Most compliance professionals are well aware that regulators can levy penalties not only when compliance programs fail, but also when compliance measures are insufficient. As a result, obligated industries must implement a flawless risk-based approach to the

Anti-Money Laundering (AML) program. For this reason, one of the most significant parts of an effective compliance program – PEP – should never be overlooked.

In this article, you will find out what a politically exposed person (PEP) screening is and how it can prevent financial crimes such as money laundering.

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    What is PEP Screening?

    A politically exposed person (PEP) is the individual who holds or has held a prominent public-sector role. Government officials, heads of state, high-ranking judges or military officers, and governors are common examples.

    All high-ranking officials are considered a high risk due to their possible involvement in bribery, corruption, money laundering or other financial crimes. In order to prevent illicit activities, financial institutions and other industries must implement PEP list screening. This process determines whether an individual is a PEP by screening official PEP lists.

    How Does PEP Screening Work?

    During the process of PEP screening, a Know Your Customer (KYC) specialist or a screening service compares the client’s personal information against the PEP list database. This screening is an inherent part of a due diligence procedure that is performed during customer onboarding process.

    Since exposure to bribery and corruption is not limited to just PEPs, their family members and close associates can also be at risk if they attempt to take advantage of their association with the PEP in question. Other individuals who may fall under this designation include former PEPs and people who have been entrusted with handling money on behalf of a PEP – for example, an accountant or lawyer working for them. 

    As a result, AML compliance laws require both PEPs and people associated with them to be treated as higher risk. It means that when a KYC specialist finds a client on PEP lists, they must begin an enhanced due diligence procedure.

    Why is PEP Screening Important?

    Just like sanctions screening, PEP screening is an essential component of a risk-based AML compliance program, since it helps to mitigate potential customer risks. Individuals in prominent public positions are entrusted with important functions in a government or another organization that could be abused for criminal purposes, such as fraud, bribery, or money laundering. 

    A PEP can also make decisions about large sums of money or critical infrastructure projects in their country. Effective screening can help financial institutions and law enforcement to prevent PEPs from abusing their positions of power.

    It’s worth noting that failure to establish a client’s PEP status can result in hefty regulatory penalties. Businesses must monitor their customers and partners at the start of business relationships and implement ongoing monitoring to avoid repercussions.

    Why Should You Implement an Automated PEP Screening Service?

    Unfortunately, there’s a lack of a single PEP list that consolidates all politically exposed persons worldwide. This makes the due diligence process used to prevent financial crimes a complex and long procedure.

    As a result, global companies spend a lot of resources checking all relevant lists when onboarding new clients and partners. The significant expenses related to labor and time spent on these checks make manual PEP screening inefficient.

    With the market of effective KYC compliance software expanding, many companies start to abandon manual processes and instead rely on KYC tools for PEP automatization. Minimizing the need for human input boosts the speed of the screening process, lowers its cost, and allows companies to focus on their primary functions.

    Conclusion

    Screening for politically exposed persons (PEPs) is the process of determining whether an individual is on any official PEP lists. Individuals who hold prominent public-sector roles, such as government officials or heads of state, are typically considered politically exposed. Because regulators established these individuals to be an automatic compliance risk, financial institutions must verify their clients’ PEP status during the onboarding process. Since the status can change anytime, regulators additionally require ongoing monitoring of PEP status.

    Businesses spend a lot of money and time on manual PEP screening, but those who want to save time and money choose automated KYC software to do the job for them.