How To Manage the Risk of PEPs in Banking?

“For too long, public figures and their families have suffered discrimination from the banks. This is at least a start in unraveling the debanking scandal that has hurt so many individuals and small businesses. Much more is needed.”

Nigel Farage

Nigel Farage, a prominent public figure in the UK, shares his thoughts on how politically exposed persons are mistreated by the banking sector. But what led him to call out the banking sector so publicly?

Farage personally experienced “debanking”, a practice where financial institutions ban accounts based on political views, not on financial illegibility.

After this incident, a troubling trend emerged where multiple banks stopped offering financial services to individuals based on their reputation or political ideologies.

With the increase of PEP in banking, authorities worldwide expect obliged entities to manage PEPs with greater responsibility.

Stay connected as this article examines:

• Who qualifies as a PEP;
• What is PEP in banking;
• What risks do these PEP pose;
• What challenges do banks face in dealing with high-risk PEPs; and
• What are the best PEP screening practices they can adopt to mitigate these risks?

Who are Politically Exposed Persons (PEPs)?

According to the Financial Action Task Force (FATF), a PEP is someone, who is more likely to be involved in financial crimes because of their position or influence. PEPs are classified as foreign, domestic, or those entrusted with key functions by state-owned corporations and international organizations.

Interestingly, any PEP classified as a foreign PEP is also considered a de facto domestic PEP in its home nation.

UK anti-money laundering regulations define a broad range of positions that could classify individuals as PEPs specifically those with senior public responsibilities, excluding mid or junior-level officials. As per these, UK banks must consider domestic PEPs as less risky than non-domestic PEPs, conducting a lower level of enhanced due diligence unless other risk concerns require greater

What Does PEP Stand For in Banking?

PEP Meaning in Banking is a politically exposed person who has been assigned to a high-profile post by a government entity. It can be:

• Heads of state
• Ministers of all ranks
• Members of parliaments
• Ambassadors
• High-ranking officers in the armed forces
• Heads of government
• Local Mayors
• Members of courts and national judicial bodies
• Individuals serving on the boards of central banks
• Administrators and managers of state-owned enterprises

When Does an Individual Consider a PEP in Banking?

A client can be considered  a PEP in banking if they:

• Receive retainer payments from government funds.
• Utilize official government correspondence materials.
• Receive news or get interaction, which suggests that they are associated with someone who could be considered politically exposed.

Risks Associated with PEP in Banking

The most prominent risks that are linked with the politically exposed person include:

• PEPs may attempt to launder funds gained unlawfully through embezzlement and bribery.
• They might engage themselves in illicit financial crimes such as wire fraud to conceal the provenance and intended purpose of their funds.
• They may use these illegal funds to hide bigger crimes like terrorism financing or organized crimes.

Why Do Banks Struggle with PEP Screening?

PEP in banking may have complex networks of associations and commercial interests and ties to high-risk jurisdictions and financial activities, making it difficult for banks to analyze their risk profiles appropriately.

Banks often rely on different data providers and anti-money laundering sources to conduct thorough PEP in banking screening, but inconsistencies or outdated AML data may undermine the PEP screening practices.

The sheer number of PEP data gathered from client databases, third-party watchlists, media sources, and regulatory databases, may overpower banks’ screening algorithms, resulting in false positives or missed alerts.

Global Regulatory Frameworks for PEP in Banking Management

The legal landscape for managing Politically Exposed Persons (PEPs) in banking has changed dramatically, with recent legislative updates to increased due diligence obligations.

Notable national regulations and international entities include:

Financial Action Task Force

FATF’s Recommendations 12 and 22 regulate PEP screening, mandating enhanced due diligence to mitigate risks associated with money laundering and terrorism financing.

The European Union

EU’s Directive (5AMLD & 6AMLD) outlines PEPs, with several European nations following the FATF’s recommendations for effective screening.

The United States

FinCEN and OFAC enforce PEP laws under the Bank Secrecy Act and the PATRIOT Act, with additional due diligence and suspicious activity reporting requirements for foreign officials.

Australia

The Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act) of 2006 requires the identification of PEPs and their families, as well as oblige increased due diligence and comprehensive risk management systems.

The United Kingdom

The Money Laundering Regulations 2017 are in line with the FATF’s definition of PEPs, and the FCA and Joint Money Laundering Steering Group give detailed PEP management instructions.

Canada

The Proceeds of Crime and Terrorist Financing Act of 2001 establishes reporting obligations, with domestic PEPs remaining active for five years after leaving office and international PEPs permanently.

Singapore

MAS Notice 626 mandates increased due diligence for PEPs and their close affiliates to ensure comprehensive risk management.

Middle East and North Africa Financial Action Taskforce (MENAFATF)

MENAFATF guarantees that the FATF’s 40 recommendations are implemented throughout the MENA area, with a particular emphasis on PEP inspection.

South Africa

The Financial Intelligence Centre Act was revised to include politically influential individuals (PIPs), such as private sector officials involved in public service procurement.

As per these regulatory bodies, instead of closing bank accounts, financial institutions must develop enhanced due diligence and effective PEP screening measures that assist them in managing PEP risks.

These PEP screening practices hold multiple challenges, what are these, let’s review them.

Major Challenges For PEP Screening in Banking

PEP screening in Banks is necessary for AML compliance procedures, but it poses various obstacles. When not appropriately managed, these issues can increase the likelihood of AML  violations and reputational harm. Key challenges include:

Inconsistent PEP Definitions

The lack of a universally accepted definition causes inconsistencies in identifying and monitoring PEPs across jurisdictions. FATF has broader criteria for considering any person as PEP, whereas the US, UK, Canada, and other countries have different explanations for PEPs.

Limited Jurisdictional Coverage

Effective PEP screening must include PEP data from occupied, controversial, or less-recognized territories, however, many vendors ignore these regions, resulting in significant AML risk management gaps.

Ignoring Close Associates

Effective PEP screening should extend beyond the actual individual to include close acquaintances, including family members and business partners, who could be exploited to avoid detection. Identifying and measuring these people’s risk levels is difficult and resource-intensive.

Out-Dated PEP Lists

A person’s PEP status may vary over time as they move between politically exposed roles. This delay in changes to PEP lists creates significant hurdles with higher false positives and negative alerts.

Inefficiency Due to Language Barriers

PEP data is available in a variety of languages, complicating cross-jurisdictional coordination and increasing the likelihood of inaccuracies and false positives. Many solution vendors focus on certain locations, resulting in coverage gaps and increased occurrences of missing data or erroneous outcomes.

The Nigel Farage case underscores the risks of debanking clients without a proper risk assessment. Banks should adopt a risk-based approach to AML screening, focusing on actual risks rather than indiscriminately removing clients based on a one-size-fits-all solution.

Managing PEP risks requires more than just basic screening—it demands a dynamic, risk-based approach that is responsive to the changing regulatory landscape.

Do you require that Solution provider?

AML Watcher is a solution that can streamline PEP screening, reduce false positives, and ensure continuous, reliable AML compliance.

How?

AML Watcher the Ultimate PEP Screening Solution Provider for High-Risk PEP Management

AML Watcher’s PEP screening system enables banks to manage PEP risks using a risk-based approach, reducing false positives and eliminating debanking while maintaining valuable client relationships, supporting both security and growth. It offers:

Unified PEP Definitions

AML Watcher incorporates PEP definitions from FATF, FinCEN, FCA, Wolfsberg, and other sources into a single database, ensuring the most comprehensive and globally accepted PEP data. This ensures that institutions can access essential PEP data depending on international, regional, or national criteria, regardless of their jurisdiction.

Broader Jurisdictional PEP Coverage

AML Watcher offers detailed PEP data from lesser-known or controversial regions such as Abkhazia, Crimea, Taiwan, and Northern Cyprus. Our in-house team ensures that no high-risk individuals are ignored, providing a thorough risk assessment while avoiding outdated

Real-time PEP Data Updates

AML Watcher updates its data every 15 minutes to reflect changes in an individual’s political exposure or risk status, ensuring that clients receive up-to-date and accurate risk assessments. This reduces the danger of AML compliance gaps and increases the institution’s capacity to respond rapidly to AML regulatory changes or developing concerns.

Customizable PEP Screening

Customize your PEP screening settings to reflect your institution’s unique risk appetite and regulatory requirements. AML Watcher allows you to design a personalized approach that screens only the most relevant PEPs, increasing AML compliance without overburdening your staff.

Covering PEP Risk Level 4 & Local PEP

Our solution goes beyond traditional screening by continuously monitoring Level 4 PEPs and detecting local PEPs. These often-overlooked individuals pose a substantial AML compliance risk, and AML Watcher ensures they are flagged, decreasing gaps in your PEP screening.

Risk Categorization and RCA Mapping

AML Watcher’s accurate mapping of PEPs and their related associates (RCAs) enables a thorough risk assessment. We assist you in better prioritizing high-risk persons and mitigating potential dangers by assessing characteristics such as political influence, transaction behavior, and media coverage.

Integrated Adverse Media Screening

AML Watcher offers adverse media monitoring, which searches thousands of local and international news outlets for any unfavorable press or criminal linkages to PEPs. This additional layer of screening improves the discovery of potential financial offenses that may not be on sanction lists.