Banking PEPs: How to Proactively Mitigate Screening Risks in the Banking Industry

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Because of their prominent public positions and influence, politically exposed persons (PEPs) pose a higher risk of money laundering and corruption. Banks are required to identify PEPs among their customers and apply a risk-based approach to managing relationships with them. However, PEP screening presents several challenges that can increase compliance risks for banks if not handled properly.

 

This article explores PEP screening challenges, outlines best practices banks can implement to mitigate risks, and looks at how advanced solutions like Alessa’s watchlist, sanctions and PEP screening solution and  PEP scoring can make the screening process more efficient and effective.

 

 

 

PEP Screening Challenges That Increase Risk for Banks

PEP screening is a critical component of a bank’s AML compliance program, but it comes with its own set of challenges. These challenges, if not properly addressed, can increase the bank’s risk of regulatory violations and reputational damage.

 

 Some of the key PEP screening challenges include:

 

  • Inconsistent PEP definitions: The lack of a universally accepted definition of what constitutes a PEP can lead to inconsistencies in how PEPs are identified and monitored. For additional information, view our blog overviewing politically exposed persons.
  • Keeping PEP lists current: An individual’s PEP status can change as they move in and out of politically exposed roles. Banks need to monitor these changes and regularly update their PEP lists to ensure they are screening against the latest information. 
  • Determining PEP risk levels: Banks need to assess the specific corruption and money laundering risk posed by each PEP customer. This risk is impacted by factors like the nature of the PEP’s political position, geographic location, and financial activities. Higher-risk PEPs require enhanced due diligence and more frequent, in-depth transaction monitoring.
  • Identifying close associates: PEP screening should extend beyond the primary individual to include close associates like family members and business partners. Criminals may attempt to exploit these relationships to evade detection and move illicit funds. However, properly identifying a PEP’s close associates and their risk levels can be difficult and resource-intensive.
  • Overreliance on PEP databases: While PEP databases are a helpful screening tool, they are not sufficient to verify PEP status and assess risk fully. Additional due diligence is needed to meet regulatory expectations and mitigate compliance risks.
  • Balancing risk and business considerations: Banks have to weigh the potential risks of banking PEPs against profitable business opportunities. While PEPs require more compliance resources to manage, avoiding them altogether may not be practical. Banks need systems to efficiently control PEP risk so they can safely bank these customers.

 

 

 

 

How to Minimize PEP Screening Risks

 

Use High-Quality PEP Lists from Trustworthy Sources

Accurate, comprehensive PEP data is the foundation of an effective screening program. Banks should source their PEP lists from reputable providers that aggregate data from official government lists, international organizations, and reliable media sources.

 

PEP lists should cover all relevant jurisdictions where the bank has customers. Domestic PEPs are often subject to different regulatory requirements than foreign PEPs, so it’s important that the lists make this distinction. For country-specific information, view our blog outlining how PEPs definitions can change by country

 

PEP data should include critical identifying information like:

 

  • Full legal name and any aliases
  • Date of birth
  • Country of residence
  • Political position and dates held
  • Reason for PEP designation

 

This level of detail helps banks accurately match customers to PEP lists and assess their risk. Basic name screening alone can lead to many false positive matches.

 

 

Ensure PEP Lists are Always Up-to-Date

PEP screening is not a one-time check done during client onboarding. Ongoing PEP monitoring is required throughout the customer relationship. An individual’s PEP status and risk level can change over time.

 

Banks should have processes to continually update their PEP lists as individuals are added, removed, or change political roles. The frequency of these updates depends on the bank’s risk exposure and regulatory requirements. For higher-risk jurisdictions and customer types, PEP lists may need to be refreshed daily.

 

 

Use PEP Data Alongside Other Data Sources

PEP screening should not occur in isolation. To build a complete risk profile, PEP data should be used in combination with other due diligence data sources, such as:

 

  • Adverse media screening for negative news related to financial crime
  • Official sanction lists and watchlists
  • Company registries and beneficial ownership data
  • Transaction monitoring and analysis

 

Cross-referencing these different data sets provides a more comprehensive view of a PEP’s risk. A PEP with no negative media or sanctions hits and a normal transaction profile is a lower risk than a PEP frequently mentioned in corruption news stories and exhibiting suspicious financial activity. Our watchlist, sanctions and PEP screening solution for banks allows you to screen against all pertinent data sources to ensure you know exactly who you are conducting business with.

 

 

Take a Risk-Based Approach When Screening Bank PEPs

A risk-based approach means banks adjust the level of due diligence and monitoring of each PEP customer proportionate to the level of money laundering or corruption risk they pose to the bank.

 

Factors that impact a PEP’s risk level include:

 

  • Seniority and influence of their political position
  • Whether they are a domestic or foreign PEP
  • Geographic risk and exposure to corruption in their country
  • Nature and volume of transactions (e.g., wires to high-risk jurisdictions or cash deposits)
  • Involvement in adverse media stories related to financial crime

 

Based on an analysis of these risk factors, banks should group PEPs into risk categories (e.g., low, medium, high). The risk category determines how frequently the PEP is screened against updated lists, the depth of enhanced due diligence applied, and the level of ongoing transaction monitoring.

 

Higher-risk PEPs may require screening against PEP lists daily, while lower-risk PEPs may need to be checked less often. High-risk PEPs should have more frequent reviews of their KYC data and transaction activity to detect any changes in risk levels. One way to strengthen CDD and KYC efforts is to implement an identity verification and KYC compliance solution built for the banking industry

 

 

Regularly recheck customer base for PEPs

In addition to screening new customers for PEP status during onboarding, banks should also regularly rescreen their existing customer base. Even if a customer was not identified as a PEP initially, they may become one later. Banks should have a systematic process to periodically recheck all customers against the latest PEP lists based on their risk profile.

 

 

Leverage advanced analytics and PEP screening automation

The large volumes of PEP and transaction data banks have to analyze mean manual screening processes are no longer sufficient. PEP screening solutions that incorporate automation, machine learning, AI, and advanced analytics can significantly improve a bank’s PEP risk management.

 

PEP screening software integrates with a bank’s core systems and screens customers against PEP lists and other risk data. Screening is automatically triggered during key events like onboarding, periodic reviews, and when PEP lists are updated.

 

Potential PEP matches are flagged for review by compliance staff. Advanced PEP screening solutions assign a risk score to each PEP based on the risk factors present. This allows banks to focus their limited compliance resources on the highest-risk PEPs.

 

 

 

 

PEP Screening For Your Bank With Alessa’s Proprietary PEP Scoring

Alessa offers a proprietary PEP scoring solution as one of the modules in our complete anti-money laundering software for banks. Alessa screens bank customer databases nightly against the latest sanctions and PEP lists. Our PEP scoring model analyzes the PEP’s geographic location, political position, adverse media mentions, transactional activity, and other key risk indicators. It then assigns a risk score that categorizes PEPs into high, medium, and low-risk bands.

 

Banks can configure Alessa to automatically clear PEP alerts in low- or medium-risk categories that don’t require additional review based on their risk appetite. High-risk PEPs are flagged for further due diligence. Alessa also allows banks to easily add their own internal risk factors to our PEP scoring model.

 

The key benefits of Alessa’s automated PEP scoring approach include:

 

  • Ensuring PEP screening is done against the most current data
  • Efficiently risk ranking PEPs so compliance efforts are focused on the highest risks
  • Reducing false positives and minimizing the time spent clearing low-risk PEP alerts
  • Improving audits with detailed records of PEP screening results and risk scores

 

Alessa empowers banks to take a more proactive, risk-based approach to PEP screening, enabling them to more effectively identify and mitigate PEP risk while meeting their regulatory obligations.

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