Screening for a politically exposed person (PEP) is a vital component of the know your customer (KYC) process due to an increase in potential risks. Organizations should and do conduct business with PEPs - in fact, FATF is very clear that it does not advise institutions deny services to PEPs based solely on their PEP status.
Instead, the goal is to identify PEPs to ensure appropriate customer due diligence and risk mitigation measures are conducted, therefore lessening any associated risk, and allowing organizations to make informed decisions about whom they work with.
Although globally there are different definitions for PEPs, most organizations tend to refer to guidance from the Financial Action Task Force (FATF), which classes a PEP as an “individual who is or has been entrusted with a prominent public function.”
Individuals categorized as a PEP tend to hold prominent positions of power - in government, public institutions, or international organizations. Furthermore, as stated in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR), those who are family members or close associates of PEPs can also be considered a PEP by association.
Due to the nature of their positions of power, influence, and access to funds PEPs can pose a higher risk of being targeted for bribery, corruption, and money laundering. There are, for example, numerous instances of PEPs who have been accused of accepting large bribes. In March 2023, the FBI connected politicians in Ohio with a $60 million bribery scheme.
To mitigate these risks, organizations conduct PEP screening. This process concentrates on individuals who have political influence, access to public funds, or the ability to exert significant influence on government/political decision-making and therefore, could pose a financial or reputational risk.
The benefits of PEP screening include:
It’s worth noting that, at present, there are different levels of screening recommended for domestic vs foreign PEPs, with some institutions calling for enhanced due diligence to be actioned on all PEPs, regardless of their location.
PEPs are screened as part of a risk-based approach to due diligence. It enables organizations to make decisions about onboarding and how to perform ongoing risk monitoring, but it can be complex. The ever-changing status of politicians, senior judges, and even sporting officials’ across the globe results in lists of PEPs that change on a perpetual basis.
Organizations benefit from choosing technology that integrates with PEP databases that are updated on a near real-time basis, this allows for constant risk screening. A variety of data can be used to build an entire risk profile related to an individual. PEP screening is one component of KYC and is often combined with adverse media screening and sanctions and watchlist data. This enables a risk-based approach to compliance.
PEP screening is an important part of KYC to ensure compliance with anti-financial crime regulations and as part of building a full picture of risk, organizations will often also conduct adverse media screening.
Adverse media refers to negative news or information about an individual or entity, which can provide an additional indicator of risk, . For example, adverse media may highlight that a PEP has been implicated in corrupt practices or convicted of fraud in the past.
By monitoring adverse media and integrating alerts into KYC processes, organizations can gain insights into any publicized involvement a PEP may have had with illicit activities. Adverse media screening adds to the picture of risk and can fill information gaps that help an organization make informed decisions about which individuals to onboard and whom to continue to do business with.
Both PEPs and adverse media screening can generate “false positives”, which can be frustrating, time-consuming, and resource intensive to investigate manually. False positives occur when legitimate individuals or entities are mistakenly flagged as potential risks due to factors like their name and its similarity to another individual’s.
To combat false positives, and create efficiency in PEP screening, organizations can leverage advanced technologies, including AI. By harnessing AI and machine learning in PEP screening, it’s possible to automate processes, create more accurate alerts, and deliver fuller risk profiles. And by reducing false positives, institutions can focus highly trained analysts on enhanced due diligence and investigating PEP-associated risks more precisely.
Moody’s Analytics KYC is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence.
Our intelligent screening solution was designed to help compliance professionals increase automation and efficiency in PEP screening and risk – powered by our Grid database.
Customers build their own unique know your customer (KYC) ecosystems. They use our innovative AI, flexible workflow orchestration, access to real-time data, analytical insights, and integrations with other global data providers to support a risk-based approach to risk management and compliance.
Get in touch for more information on how we can support your business with PEP screening as part of a holistic KYC compliance program.