PEP Risk Assessment

They have political influence, administrative access, and greater opportunity to commit financial crimes, such as bribery or corruption, including money laundering. 

Additionally, there are other factors, like:

• PEPs are more likely to be targeted by criminals (for example, to be exploited or threatened for financial gain)
• They have a bigger influence (for example, they are often publicly known, which makes their crimes more damaging) 

Keep in mind that a PEP isn’t a criminal. The same goes for PEP-owned businesses. However, extra measures and screening processes are required to manage risks accordingly and in line with regulatory compliance requirements.

Yes. In Know Your Business (KYB) compliance, PEPs are also screened, along with beneficial owners and all those who hold prominent positions and pose a higher risk of financial crime. Risk assessments are required for both individual customers and corporate clients (companies) before entering a business relationship in order to determine if they are low-risk or high-risk, and as a result, worth partnering with. For example, you can’t do business with sanctioned entities and individuals. 

A PEP risk assessment is a part of the Anti-Money Laundering (AML) compliance framework, which means it follows all sorts of smaller regulations (including KYC/KYB and due diligence requirements) led by international, regional, and national regulations, all designed to prevent money laundering and terrorist financing. A PEP risk assessment is a more distinguished term for the AML risk assessment,  which particularly focuses on PEPs and requires regulated industries to identify, assess, and manage risks linked to politically exposed persons.

The main reason is for compliance, but beyond compliance, risk assessments help with internal risk management strategies. Even for non-regulated businesses, a PEP risk assessment helps avoid the risk of partnering with a high-risk individual, or worse, a person involved in crime. For this reason, risks like money laundering can go unnoticed for a long time, especially without proper due diligence measures. 

The Financial Action Task Force (FATF) recommends following a risk-based approach to AML compliance, which also includes thoroughly assessing PEPs, for example, by type, country, role, and influence. For example, Recommendation 10 requires Customer Due Diligence (CDD) on PEPs to prevent illicit funds from entering the financial system. 

That means all high-risk individuals, including PEPs, require senior approval and extra checks (as per EDD), such as source of funds/wealth verification. Additionally, the FATF recommends that PEPs should be monitored throughout the whole business relationship. 

In practice, a PEP risk assessment consists of multiple steps. 

That means, to comply with global requirements and properly assess risks linked to the potential client, you must:

• Conduct KYC verification (via ID document checks, biometric checks, etc., including collecting business information and beneficial ownership information for KYB onboarding) 
• Cross-check information (this helps determine the actual PEP status by comparing the onboarding data with other databases to identify potential PEP matches)
• Assess risks (there are AI-powered tools for that, such as iDenfy’s Risk Assessment solution, which determines the customer’s risk level based on their background and collected details)
• Conduct ongoing monitoring (assess risks periodically, for example, by screening PEPs lists, watchlists, etc., depending on the PEP’s risk level)

If suspicious activity is found, regulated entities must file a Suspicious Activity Report (SAR) within the required reporting period.