It is a continuous challenge to continue adhering to anti-money laundering (AML) regulations and international laws. Persons who are organized Politically Exposed Persons (PEPs) are holding eminent public roles, meaning they are candidates for money laundering and corruption. If financial institutions do business with PEPs, they will be at high risk and will need to take action to monitor their conduct to avoid tangling with their problems.
In this article, we’ll explore PEP screening and its importance.
What is PEP screening?
PEP screening is also known as identifying and reviewing politically exposed persons. Government officials, higher military officers, and persons closely related to such public figures might be considered these individuals. PEP’s play prominent roles, and so are more likely to be the subject of corruption, bribery, or other illicit financial activities.
The PEP list is used by financial institutions in order to screen and assess a client for being PEP to avoid unknowingly conducting an illegal transaction or could be penalized for non-compliance with AML regulation.
How Does PEP Screening Work?
PEP screening is a process whereby a customer’s or potential client’s information is compared with the PEP data sources. Such data sources are global databases, government lists and commercial PEP lists. One of the most documented toxic lists is the UN’s Sanctions List, which is also included in the PEP list (World Bank).
It simplifies the process for many institutions to integrate PEP screening into Know Your Customer (KYC) procedures. This helps institutions confirm customers’ identities and assess the risk that they might pose. If someone is flagged as a PEP or is linked to one, these checks are carried out. This could include a more in-depth look into the person’s background, sources of wealth, and the nature of their political influence.
Risks of Failing to Conduct PEP List Screening
The negative outcomes of not performing adequate PEP list screening can be devastating. With countries getting firmer in enforcing AML regulations, non-compliance can lead to fines that are in the millions of dollars.
The U.S. Department of the Treasury fined a global bank over $500 million for not assigning enough importance to risk in dealing with a PEP that had been identified. Such institutions could suffer from very bad reputations, which is commonly called reputational damage, and that results in loss of trust from customers.
Best Practices for Conducting PEP Screening
To comply with PEP AML regulations and limit risks, PEP checks should be done based on best practices. Some strategies for efficient and effective screening are listed here.
- Utilizing Comprehensive Data Sources: banks should use various sources that provide updated information on PEPs for subscriptions. This is to ensure that whatever information they are using is correct and reliable.
- Update Screening Processes Regularly: With the changing political landscape, PEP screening processes should also be updated regularly. Although not always, the status of a person can change being a PEP from elections or recruitment for the government.
- Program scanning of Financial Groups: Financial institutions can program screen their customer data against a large PEP list to eliminate any potential risk of dealing with a PEP; this tool ensures that no potential risks are overlooked. This also helps minimize human error and speeds up the customer onboarding process as the process is automated.
- Monitor Transactions from High-Risk Clients: After a PEP has been identified, financial institutions must monitor high-risk client’s transactions.
The Role of Technology in Enhancing PEP Screening
Technology will become more and more important for the effectiveness of PEP screening. Manually screening vast amounts of data can be overwhelming to human processes, and there are really no viable options other than advanced automation and technologies like artificial intelligence (AI) or machine learning (ML) for a proven method of real-time screening.
Such tools allow the determination of client information matching multiple, most up-to-date PEP lists from numerous sources very quickly, which results in increased accuracy and speed. Increasingly complex financial trade-offs and more stringent regulatory requirements mean institutions are required to integrate technologies of this nature if they are to remain at the top of the pile and protect themselves from emerging risks and from not meeting global standards.
The Future of PEP Screening
With so many advancements in technology, the next logical step for PEP screening is to make use of more advanced methods, including artificial intelligence (AI) and machine learning (ML). These technologies will help speed up and refine the process of finding potentially risky assets so that institutions remain aware of new threats as they arise. By 2026, AML processes will use AI for automation for more than 40% of AML processes, thus making PEP checks and all compliance procedures more efficient.
Tougher rules are expected for regulators to put in place for PEP screening. FATF is attempting to upgrade the procedures for PEP screening practices around the world to be more uniform. To achieve that, financial institutions will have to be adaptable and make sure that their compliance program can be future-proof.
