Politically exposed persons (PEPs) are considered high-risk entities, and their transactions are expected to be linked with financial crimes. As PEPs pose risks to financial institutions and other regulated businesses.
Thus, financial organizations must perform PEP checks to screen PEPs against the PEP list to identify risks associated with them.
If a PEP has committed corruption or is involved in another illicit activity, such as money laundering or terrorist financing, its status is updated in the lists. The risk score is also updated, and businesses take informed decisions after screening PEPs.
Businesses, fintechs, and financial organizations must ensure that their clients or partners are not engaged in bribery or other illegal activities. Dont start business deals with them, or terminate the business relationship if you already deal with them.
PEP screening ensures AML compliance as it is one of the processes that is conducted to comply with AML laws and regulations.
PEP screening tools and software streamline the process by automating it and reducing the false positives.
What is PEP screening and what is its significance?
Influential individuals who hold or have held public positions like military officials, executives of businesses, politicians, or heads of state are possibly involved in illegal activities.
Due to their power, position, and impact, they have more opportunities to exploit financial platforms for illicit activities like corruption, money laundering, bribery, or terrorist financing.
These individuals are categorized as high-risk and must go through the EDD measures.
Financial organisations and businesses are mandated to perform PEP list screening to monitor the PEPs during business relationships and while onboarding them to detect and flag potential associated risks.
It ensures AML compliance with laws and regulations to combat financial crimes.
PEPs have close relatives, immediate family members, and associates; they are also screened to detect risks.
Detail of PEP Screening Process
The PEP screening process usually covers the following steps.
- When a client is onboarded, its data is screened against local and international PEP lists to detect “potential matches”
- When your search name appears on the PEP list, PEPs are categorized according to their risk level; for example, domestic PEPs and foreign PEPs will pose different risks.
- Enhanced due diligence (EDD) must be conducted for PEPs by financial institutions and regulated businesses to know their source of funds and other details before initiating or continuing the business relationship.
- Ongoing monitoring will allow you to flag PEP status changes in real time.
PEP Screening Requirements of Regulatory Bodies
FATF’s guidelines
As per the AML/CFT policies by FATF, financial organizations and businesses must do risk management after the detection of risks related to PEPs and their Relatives and close associates (RCAs)
According to FATF’s recommendation, A risk-based approach should be used for local PEPs, and EDD must apply to foreign PEPs.
Their family members and close associates must be screened against PEP Lists.
EU AML Directives (AMLD) guidelines
According to the “4th, 5th, and 6th AML Directives” of the EU, PEP screening must be done using PEP screening tools. According to guidelines, local and foreign PEPs must be checked against local and international databases.
Firms must update their PEP lists with risk and status changes.
All transactions of high-risk clients related to PEPs should be transparent, and beneficial ownership must be known.
Guidelines of FinCEN (U.S. Financial Crimes Enforcement Network)
According to FinCEN’s regulations, follow a risk-based approach for foreign PEPs.
When a suspicious activity is detected in transaction monitoring, it must perform EDD for high-risk clients and transactions.
When dealing with private banks engaged with PEPs, they must monitor them, especially when PEPs have assets over “$1 million” in those banks.
Penalties for noncompliance
Any financial organization and regulated business that fails to conduct PEP list screening and has ineffective PEP screening tools must face reputational damage and penalties..
Financial institutions must have effective PEP screening software that automatically detects PEP risk changes to avoid legal penalties.
Selection of the right PEP Screening Tools
Choosing the right PEP screening software according to your business requirements is necessary. Efficient PEP screening tools provide you with accuracy and give results quickly.
They have less chance of false positives than manual PEP checks, where there are risks of mistakes, and it is tiring to handle large amounts of data.
What should be incorporated in your PEP screening tools is explained below :
- It has access to all local and foreign PEP lists, and according to countries, PEP lists are regularly reviewed and updated
- PEP screening software should also include sanction and watchlist screening to give detailed information.
- PEP screening tools should have an Adverse Media screening feature as well to know information about PEPs
- Alerts should be generated for new matches and updated instantly to ensure continuous monitoring
- It should have a custom risk scoring feature that aligns with your business AML requirements
- It should provide transparent, quick, exportable, and clear reports for audits and investigations
Click here to know the challenges of PEP list screening and its solutions.