In recent years, several high-profile cases have highlighted the importance of effective Politically Exposed Person (PEP) screening for businesses. In 2019, Standard Chartered Bank was fined $1.1 billion by U.S. and U.K. authorities for poor controls related to customer due diligence and PEP screening. The bank had processed transactions for high-risk clients, including PEPs, without adequate monitoring and oversight.
Similarly, in 2018, ING Bank paid €775 million to settle an investigation by Dutch authorities into the bank’s failure to prevent money laundering and properly vet its clients, including PEPs.
These cases underscore the critical role that PEP screening plays in a robust anti-money laundering (AML) compliance program. But what exactly is PEP screening, and why is it so important for businesses today?
What is PEP Screening?
PEP screening aims to identify individuals in prominent public positions and their close connections. Due to their positions of power and influence, PEPs are considered at higher risk for involvement in corruption, bribery, and money laundering.
The process typically starts with collecting and verifying customer data against databases containing information on individuals known to be PEPs. Advanced algorithms and data matching techniques are employed to sift through vast amounts of data to detect potential matches, considering variations in name spellings, aliases, and other factors.
The most sophisticated PEP screening solutions also use PEP scoring to assess risk and guide compliance teams to high-risk individuals.
Once a potential PEP is identified, enhanced due diligence (EDD) procedures may be initiated. EDD involves gathering additional information about the individual’s source of wealth, business relationships, and the nature of their transactions to assess the level of risk they may pose.
Learn more about PEPs and how definitions can change by country.
Five Reasons Your Business Needs PEP Screening
1. Risk Mitigation
PEPs carry a higher risk of involvement in financial crime and money laundering. By identifying PEPs through screening, businesses can assess and mitigate these risks more effectively. PEP screening is an essential part of a risk-based approach to AML compliance, which involves allocating resources and applying controls based on the level of risk each customer poses.
2. Regulatory Compliance
Regulatory bodies worldwide, including the Financial Action Task Force (FATF), expect financial institutions and other entities to incorporate PEP screening into their AML compliance programs. Failure to do so can lead to inadvertently transacting with individuals who expose banks and other organizations to AML compliance failures, resulting in hefty fines.
3. Reputation Management
Doing business with PEPs involved in corruption or other financial crimes can have serious reputational consequences for a company. PEP screening helps businesses avoid these risks by identifying high-risk individuals and enabling informed decision-making about establishing or maintaining a business relationship. Reputational damage from PEP-related scandals can be difficult to recover from and can lead to loss of customer trust and market share.
4. International Sanctions Compliance
High-risk PEPs may also be subject to international sanctions because of their location, involvement in corruption, or other illicit activities. By screening for PEPs, businesses can ensure they are not inadvertently facilitating transactions that violate sanctions, which can result in severe penalties.
5. Prevention of Financial Crimes
Ultimately, the goal of PEP screening is to stop bad actors from misusing the financial system for money laundering, corruption, and other illicit purposes. By identifying and monitoring PEPs, businesses can help detect and report suspicious activity, aiding law enforcement efforts to combat financial crimes.
PEP Screening and Risk-Based AML Processes
PEP screening is most effective when integrated into a comprehensive, risk-based AML compliance program. AML programs should include identity verification, KYC, and customer due diligence measures to collect and verify customer information. They should also assess the level of risk each customer poses based on factors such as their geographic location, industry, and transaction patterns and apply enhanced due diligence measures for higher-risk customers. Implementing a robust watchlist and sanctions screening solution can further strengthen a risk-based approach to onboarding and client management.
A risk-based approach to PEP screening involves PEP scoring, which helps organizations focus resources on the PEPs that pose the highest risk rather than applying a one-size-fits-all approach. It requires businesses to have a deep understanding of the specific risks associated with different types of PEPs and to tailor their screening and monitoring processes accordingly.
For additional information, view our blog outlining PEP screening guidance by country.
PEP Screening with Alessa
Alessa is an AML compliance solution with robust PEP screening and scoring capabilities. With Alessa, businesses can automate screening customers against comprehensive PEP lists and databases and monitor transactions for suspicious activity. Alessa’s risk-based approach to PEP screening enables businesses to focus their resources on the highest-risk individuals while ensuring compliance with regulatory requirements.
Alessa’s AML compliance solutions features a variety of modules that can be used together as an end-to-end compliance solution, or as separate modules, which include:
- Automated screening of customers against global PEP lists and databases
- Customizable risk scoring based on PEP type, geography, industry, and other factors
- Real-time monitoring of PEP transactions and activity
- Automated alerts and AML case management for suspicious activity
- Automatic regulatory reporting for multiple jurisdictions.
Contact our AML and sanctions compliance experts today to learn how Alessa can streamline and optimize your PEP screening program.
