Do you think that PEP Corruption reduces your investment and the effectiveness of the financial systems?
Warren Buffet said, “Honesty is very expensive. Do not believe those who are cheap. However, for corruption professionals involved in PEPs, there are severe risks to investors and financial market stability in the process.”
PEP corruption is defined as the use of a position of authority in government by the official, their relatives, or friends to obtain personal benefits.
This type of corruption negatively affects investor confidence and weakens the pillars of a proper financial market.
In this article, we will discuss how this form of corruption endangers your investments and how one can curb this important problem.
Understand the Risks of PEP Corruption
PEP corruption refers to corruption in which the corrupt officials are political executive appointees, their relatives, or persons close to them (RPCs).
PEP corruption results in bribery, embezzlement, and other unlawful deeds that have effects on society.
That is why it is necessary to be very attentive to the PEPs and their relatives and close associates corruption.
The occurrence of bribery in public procurement, said the World Bank, was expected to reduce global economic growth to up to 5 percent of the nations’ Gross Domestic Product in 2023.
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PEP Corruption’sCorruption’s Impact on Financial Markets
Whenever PEP corruption occurs, investor confidence in the financial markets is affected badly. Their investments remain insecure, and they need to be corrected. This can lead to low share prices and difficulty in financing for companies.
RCA corruption also compels the government to underperform its responsibilities in the management of the economy, leading to financial instabilities.
A 2023 report explored that PEP corruption reduces investor confidence in emerging markets by 5-10%.
Erosion of Investor Trust and Confidence
PEP corruption undermines investors’ confidence in the financial system. They have fears about the safety of their money and the fairness of the markets.
This can lead to capital flight in the stock market, which makes the whole system weaker as nobody is willing to invest.
Getting that trust and confidence back is important for the well-being of the financial markets. According to the latest studies, corruption in the global public sector is costing economies $1.5 trillion and above annually, deepening the crisis in investor confidence.
Systemic Consequences of PEP Corruption
Corruption of Politically exposed persons affects the financial system in a big way when it occurs. It declines the economy, hinders business expansion, and shrinks the government’s income.
This results in reduced employment opportunities, poor lifestyle, and high levels of poverty. The loss of public confidence in government and financial institutions is very difficult to remediate.
The latest report of 2024 data shows that corruption related to PEP is valued at more than $ 1.26 trillion in the international market today.
Regulatory Efforts to Combat PEP Corruption
Governments and other financial regulators are trying their best to mitigate the effects of corruption.
They have provided laws and regulations that compel financial institutions to screen PEPs and their relatives/associates (RCAs) for any unwanted activities.
Such a PEP Screening process enables early detection of corruption risks. Institutions also have to forward suspicious transactions to the authorities for investigation.
Based on a 2024 study, the number of countries implementing the FATF recommendations for PEPs regulation is over 200.
Importance of Robust PEP Identification Processes
Appropriate identification of RCA and PEPs is of great value in combating corruption. An effective PEP identification control must be in place in financial institutions to be aware of high-risk customers.
This way, the firm is able to oversee these customers to check on any suspicious activities and or report back to them.
To ensure the efficiency of the financial system, PEP checks and their supervision must be conducted both periodically and continuously.
High-risk PEPs are identified to be involved in money laundering exceeding 90% of money laundering cases by the Financial Action Task Force (FATF).
Ongoing Monitoring and Verification of PEPs
Once PEPs and RCAs have been identified, they must be monitored for any continuous changes in events or activities.
A financial institution must verify when a PEP becomes categorized as such, as well as their relations and the sources of their funds.
The continued check and verification of PEP ensures that any corruption is detected before it gets worse.
PEP corruption prevention is a delicate fight that requires keen observation, amongst other measures.
Strengthening Financial Sector Integrity and Stability
Countering PEP corruption to preserve the potency and strength of the economic industry is important.
In their corrupt activities, they erode investors’ confidence, create instability in the market systems, and weaken the economy.
Developing countries lose about $1 trillion per year through illicit financial flows, which include actions by PEPs.
Upon meeting strict criteria for PEP identification and Corruption monitoring, the financial institutions can contribute to preventing the system from negative GA impacts of corruption.
This helps to promote the stability and geometry of the whole economic system and the wealth of all.
