PEP screening checks are a key due diligence process designed to help with AML (anti-money laundering).
But how does it work? Who audits the results? And what should you do if one of your customers is indeed a politically exposed person? All the answers are in this in-depth guide.
What Is PEP Screening?
A PEP (Politically Exposed Person) screening, often referred to as PEP checks, is a process used to determine whether a customer, user, or business partner appears on any official PEP lists. These lists are maintained and regularly updated by government agencies, public registries, and third-party databases. The purpose of PEP checks is to identify individuals in prominent public roles or those closely connected to them, as they are considered at higher risk for activities such as corruption, bribery, and money laundering.
The screening process typically involves comparing customer data against PEP databases using advanced algorithms and data-matching techniques to account for variations like name spellings or aliases. Once a potential PEP is flagged, enhanced due diligence (EDD) may be conducted to gather more information about their source of wealth, business relationships, and transaction history. This thorough evaluation helps compliance teams assess risk levels and ensures adherence to legal obligations aimed at reducing money laundering and terrorist financing.
Learn more about the term PEPs here.
The Importance of PEP Checks for Businesses
PEP checks, an integral part of AML (Anti-Money Laundering) compliance, were once primarily required by banks and financial institutions. Today, however, a growing number of industries are subject to these regulations, depending on the jurisdiction. Businesses that may need to run PEP checks include:
- Real estate firms involved in buying and selling property.
- High-value item dealers, such as those selling antiques or art collections.
- Financial services companies, including hedge funds and accountancy firms.
- Gambling and online gaming companies, which handle significant financial transactions.
Since AML compliance laws differ between countries, it is crucial for businesses to consult their local regulatory bodies to confirm whether they are required to perform PEP checks.
Consequences of Failing to Perform PEP Checks
PEP checks are not just recommended—they are a legal obligation in many jurisdictions. Failing to conduct proper screenings can lead to severe repercussions, such as:
- Substantial fines: Regulatory bodies do not hesitate to impose significant penalties. For instance, in October 2022, UK financial institution Gatehouse was fined $1.8/£1.5 million by the Financial Conduct Authority for inadequate PEP checks and sanctions screenings.
- Reputational damage: Businesses that fail to comply with AML requirements risk losing the trust of shareholders and customers. Legal fines can tarnish a company’s image and diminish confidence in its brand.
- Decline in stock value: According to Themis, a financial crime intelligence provider, AML scandals can lead to a bank’s stock dropping by 5.2% on the day a fine is announced, with losses potentially extending to 20.7% over the following six months.
While larger financial institutions may absorb AML fines as part of their operational costs, smaller businesses often face more significant consequences. Legal battles and heavy fines can slow operations, reduce competitiveness, and hinder growth, particularly when trying to expand.
In summary, running PEP checks is not only a regulatory requirement but also a vital step in protecting businesses from financial penalties, reputational harm, and operational setbacks.
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Who Audits the PEP Screening?
PEP checks are a legal requirement, but the regulatory bodies in charge of these requirements vary from one country to the next. While this might make things confusing for what legally constitutes a PEP, most countries base their definitions on the one issued by the US’s 2013 Financial Action Task Force on Money Laundering (FATF).
However, the actual PEP audits will be performed by local authorities who are sometimes also in charge of AML verification screening. For instance:
- Australia: This will fall under Australia’s Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF).
- Singapore: The Monetary Authority of Singapore (MAS) defines PEPs and includes relatives or close associates (RCAs).
- South Africa: The Financial Intelligence Centre will audit what it calls Politically Influential Persons (PIP). The term serves the same function as PEPs.
- United Kingdom: The Financial Conduct Authority (FCA) and Joint Money Laundering Steering Group both publish guidance on PEPs along with other KYC matters.
Note that PEP definitions can also be updated and checked by international organizations, such as the EU’s 6th AML directive.
3 Ways to Perform PEP Screening
While regulators must ensure you perform your customer due diligence (CDD) and enhanced due diligence (EDD) checks, there are no strict rules on how to do PEP screening.
Here are three methods that may generally suit your organization, depending on your scale and risk appetite.
Manual PEP Screening
The easiest (and most resource-intensive) way to run a PEP check is simply to manually look at the right lists. Businesses can do this by accessing the information on PEPs available through official government websites, public registers, or commercial databases.
OSINT sources and OSINT tools can also accelerate the process by aggregating information about a person based on their name.
Finally, you could also monitor news reports from reputable sources in order to keep an eye on the latest political or judiciary appointments.
Manual PEP Checks With an AML Solution
The advantage is that it speeds up the searches by automatically aggregating results from a number of PEP lists around the world.
The results are sometimes processed via algorithms to give you the best estimate as to whether you are indeed dealing with the right person or not. Note that this can be a challenge as names aren’t exactly unique identifiers.
You still need to confirm the information manually to ensure you are indeed checking the identity of the right person.
Learn more about AML software tools here
Fully Automated PEP Checks
The most ambitious businesses subjected to AML rules will sometimes deploy fully automated checks.
This involves integrating sophisticated AML software either on-premise or via API. Automated AML verification also works by aggregating data from a number of PEP lists around the world and running it through algorithms.
The advantage of fully automated PEP checks is that you can verify the identities of large numbers of new customers in nearly real-time. The challenge is that, once again, people with similar names may be processed as false positives or negatives.
What Happens After a Positive PEP Check?
If a PEP check returns a positive result, the company should apply EDD measures to minimize the risk of the person being able to use the organization’s infrastructure and workflows to launder money acquired illegally – usually from bribes.
Once someone is established as a PEP, the FATF Recommendations outline a series of steps to take.
These include obtaining approval from the financial institution’s senior management – particularly individuals who have clearance to approve AML and CFT policies. Also, the source of the funds being deposited needs to be established, and the business relationship should be monitored.
| non-PEP customers | PEP customers | |
| sign-up and onboarding | Institution conducts standard KYC | Institution conducts KYC + ongoing EDD |
| internal approval | No additional approval needed | Approval from upper management needed |
| source of funds info | Might be needed for higher transactions, which can lead to Suspicious Activity Reports (SAR) | Always needed |
| activity monitoring | Minimal for the sector | Extended |
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How Can PEP Screening Help Us Fight Fraud?
Incorporating the identification of PEPs, both when accepting new customers and clients and as part of ongoing anti-money laundering transaction monitoring measures, is a key way for financial institutions to fight fraud and avoid hefty AML fines while helping keep the overall economy healthy.
According to PwC, 5% of global GDP is lost to corruption each year. Enhanced due diligence in relation to PEPs can identify instances of corruption and bribery, money laundering and more, fighting against this global problem.
How SEON Does PEP Screening
Fraud fighting and customer intelligence tool SEON allows you to instantly identify suspicious profiles, behavior, or even software configuration. This profiling power extends to AML and PEP checks, allowing you to improve your compliance, avoid hefty fines, and know exactly who you are doing business with at all times.
Paired with powerful device fingerprinting, digital footprint analysis, flexible API modules, and innovative machine learning of two types, SEON is designed to provide you with a complete toolset to protect and grow your business while ensuring it is compliant.
FAQ
To check if someone is a PEP, you can manually enter their name on politically exposed persons lists found on official websites. You can also look at open-source or commercial databases or even monitor media sources. However, most online businesses rely on AML software to automatically aggregate PEP list data for them.
You are allowed to run a PEP check manually by searching for information about a person on official government PEP lists. You can also rely on AML software to automatically scan for that person’s name on dozens of aggregated databases.
PEP checks are crucial to ensure compliance with AML (anti-money laundering) and CTF (counter-terrorism financing). Failing to perform these checks when dealing with politically exposed persons could incur fines, legal battles, and reputational damage for a business.
Sources
- Financial Conduct Authority: FCA fines Gatehouse Bank £1.5m for poor anti-money laundering checks
- Global Trade Review: Share price and reputational damage: banks count cost of AML failings
- PWC: Five forces that will reshape the global landscape of anti-bribery and anti-corruption
