What is a Politically Exposed Person (PEP) and Why is PEP Screening Important?

Compliance is a critical point in the world of finance, and one of the parts that cannot be neglected is the identification of politically exposed persons (PEPs). So, precisely who qualifies as a PEP, and why do we need to screen for them? Whether you manage in the financial or security sector, PEP checks and the PEP screening process have now never been so vital in a time when financial systems are under increasing public scrutiny. The process stops financial crimes like money laundering from happening because those institutions do not end up turning into money laundering and terrorist financing channels.

This article talks about politically exposed persons, why PEP checks are important, and how they keep financial integrity and avoid money laundering.

What is a Politically Exposed Person?

Politically exposed persons (PEPs) are individuals who have or held significant public positions that would make them susceptible to corruption, bribery, or some other type of illicit financial engagement. They are mainly high-ranking government officials, heads of state-owned enterprises, and other high-profile political leaders.

Financial institutions consider PEPs to be high-risk clients, due to which PEP screening has become a part of the customer due diligence. The aim is to find out any pitfalls before getting involved in the business relationship and not to use financial services for illegal purposes.

Why is PEP Screening Important?

The purpose of PEP screening is also important for protecting the financial system. PEP screening is helpful in ensuring that organizations are aware of their customers’ political exposure.

• PEPs can abuse their positions of power to pass the money for illicit funds, and screening prior to the course of payment can prevent such actions of PEPs before they spread.
• Worldwide regulations like the FATF recommendation require financial institutions to be screened for PEPs to reduce the risk.
• Transparency in financial operations increases when businesses verify PEP statuses; thus, stakeholders gain trust, and institutions maintain adherence to best industry standards.

Bonus: An informed organization will be aware of the most up to date PEP screening regulations and technologies, thus they are able to better protect the organization from financial crime risk and protect the global financial system.

The PEP Screening Process

The PEP screening process is a significant step for institutions or financial organizations that deal with customers. This process is divided into a number of stages.

Initial Identification

Institutions will begin by gathering basic information about their clients: their names, nationalities, job titles, and who they perhaps are politically connected to. It determines whether the person may be subjected to PEP under international regulations.

PEP-Check

The information is cross-checked with global PEP databases. The lists of politicians, senior government officials, executives of state-owned enterprises, and others are contained in these databases. Tools are used to check whether the individual is listed as a PEP.

Enhanced Due Diligence (EDD)

If a person is identified as a PEP, then the organization will perform the enhancement of due diligence (EDD) to examine the additional risk. This could lead to acquiring more of the person’s political connections and how they have procured their wealth.

Ongoing Monitoring

The PEP monitoring doesn’t stop upon initial screening. It is a continuous process where customer checks are made to see that they are still PEP and that there are no changes in political status.

Example of a PEP Screening Process

PEP Monitoring

Once a PEP has been identified, and if a financial institution is working with the PEP, they are responsible for continuing to monitor PEPs. It means updating the customer records on a regular basis, checking and keeping track of changes in their political status, and compliance with anti-money laundering/AML standards.

Without proper PEP monitoring, an institution has the risk of being dragged into illegal practices, including money laundering or financing of terrorism. Typically, they use automated systems to keep track of transactions for any irregularities, and compliance officers are quick to respond to such risks.

Key Challenges in PEP Screening and Monitoring

Despite the similarity of PEP checks and monitoring to processes used in information processing, organizations often find it difficult to implement these processes effectively. Some of the common issues include

Complexity of Identifying PEPs

It can be difficult to identify if a person is a PEP because different countries have different political roles or positions. Furthermore, the way a Politically Exposed Person can be identified can differ between jurisdictions.

Changes in Political Status

Politicians and people in public positions change roles, leave the government, and sometimes lose their political status. These shifts take care of keeping track of and making certain that individuals are properly categorized. It can be demanding work and require constant monitoring.

Data Privacy Concerns

When individuals are being screened for political exposure, financial institutions deal with highly sensitive personal information. This means the data is stored and used safely and is compliant with privacy laws, thereby preventing a breach.

For more information on how financial institutions can secure themselves from PEP screening compliance, click here.