In today’s globalized world, the movement of money and the fight against corruption have become significant concerns for governments, financial institutions, and businesses alike. One term that frequently surfaces in these discussions is PEP, which stands for Politically Exposed Person. But what exactly does this term mean, and why is it essential to understand?
PPEP screening has become one of the branches of KYC guidelines, requiring institutions to perform enhanced Customer Due Diligence (CDD) procedures on people who are PEPs.
The significance of identifying PEPs lies in their potential risks regarding money laundering, bribery, and corruption. Due to their influential positions, PEPs may have access to public funds and be susceptible to engaging in illicit financial activities. Their involvement in corruption schemes can result in the misappropriation of public funds, undermining economic stability and hindering the development of democratic institutions.
To thoroughly screen a person, institutions have to check the relevant information in two ways:
- Sanctions – to ensure the individual is not allowed to make transactions if she or he is on global law enforcement or a sanction list. Here are the main sanctions databases: United Kingdom – HM Treasury Consolidated, United Nations – Consolidated sanctions list, European Union – Consolidated list of sanctions, United States – The Office of Foreign Assets Control (“OFAC”, “OFAC Non-SDN”, “OFAC SDN”), International Organization of Securities Commissions (IOSCO)
- PEP screening – to assess whether the person is a PEP and to conduct CDD processes correctly.
It’s important to note that the watch lists are continuously updated. Therefore, a thorough screening must be done in real-time and based on the latest databases to comply with KYC and AML regulations.
What is a PEP (Politically Exposed Person)?
As with every other term, Politically Exposed Person (PEP) has many definitions, varying from country to country. It’s best to use unifying terminology to avoid any potential confusion.
A Politically Exposed Person (PEP) refers to a person who holds a prominent public position or has a significant role in a government, either currently or within the last few years.
These positions could include heads of state, high-ranking government officials, senior politicians, military officers, and leaders of state-owned enterprises.
An independent inter-governmental body responsible for the development of policies to fight money laundering and terrorist financing – The Financial Action Task Force (FATF) – defines the term in the FATF recommendation 12 this way:
“A politically exposed person (PEP) is defined by the Financial Action Task Force (FATF) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offenses and related predicate offenses, including corruption and bribery, as well as conducting activity related to terrorist financing (TF).”
It’s not enough for PEPs to be monitored more carefully. Family members, siblings, and partners of PEPs should also be involved in the PEP screening processes.
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What are the Main Variations of Politically Exposed Persons?
Practical and broad as it is, the definition of PEP requires some clarity to distinguish various entities from one another. For this reason, FATF defines different categories that the term PEP encompasses:
- Foreign PEPs are the individuals entrusted with prominent public functions by a foreign country
- Domestic PEPs are the individuals entrusted with prominent public functions domestically
- International organization PEPs are persons entrusted with prominent functions by international organizations, refer to senior management members, or are entrusted with equivalent functions
- Family members are individuals related to a PEP – either directly or through civil forms of partnership
- Close associates are individuals closely connected to a PEP, either socially or professionally
It’s important to note that both individuals who are currently entrusted with prominent public functions and those no longer holding such a position should be marked when PEP screening is performing. The same can be said about people related to or associated with them.
Depending on which of the categories an individual falls under, different measures should be taken in response. For example, the enchanted risk mitigation measures should be applied whenever dealing with a foreign PEP. At the same time, these measures should only be used when establishing a higher-risk business relationship in the case of domestic or international organization PEPs.
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Why is PEP Screening Important for Businesses?
Financial institutions and businesses must exercise enhanced due diligence (EDD) when dealing with PEPs. These measures are crucial to prevent money laundering, terrorist financing, and other illicit activities. Regulators, such as anti-money laundering authorities and central banks, often require banks, insurance companies, and other financial entities to have robust systems in place to detect and manage the risks associated with PEPs.
The reason why PEP screening should be a priority for various institutions is to prevent fraud, money laundering, and terrorist financing. Those are crucial issues yet to be resolved globally; more often than not, financial institutions hold the key to successfully fighting them. It’s a responsibility not to be taken lightly.
It is important to note that being a PEP does not imply involvement in illegal activities. The designation indicates potential risk, necessitating a higher level of scrutiny to protect the integrity of financial systems and prevent abuse.
The goal is to strike a balance between preventing financial crimes and avoiding undue discrimination against individuals based solely on their political connections.
Here are other reasons explaining why PEP screening is important for businesses:
PEP Screening Minimizes Corruption
Understanding the concept of Politically Exposed Persons is crucial in the fight against financial crimes and corruption. By implementing enhanced due diligence measures, financial institutions can contribute to maintaining transparency, integrity, and stability in the global financial system.
We all want to live in an orderly world, and there’s nothing like corrupt politicians, agencies, or government entities to get our blood boiling. The company’s reputation may be irreversibly damaged if it’s found to be responsible for doing business with unreliable entities – and no amount of promises or apologies will help if the public loses its’ trust in it.
PEP Screening Helps Companies Stay Compliant
PEP screening is currently mandatory in most countries worldwide. The regulations differ from country to country – some only require identifying Foreign PEPs, while the strictest obligations require screening Domestic, Foreign, and International PEPs. Only a handful of countries impose no obligations on their residents to identify PEPs – and they likely will in the future.
The companies’ reputations are not the only things on the line – failure to adhere to the regulations puts them at risk of being fined. Between 2008 and 2018, $27 billion was levied in fines against financial institutions for Anti-Money Laundering (AML) and Know Your Customer (KYC) sanctions violations globally.
Data Required for Effective PEP Screening Process
That’s why only through robust systems and adherence to international standards companies mitigate the risks associated with PEPs and create a more secure environment for legitimate financial activities.
For PEP screening to be effective, financial institutions must collect and verify this data about their potential clients:
- Full name
- Date of birth
- Gender
- Country in which the person held a politically exposed position
- Roles, appointment dates, and duration of said position
- The date a person left his post (if he is no longer a PEP)
Along with PEPs, financial institutions often conduct checks against adverse media sources and sanctions lists to identify any negative associations or legal restrictions linked to the PEP. This includes searching news articles, reports, and official sanction lists to assess whether the PEP has been involved in any illicit activity.
What are the Challenges of PEP Screening?
Now that the importance of complying with governmental regulations is established let’s move on to the challenges.
Screening customers against various sanctions and regulatory lists is a costly and time-consuming task if done manually. Even then, there’s a risk of false positives, tampering with the experience of customers unnecessarily flagged, and missing the real positives, making companies susceptible to fines due to negligence.
Other challenges that companies face when screening PEPs involve:
Evolving PEP Profiles
PEPs can change their political positions, affiliations, or roles over time. New PEPs can emerge, while others may no longer hold positions that warrant their designation as PEPs. Keeping track of these changes and updates requires continuous monitoring and timely data updates to maintain the effectiveness of the screening process.
Cross-Border Complexity
Financial institutions operating globally encounter the challenge of dealing with PEPs from various countries with different regulatory frameworks. Understanding and complying with the diverse regulatory requirements for PEP screening in different jurisdictions can be complex and resource-intensive.
Data Privacy and Compliance
PEP screening involves handling sensitive personal information, which requires strict adherence to data protection and privacy regulations. Financial institutions must ensure that the collection, storage, and processing of personal data comply with applicable laws while maintaining the necessary security measures to protect against data breaches or unauthorized access.
How iDenfy Helps Solve the Challenges Related to PEP Screening
Addressing these challenges requires a combination of technological solutions, expertise in compliance and risk management, and a commitment to ongoing monitoring and improvement.
Financial institutions must continually enhance their PEP screening capabilities to effectively mitigate the risks associated with Politically Exposed Persons.
An automated identity verification system powered by AI is the solution iDenfy can offer its clients. Among other features, iDenfy allows its’ partners to meet the KYC and AML regulations and directives – including PEP screening. It supports more than 2000 documents from 200+ countries and extracts relevant identity information in just 0.02 seconds.
For Enhanced Due Diligence, iDenfy offers AML databases monitoring, which means that in the event of a person’s PEP status change during the year.
iDenfy will flag this and show which actual PEP, sanctions, or other law enforcement database was triggered. Get started today!
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