When it comes to preventing money laundering and terrorist financing, financial institutions and large corporations have a crucial role to play. One important step in this process is screening politically exposed persons (PEPs) — individuals who hold a prominent public position or have close ties to such individuals — for potential risk.
PEPs are considered a higher risk due to their position and influence, which can make them vulnerable to bribery, corruption and other forms of financial crime. As such, financial institutions and corporations subject to anti-money laundering (AML) regulations must screen these individuals as part of their risk management strategy.
In this article, we’ll take a closer look at why PEP screening matters and how you can optimize your screening process to ensure compliance and maintain a safe, sustainable financial ecosystem.
What is a PEP?
Politically exposed persons (PEPs) are individuals who hold prominent public positions or have close ties to such individuals, making them vulnerable to financial crime such as corruption and money laundering. If you work in the financial industry or deal with financial transactions, chances are you may have heard the term “politically exposed person” or PEP. But who exactly is considered a PEP and why does it matter? Let’s take a closer look at what a PEP is and explore examples of the types of individuals who fall into this category.
Here are a few examples of the types of individuals who may be considered PEPs:
- Domestic PEPs: Heads of state or government, senior politicians, senior government officials, judicial or military officials, senior executives of state-owned corporations, and important political party officials.
- Foreign PEPs: Heads of state or government, senior politicians, senior government officials, judicial or military officials, senior executives of state-owned corporations, and important political party officials from foreign countries.
- International PEPs: Individuals who hold a prominent position in an international organization, such as the United Nations or the World Health Organization.
In addition to these examples, PEPs can also include the immediate family members and close associates of individuals who hold prominent public functions. Financial institutions and other organizations need to conduct PEP checks as part of their risk management strategies to prevent financial crime and maintain a safe and sustainable financial ecosystem.
What is PEP Screening?
PEP screening, also known as a PEP check, is the process used to search an official list of politically exposed persons to determine if a candidate is on any watchlists. This type of check is a critical part of the customer due diligence process (CDD) and is usually required to fulfill anti-money laundering and Know Your Customer (KYC) compliance regulations. The ultimate goal of PEP screening is to determine the potential risk of doing business with the candidate and to employ a risk-based approach.
Why Conduct PEP Screenings?
PEP screening is an essential step for organizations to ensure they are complying with AML regulations and protecting themselves from financial crimes. PEPs are individuals who hold prominent public positions or have close associations with those in power, and they are at higher risk of committing financial crimes such as money laundering and corruption. By conducting PEP screening, organizations can identify these individuals and prevent potential financial crimes.
Transactions with individuals on PEP lists put organizations at risk of regulatory fines and damage to their reputations. Organizations need to understand the risks associated with PEPs and conduct a thorough risk assessment. While standard procedures may not include this type of risk assessment, organizations must include PEP screening as part of their compliance measures.
PEP screening is a necessary step to ensure regulatory compliance and protect organizations from the risks associated with financial crimes. By conducting thorough PEP screenings and risk assessments, organizations can safeguard their reputation and avoid costly fines.
Who Should Screen for PEPs?
Financial institutions such as banks and credit unions are the primary organizations that should conduct PEP screenings. These institutions are subject to AML and KYC regulations, which make it mandatory to screen for PEPs. However, the list of organizations is not limited to financial institutions. Any business, organization or industry that is required to follow AML and KYC regulations should screen for PEPs.
Ignoring PEP screenings can lead to significant consequences, including being placed on a sanctions list and facing hefty fines from the Office of Foreign Assets Control (OFAC). Therefore, it is essential to include PEP screening in the client onboarding process, as well as conduct periodic screenings of existing clients.
PEP screenings are a vital component of KYC compliance, which aims to ensure that financial institutions and other organizations do not become involved in illegal activities such as money laundering or terrorist financing. By screening for PEPs, organizations can identify high-risk clients and assign them a risk level, which enables them to implement appropriate measures to mitigate the risk.
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What is the PEP Screening Process?
Financial institutions and other organizations must conduct PEP screening as part of their risk management strategy. The PEP screening process involves identifying individuals who meet the criteria for being a PEP and assessing their potential risk. Although there are no universally accepted rules for defining who is and who isn’t a PEP, organizations can take several measures to ensure that they effectively monitor potential candidates. These measures may include:
- Developing a PEP risk assessment framework to identify potential PEPs and assess their level of risk.
- Conducting enhanced due diligence (EDD) on PEPs, which may involve gathering additional information such as the source of their wealth and their business relationships.
- Monitoring PEPs on an ongoing basis to detect any suspicious transactions or activities.
Let’s take a closer look at the process.
1. Identify New Customers
To identify new customers who may be PEPs, organizations need to collect enough data on the customer to screen them against multiple data sources, including PEP lists. This typically occurs during the customer onboarding process but could also take place during the first interaction between a customer and an organization.
This data may include the customer’s full name, date of birth, gender and any politically exposed roles they may have held, including the years of service and appointment dates. It’s also essential to know the country of political exposure and the current status or date the individual left the post.
To effectively screen for PEPs, organizations need to have access to reliable and up-to-date PEP lists and data sources. These sources may include government websites, media outlets and private databases. By collecting and analyzing this information, organizations can identify potential PEPs and assess their level of risk before entering into a business relationship with them.
2. Risk Assessment
When it comes to screening for politically exposed persons, not all individuals carry the same level of risk. After identifying a potential PEP, the next step is to conduct a risk assessment and assign a level of risk to the individual. According to Financial Action Task Force (FATF) guidelines, foreign PEPs are automatically classified as higher risk than domestic PEPs. Other risk factors to consider when assessing the level of risk include the type of business, product and geography.
Organizations must conduct due diligence when assessing the level of risk associated with a PEP. By taking into account various risk factors and using a screening solution, organizations can establish an appropriate level of monitoring for the PEP and maintain a strong compliance program.
Approval is a crucial step in the PEP screening process. Before a PEP can become a customer of the organization, senior management must approve them. This step ensures that all high-risk individuals remain visible throughout the organization. It also provides an opportunity for enhanced diligence checks on any Relatives and Close Associates (RCA) with a PEP relationship.
Senior management plays a key role in ensuring that the organization conducts PEP screening properly and in compliance with regulatory requirements. They are responsible for making the final decision on whether or not to approve a PEP as a customer, based on the risk assessment and other factors. This decision must be well-documented and made by the organization’s policies and procedures.
The approval step in the PEP screening process helps organizations manage their risk exposure and protect themselves against financial crime. By involving senior management in the decision-making process, organizations can ensure that they are taking a risk-based approach to their PEP screening and compliance efforts.
4. Continued Screening
PEP screening doesn’t end after the initial approval and onboarding process. Ongoing monitoring and screening of existing PEP customers are necessary to detect any changes in their risk status. This is where enhanced due diligence and ongoing monitoring come into play.
Enhanced due diligence requires more in-depth research and analysis to fully understand the level of risk posed by the PEP customer. This may include regular reviews of their financial activities, verifying their source of wealth and funds, and keeping an eye on their business dealings.
Ongoing monitoring, on the other hand, involves regularly screening the PEP customer against updated PEP lists and other relevant watchlists to ensure they aren’t on any new lists. This is especially important as a customer’s PEP status can change over time, and they may become more or less risky to the organization.
Continued PEP screening and monitoring is a vital part of an organization’s AML compliance efforts, as it helps protect the organization from financial crimes and reputational damage.
PEP Screening Solutions
To streamline the PEP screening process, many organizations use a screening solution that can automate and accelerate their compliance workflow. This can help to reduce the time and resources required to manually screen PEPs against various data sources.
The solution should seamlessly monitor PEP data throughout the customer lifecycle and protect against reputational risk. For example, Jumio combines ID verification with screening and monitoring for PEPs, sanctions and adverse media for real-time results and reduced false positives. This type of solution can help organizations comply with PEP screening requirements and relevant regulations while also improving the customer onboarding experience.
Optimize PEP Screening With Jumio
Jumio’s AI-powered platform provides a range of identity verification, risk signals and AML screening solutions to help businesses protect their ecosystems. From onboarding to ongoing monitoring, Jumio helps businesses stay compliant with AML and KYC regulations.
Jumio’s technology provides real-time, accurate results, helping businesses reduce fraud and protect their reputation. To find out more about how Jumio can help you implement a streamlined and efficient approach to verifying the identities of your customers while staying compliant with regulatory requirements, contact us today.