimental to a business.

Implementing a robust Anti-Money Laundering (AML) compliance program and effective risk management strategies is crucial for your business to stay ahead of potential threats and comply with regulatory requirements in Nigeria.

This involves customizing your screening process to address the unique risks tied to the products, services, and customer base of your financial institution.

The following are ways to effectively mitigate the risks around Politically Exposed Persons (PEPs)

1. Enhanced Due Diligence (EDD): Enhanced due diligence is a critical component of managing the risks associated with PEPs in compliance with KYC and AML norms. It involves verifying the identity of the customer, their source of funds, and their intended purpose for the transactions. Know Your Customer (KYC): Use advanced tools for screening customers against global PEP databases. Transaction Profiling: Assess the legitimacy of large transactions involving PEPs, as required by Nigeria’s Money Laundering (Prevention and Prohibition) Act 2022. Effective due diligence can help to identify and mitigate PEP-related risks. However, it can be a resource-intensive process that requires a significant investment of time and expertise.
2. Risk-Based Approach: Conduct a risk assessment to determine the level of risk associated with a particular PEP, and implement appropriate controls to mitigate that risk. This may include implementing enhanced due diligence measures for high-risk PEPs, such as conducting additional background checks or requesting additional documentation. Implement a tailored risk management approach and framework. For instance, fintech could classify PEPs by risk tiers (e.g., high-risk for active politicians, medium-risk for associates). Allocate enhanced monitoring resources to high-risk PEP accounts.
3. Technology Integration: Artificial Intelligence (AI): Deploy machine learning algorithms for real-time transaction monitoring and anomaly detection. Blockchain Analysis: Use blockchain forensic tools to trace suspicious cryptocurrency transactions involving PEPs.
4. Staff Training and Governance: Educate employees about the risks associated with PEPs and how to identify and manage those risks. This can be achieved through regular AML compliance training and PEP-related risk management training, as well as the development of clear policies and procedures to guide employee’s actions. Educate employees on identifying red flags, such as frequent large cash deposits, which were common in cases like the Malabu scandal. Establish governance policies that promote accountability and whistleblowing for PEP-related issues.
5. Collaborate with Regulators: Regularly engage with the CBN and NFIU for updates on emerging PEP risks and compliance requirements.

PEPs pose significant risks, but with the right mix of technology, risk management, and governance, Nigerian fintechs can turn AML compliance into a competitive advantage. As the fintech space grows, companies must prioritize robust PEP management to build trust, attract investments, and contribute to a transparent financial ecosystem.

For fintech founders and compliance professionals, addressing PEP risks is not just about avoiding penalties—it’s about fostering sustainable growth and innovation in Nigeria’s dynamic fintech environment.