PEPs screening process: 7 best practices

Fighting financial crimes committed by political figures starts with identifying them. It’s easy to identify a head of state or key members of a legislature, but there are many politicians in the world who don’t claim a significant spotlight. Screening for politically exposed persons (PEPs) is a crucial part of a financial institution’s anti-money laundering (AML) program, but it can be challenging to get PEPs screening right.

This article outlines key components of PEP screening before highlighting seven best practices that financial institutions (FIs) should consider when optimizing their processes.

What is PEP screening?

PEP screening is a due diligence process conducted by FIs and businesses to identify individuals who hold prominent public positions or have affiliations with high-ranking officials. This proactive measure helps mitigate financial crime risks such as corruption, money laundering, and illicit transactions by assessing the potential risk associated with engaging in business with these individuals.

Key components of PEP screening include:

• Identification: This step involves accurately identifying individuals who either currently hold or have held significant public positions. This category includes government officials, politicians, military officers, and their immediate relatives or close associates (RCAs).
• Risk assessment: This involves evaluating the potential risks associated with conducting transactions or establishing business relationships with PEPs. The evaluation is based on their political influence, exposure to corruption, and the likelihood of their involvement in illicit activities.
• Database checks: This step utilizes specialized databases and watchlists to cross-reference the names and affiliations of PEPs. This is to verify their status and assess any associated risks.
• Enhanced due diligence (EDD): This involves conducting in-depth investigations and additional scrutiny on PEPs to understand their source of wealth, financial activities, and any potential red flags that may indicate illicit behavior.
• Documentation: Maintaining comprehensive records of the PEP screening process is essential. This includes documenting the rationale behind decisions and any actions taken to mitigate identified risks.
• Ongoing monitoring: Continuously monitoring PEPs and their activities is necessary to detect any changes in their risk profiles. It also involves promptly responding to emerging threats or compliance issues.

Why is PEP screening important?

PEP screening is pivotal in safeguarding FIs against the risks associated with engaging with political officials. It helps mitigate the potential for corruption by identifying individuals who hold prominent public positions or wield significant political influence. By subjecting these individuals to thorough scrutiny, firms can better assess the integrity and legitimacy of their financial transactions, thereby reducing the likelihood of being unwittingly involved in corrupt practices or bribery schemes.

Furthermore, PEP screening is essential for combating money laundering activities. PEPs may have access to significant financial resources and connections that could be exploited for illicit purposes. By subjecting them to EDD and ongoing monitoring, firms can detect and prevent the laundering of illicit funds through their accounts or business dealings. This protects the FI from reputational damage and contributes to the broader efforts to disrupt criminal networks and uphold the financial system’s integrity.

Additionally, PEP screening is crucial for regulatory compliance and risk management. Many jurisdictions mandate FIs to conduct PEP screening as part of their anti-money laundering and counter-terrorism financing (AML/CTF) efforts. Failing to comply with these regulations can result in severe penalties, including fines and legal sanctions. By implementing robust PEP screening processes, firms demonstrate their commitment to upholding regulatory standards and protecting themselves and their customers from financial crime.

PEP screening challenges

While PEP screening is essential for a firm’s AML program, it comes with several challenges:

• Lack of universal definition for PEPs: Varying criteria across jurisdictions and regulatory bodies create inconsistencies in screening processes.
• Dynamic nature of political affiliations and status: Individuals can quickly ascend to power or lose political standing, necessitating continuous monitoring and updating of PEP databases.
• Complexity of continuously updating PEP databases: Failure to promptly identify and assess newly designated PEPs or updates to existing profiles can leave institutions vulnerable to regulatory non-compliance or exposure to illicit financial activities.
• Cross-border transactions and jurisdictional challenges: Global finance introduces complexities in identifying and screening PEPs across borders, requiring coordination with international counterparts.
• Language barriers and limited access to reliable information: Cultural differences and the scarcity of information in certain regions hinder institutions’ ability to accurately assess risks associated with politically exposed individuals.

7 best practices for an effective PEP screening process

1. Prioritize high-quality data

Prioritizing high-quality data is crucial for establishing an effective PEP screening process because the accuracy and reliability of the data used have a direct impact on the efficiency and efficacy of screening efforts. High-quality data sources include reputable and up-to-date databases, watchlists, and public records that provide comprehensive coverage of PEPs and their associated entities.

Ensuring data integrity starts with selecting reputable data providers known for their thorough verification processes and adherence to regulatory standards. These providers compile information from diverse sources, including government registries, news outlets, and international organizations, to create comprehensive databases of PEPs. Moreover, the data should be regularly updated to reflect changes in political positions, affiliations, and regulatory designations, enabling institutions to maintain accurate and timely screening results.

RegTech Solutions (formerly SQA Consulting) has rated ComplyAdvantage’s PEP data coverage as “Excellent”. 

“Our benchmarking shows ComplyAdvantage’s name-matching efficiency and effectiveness are market-leading, with name-matching rates of close to 100%. This is very good, almost exceptionally good, a little higher than we often see for exact name tests.”

RegTech Solutions

2. Keep the PEP list updated with the latest guidance

FIs should also ensure their PEP lists adhere to the latest guidelines set forth by the regulatory bodies in their jurisdictions. This entails regularly updating and refining screening processes to align with evolving regulatory requirements and industry best practices. FIs should establish robust mechanisms for monitoring changes in PEP classifications, ensuring their lists remain accurate and up-to-date.

Moreover, FIs must stay vigilant to changes in PEP legislation and regulatory expectations to maintain compliance and mitigate potential risks effectively. Sophisticated PEP screening software can be a real game-changer when it comes to staying on top of ever-evolving guidelines and restrictions. Many offer easily customizable features that can be adjusted based on changing organizational risk appetite and requirements – streamlining the process and ensuring protection.

The Challenge of PEPs

Despite being a core component of any risk management program, PEPs remain inconsistently defined and difficult to screen for effectively. Download our guide to take a comprehensive and practical look at the PEP landscape and see how firms should navigate it.

Download your copy

3. Perform additional customer due diligence checks

Given the challenges in screening for PEPs, their relatives, and close associates, additional due diligence checks may be warranted during onboarding and throughout the customer relationship. Monitoring for adverse media may surface information about the financial crime or reputational risk a customer poses that official PEP screening and RCA lists may not.

Therefore, performing regular negative news checks expands the pool of available customer data and adds context to the customer’s risk profile. Deploying adverse media scanning software can be very beneficial when searching for the right adverse media software organizations should look out for the following:

• Ensure the software provides a comprehensive overview of key risks by grouping adverse media articles at an entity level rather than overwhelming analysts with a flood of individual news pieces.
• Look for software that tags adverse media information according to categories aligned with regulatory standards, such as those set by the Financial Action Task Force (FATF), covering offenses like narcotics, cybercrime, fraud, and corruption.
• Many tools can integrate adverse media screening seamlessly into the wider AML function, adjusting screening processes based on changes in customer risk profiles and ratings.
• Ensure the software can enhance operational efficiency by automating monitoring tasks, providing curated insights, and minimizing repetitive, low-value alert remediation tasks to boost employee morale and productivity.  

4. Take a risk-based approach to PEPs

Heads of state or senior officials of prominent organizations have more authority than PEPs who hold middle-level positions, and an FI’s approach must consider varying levels of influence. 

Foreign PEPs are generally considered higher risk than domestic PEPs, given that an FI may not fully understand the foreign PEP’s background and connections and that the PEP in question is opening up channels for money movement abroad, which could indicate money laundering activity. 

However, not all governments or regulators explicitly classify domestic public officials as PEPs – for example, neither the US nor China requires domestic PEP screening. Nevertheless, many other countries do, and screening for them remains the best practice to mitigate an FI’s overall risk.

Given the above, performing EDD measures may be necessary for one class of PEPs but excessive for another. FIs must take a risk-based approach to their know-your-customer (KYC) processes based on the type of PEP, their jurisdiction, and the level of corruption in that jurisdiction, among other factors.

5. Apply that approach throughout the relationship

It’s important to remember that an FI’s risk-based approach mustn’t stop once a client has been onboarded. Deciding the level of risk a PEP poses and whether to do business with them is only the first step. Firms need to have processes in place to ensure they are applying an appropriate level of increased scrutiny to all customer activity.

Conducting an analysis of the risk level they hold and the nature of the business relationship they wish to engage in is a key step. Once complete, FIs must configure rules and set thresholds based on the risk category assigned to them to engage in a proper transaction and behavior monitoring ruleset.

Lastly, firms can establish solid ongoing monitoring processes that apply to an entire client base. Many solutions on the market can streamline this functionality and ensure it doesn’t take up a significant portion of a compliance team’s workload.

6. Reevaluate after changes in PEP status

While “once a PEP, always a PEP” is a good rule of thumb, a politician or high-level appointee may not always pose the same level of risk after leaving their post. 

Political shifts trigger changes in PEP status – while there are career politicians who stay in their positions for years, many political figures are transient, with tenures lasting only a short while. When PEPs move on from their role, it may be possible to declassify them and place them into a lower-risk category with different screening alert thresholds. With this in mind, PEP lists must be diligently maintained to provide actionable guidance.

Nevertheless, this decision depends on many factors, including the jurisdiction in which the FI operates. Some countries, such as Mexico, don’t allow this at all, while others have specified time limits (usually a year to 18 months). The country’s corruption level, the time spent in their post, the extent to which they’re still politically connected, and the degree of influence they still hold are other important factors to consider.

7. Invest in proper training

Investing in an automated solution that relies on high-quality data sources is a good first step toward closing gaps in an FI’s PEP screening strategy. However, world-class tools that do the heavy lifting still require compliance officers to clear alerts and act on the information provided.

Therefore, rooting out corrupt activity depends just as much on your employees. To ensure a uniform and regulatorily-sound risk-based approach is being followed, all personnel must be properly trained (and periodically refreshed) on internal processes, risk categories, and relevant regulations.

Screen PEPs using advanced solutions

With the increasing complexity of financial transactions and the evolving nature of regulatory requirements, traditional PEP screening methods that overly rely on manual processes are no longer sufficient. To address these challenges, savvy FIs are turning to advanced solutions that leverage technology and data analytics to enhance PEP screening processes. These solutions offer a comprehensive approach, combining real-time screening, entity resolution, customizable search profiles, and continuous monitoring. By integrating these advanced solutions into their compliance frameworks, firms can effectively identify and mitigate the risks associated with PEPs, thereby safeguarding the financial system’s integrity and ensuring regulatory compliance.

An example of a successful PEP screening software application comes from ComplyAdvantage’s partnership with UK-based OakNorth Bank. Thomas Szymanski, Senior Operations Manager (Deposits), said of the partnership: 

“We’re very happy we were able to build an API integration, allowing applicants to go through PEPs/Sanctions screening via ComplyAdvantage during onboarding. Since we launched, all new applicants have only a 2.3 percent hit rate, and the overall portfolio has a 4.1 percent hit rate. This ultimately means the team can spend less time reviewing false positives and more time on value-add activities.”

Thomas Szymanski, Senior Operations Manager (Deposits) at OakNorth Bank