PEP Checks: The Comprehensive Guide to Screening Politically Exposed Persons for Businesses

Recent headlines have highlighted the troubling connection between influential political figures, known as politically exposed persons (PEPs), and money laundering incidents. This has shed light on the importance of understanding and managing the risks tied to these figures. For financial institutions keen on building a solid anti-money laundering (AML) framework, a thorough understanding of PEPs, the regulatory landscape, and effective due diligence is crucial. Through this blog, we aim to provide a comprehensive guide on PEP screening and how it is a pillar of a comprehensive AML program.

Who is a Politically Exposed Person?

An individual who is offered a prominent public position, or duty, which adds to their influence and power to manipulate their authority is termed a politically exposed person (PEP). Their position in the hierarchy gives them higher access to pose risks related to money laundering, corruption, terrorist financing, and many such illicit activities.

In light of Article 52 of the United Nations Convention against Corruption (UNCAC), PEPs are defined as “ subjects who are or have been titled with prominent public positions in past or present, including their family members and close associates”

FATF has issued recommendations that will help in the efficient execution of these extra procedures as outlined in Recommendations 12 and 22 for PEPs from foreign, domestic, and international organizations as well as their families and close associates.  FATF Guidance: Politically Exposed Persons

Types of Politically Exposed Person (PEP)

• Foreign PEP: Subjects entrusted by prominent public positions in foreign nations are known as foreign PEP, including Heads of state or government, famous political leaders, prominent government, judicial, or military officials, CEOs of public-owned organizations, and major political party executives and leaders might all fall under this category of PEP.
• Domestic PEP: This category of PEP included heads of both state and government, significant party position holders, senior and famous political leaders, senior owners and chief executive officers of state-owned enterprises, and associated individuals.
• International Organization PEP: This category involves individuals who are currently holding or formerly held an important position granted by any recognized international organization. These prominent PEP-related roles may include dictatorship, head of boards, or associated positions which may give them the power to conduct illicit financial activities.

Significance of PEP Screening

Why there exists urgency to use PEP screening for your business?

PEP screening lays the foundation of a secure onboarding process, including both in terms of AML and KYC. This core category of screening helps detect PEP, their level of authority, and the risk level associated with them by closely analyzing their backgrounds and that of their relatives and close associates as well, so that your business may stay safe from being part of money laundering, corruption, and associated crimes.

PEPs themselves are not criminals, but they carry an increased risk exposure requiring supplementary AML/CFT measures during onboarding.

Why Should PEPs Be Determined?

Bribery and corruption have emerged as significant global challenges with far-reaching negative consequences. An estimated $1 trillion in bribes flows through corrupt channels annually, contributing to a staggering total corruption value of nearly 2.6 trillion dollars. The 2022 (CPI) Corruption Perceptions Index, evaluates nearly 180 global countries and territories to picture their risk level based on the perception existing about the level of corruption in the public sector, highlighting the importance.

The global score of pervasive corruption has stuck to the score of 43 out of 100 for almost a decade now. Nearly two-thirds of countries score below 50 and 26 score even more below the belt, marking their corruption rating to a bare minimum. Despite these stats, depicting success against financial fraud, 155 countries have stayed stagnant against their fight to develop a corruption-free environment since 2012.

PEP Screening and Categorization

When conducting PEP screening, it is essential to pinpoint politically exposed individuals, as well as their relatives and close associates (RCAs). Additionally, it’s important to note that not all PEPs carry the same level of risk, as there are distinctions within the PEP category itself.

Categorization of the 4 Levels of Risk

Different PEPs present different levels of AML/CFT risk. In light of this, it is possible to categorize the PEP risk levels into the following 4 quadrants:

Level 1 (PEPs at High Risk)

• Executives in state and local governments (National Leadership)
• Leading positions in the armed forces, judiciary, and law enforcement, such as Army Chiefs, Chief Justices, etc.
• Parliamentary representatives, such as senators and house members
• Prominent members of political parties, such as the leader of a political party.

Level 2 (PEPs with Medium-High Risk)

• Senior state, military, and law enforcement officials, such as a general in the armed forces or the director of a law enforcement agency.
• Senior civil servants, religious authorities, and government organizations.
• State commissioners, ambassadors, and diplomats, such as the commissioner for Ohio.

Level 3 (Medium-risk PEPs)

• Senior management in government-owned companies.
• Board members of a state agency.

Level 4 (PEPs at Low Risk)

• District assembly members; Subordinate officials and staff of international organizations.
• Lower-level government employees or officeholders.

Regulatory Landscape

How does the PEP Screening Process work and How do FIs identify a Politically Exposed Person?

The screening for PEPs should align with a risk-based approach adopted by a financial institution. AML Watcher offers a solution for screening PEPs through a due diligence process, ensuring that PEP screening occurs during the initial customer engagement and through periodic reviews triggered by specific events necessitating an Enhanced Due Diligence assessment.

Step 1: Gather Customer ID Data

Collect customer information necessary for identification, such as:

• Full Name
• Date of Birth
• Nationality
• Residential Address
• Occupation
• Tax Identification Number (TIN)

Step 2: Software PEP Screening Execution

The AML software examines the input parameters and compares it to an extensive database of politically exposed people. The system generates an alert when it discovers a probable hit due to a matching name and other parameters. The strictness of such a match depends on the ‘Fuzzy Matching’ scale usually set by an MLRO. Higher fuzzy matching will result in many loosely matching hits whereas a lower fuzzy matching will return only closely matching hits.

Step 3: Detecting False Positives

These hits are then examined by MLROs to determine whether they represent true hits or false positives. This step is necessary so that no misidentification issues arise leading to blockage of normal accounts.

Step 4: Risk Scoring
After screening customer information, a risk score is assigned which triggers either of the three due diligence levels: simplified, regular, or enhanced. MLROs have the option to configure risk scores based on their company’s compliance program. For example, risk scores can be added for the following instances: –

• Reside in a high-risk third country.
• Qualify as a politically exposed person (PEP), a family member, or an associate.
• Hits in adverse media for specific keywords such as ‘Corruption’, ‘Bribery’, etc.

Step 5: Enhanced Due Diligence 

Enhanced Due Diligence is implemented to delve deeper into higher-risk customers’ backgrounds and activities to ensure compliance and mitigate potential risks. If the customer receives a high-risk rating, Enhanced Due Diligence (EDD) is required. This entails:

• Gathering extra verification documents such as financial statements, tax records.
• Determining the source of the ultimate beneficial owner’s wealth.
• Assessing adverse media coverage.
• Developing a monitoring plan for ongoing client scrutiny.

Step 6: Documentation and Reporting

MLROs are required to maintain comprehensive case management documentation and audit trail to note their actions, reservations, and comments at each stage of screening. This helps senior compliance officers understand their perspective when scrutinizing specific high-risk cases.

Step 7: Ongoing Monitoring

Ongoing monitoring is configured to assess changes in customer’s risk profile on a frequent basis. It generates alerts if a customer suddenly adopts or upgrades a PEP status or adverse media coverage.

Is the PEP status permanent? Once a PEP, Always a PEP?

The duration of PEP status varies by jurisdiction and depends on factors like the level of informal influence an individual may still have, the seniority of their previous position, and any ongoing connections to their past function. Some financial institutions adopt the “once a PEP, always a PEP” approach, maintaining this status for clients even after they retire from public or political life. This approach ensures careful continuous examination, aligning with FATF’s Recommendation 12, which suggests that PEPs, regardless of their current status, should be assessed based on risk rather than fixed time constraints. This risk-based approach requires institutions to evaluate the ML/TF risk associated with PEPs who are no longer in prominent public roles and take appropriate risk mitigation measures.

We advise you to carefully read the regulations issued by the authorities in the areas in which you conduct business. The suggestions from a few of the regulators are listed below.

EU Directive: According to article 22 of Directive 2015/849 of the European Parliament and of the Council, organizations are required to take into account the ongoing risk posed by a politically exposed person for at least a year after they have been relieved of their prominent public function by a Member State, a third country, or by an international organization. Additionally, until it is determined that the person no longer poses a danger particular to politically exposed persons, they must take appropriate and risk-sensitive action.

Financial Action Task Force (FATF): mandated a specific risk-based approach without a set period of time, to focus on PEP screening so they may not pose a higher level of risk to your organization

Financial Conduct Authority (FCA): Similar to that of the EU, FCA also suggests that PEP should be focus of extra care and due diligence for almost a year after the PEP is no longer serving in the position of power and authority as previously entrusted.

Challenges and Best Practices of PEP Screening

Challenges to PEP screening

When it comes to Politically Exposed Person (PEP) screening, businesses often face hurdles that can impact their compliance efforts. These challenges range from data management to regulatory complexities.

This blog will address some of the most common industry challenges for MLROs encountered in PEP screening. It will also into key insight into how businesses can address them for more effective compliance.

Keeping an updated PEP database – is a constant hassle, especially with new individuals being added each day along with constant changes in the status of PEPs within seconds of the previous update.

Costly investment in compliance – makes the process even more complicated, thus establishing a comprehensive PEP screening program is demanding investment in terms of time, resources, and finances.

Navigating through regulatory variations – from one jurisdiction to another, both domestically and internationally requires staying informed and compliant across diverse directories.

The quality of data – used in the screening process poses a direct influence on the accuracy of screening results which lead to a higher possibility of false positives, exposing business to risks.

Handling a volume of data –  including a large volume of data, from diverse sources enables the risk of missing alerts or generating false alerts, adding to the complexity of decoding screening result reports.

Minimizing false positives – is a time-consuming process that demands complete structuration of data, causing unnecessary delays in screening by elevating review overload.

Language barriers – create technical obstacles due to differences in language and dialect, making it complex to conduct name matching with ultimate precision and accuracy.

PEP Screening Best Practices

Among dozens of service providers, claiming to be the best, here are the key strategies to compare them along in order to ensure effective & reliable PEP screening. The key metrics are as follows:

Credible Data sources are the gist of reliable screening. By confirming the data sources being used, one can expect current data and an up-to-date screening process.

Integrating a Risk-based Approach for more precise and focused screening enables insight into risks that remain hidden otherwise.

Incorporating In-depth Screening including enhanced due diligence (EDD) and Customer due diligence (CDD) modifies traditional PEP screening by reporting more in-depth analysis of customers over the course of time.

Consistent Monitoring differs from one-time screening by ensuring ongoing compliance with AML controls and reporting instant changes in the status of PEPs.

What Types of Organizations Should Screen for PEPs?

PEP screening is essential for organizations, particularly for financial institutions (FIs) including banks, investment firms, and Virtual Assets Service Providers (VASPs) to meet anti-money laundering (AML) and know-your-customer (KYC) regulations. This rigorous screening is done to mitigate the high risk of financial crime associated with the positions of PEPs. Entities operating in these sectors must prioritize PEP screening to maintain compliance with regulatory requirements.

AML Watcher’s cutting-edge PEP screening tool is designed to help organizations navigate the challenges of PEP screening effortlessly. Our high quality and holistic data, case management system, and risk scoring module simplifies PEP screening by giving you control over your compliance processes.

Contact us today to explore how our PEP screening solutions can seamlessly integrate into your compliance program, allowing you to focus on what you do best—growing your business with confidence and integrity.