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A Brief Guide to PEP and PEP Screening

A Brief Guide to PEP and PEP Screening

PEP screening is the verification process for politically exposed persons (PEPs). It is a critical part of the anti-money laundering compliance process. Identifying PEP also forms an essential part of the AML/ CFT process. Institutions need to have a robust AML compliance framework, follow customer due diligence, identify criminal activities, and combat money laundering and terrorist financing.

PEP screening is a complex process that involves dealing with people involved in political corruption and financial crimes. A vigilant eye needs to be kept on banks, financial institutions, and other money services businesses as they are often misused for money laundering purposes. But there are hefty fines imposed for non-compliance with AML rules and regulations.

But with an increase in fines, little assistance is provided to financial institutions. They need to adopt a high level of due diligence to screen high-risk customers.

Who is a PEP?

PEP is an acronym for “politically exposed person.” PEPs are defined as persons that hold a prominent public position or function. So, due to their role or power, they might be exposed to corruption or other money laundering offences. So, they are considered high risk to financial institutions and other regulated entities.

Types of PEPs:

Domestic PEPS refers to individuals who hold a prominent public position or function in the home country. They include people such as Head of State or government and senior officers, financial regulators, and foreign PEPs refer to individuals holding such prominent public positions or functions within a foreign country. International PEPs are people having an important public role or function in an international organisation, such as board members and people holding key senior management positions.

It is noteworthy that family members of PEPs are also a risk, so they need to be monitored regularly. This group of people has been defined as Relatives and Close Associates (RCAs).
  • Family members: individuals related to a PEP can also be classified as a PEP.
  • Close associates: an individual who has close relations with a PEP personally and professionally.

Financial Action Task Force (FATF) Recommendations

The FATF is an inter-governmental organisation focusing on combating money laundering and terrorist financing. The current FATF Recommendations (2012) ensure that financial institutions follow the proper procedure for identifying if their customers are PEPs or related to PEPs or can be classified as UBOs. Such screening processes give a clear understanding of the customer risk.

The organisations and Designated Non-Financial Businesses and Professions (DNFBPs) can take the appropriate action and prevent any misuse of the financial system and their organisation.

PEP Challenges 

The identification of PEP is considered complex as they have to face hurdles while conducting the AML compliance processes such as customer due diligence (CDD) and the Enhanced Due Diligence process.

It is crucial to identify the PEP to know the potential risk of associating with the person. People holding prominent positions are identified quickly, but people who do not have prominent political positions are likely to go unidentified. So are their family members and close associates. Despite the rules of identifying PEPs, the process is challenging and needs expert advice to correctly identify, screen, and keep a tab on the PEP activities.

Financial Institutions have to work with a risk-based approach to identify PEPs and monitor them. They can depend on various resources and expertise of AML consultants who will provide valuable services that will help follow the AML rules and regulations diligently. Institutions can become more efficient in AML compliance with cost-efficient services offered by professional AML consultants.

It is important to note that identifying PEPs does not mean that every PEP is a criminal and involved in money laundering or financing terrorism. All is required is a risk-based approach to ensure regulatory compliance. It is a process that needs to be followed to complete the AML process and deter criminals from misusing the financial system and laundering money.

Conclusion

Financial institutions and other regulated entities must screen customers for PEP. PEP screening will help identify the actual customer risk and help to follow the AML rules and regulations. There are various services on which financial institutions, Designated Non-Financial Businesses and Professions (DNFBPs) and other regulated entities can depend on such as AML/ CFT Policy, Controls, Procedures Documentation, Annual AML/ CFT Risk Assessment Report, AML/ CFT health check, AML Training, and AML software selection. With professional assistance, get AML compliance right and avoid penalties imposed in cases of non-compliance.

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