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Pep Screening Process: Best Practices

Why Should PEPs Be Screened For AML Compliance?

In the world of financial crimes, power is everything. And one way to prevent financial crimes is to keep an eye on people who hold enormous social and economic power. The history of financial crimes, time and again, have individuals having huge social influence and high public standing committing financial crimes like money laundering, terrorist financing, tax evasion, bribery, corporate frauds, corruption, counterfeiting, embezzlement of government funds, market manipulation, securities, frauds, and many more. 

In the world of compliance, such individuals are known as Politically Exposed Persons. This explains why the Anti-Money laundering watchdog, the Financial Action Task Force (FATF) has mandated the PEP screening system for all financial institutions including credit unions, brokerage firms, savings and loan associations, banking sector, trust companies, payment processors, building industry, investment companies, real estate, and insurance firms. 

The history of financial frauds have proved one point, it is that humans are naturally inclined to exploit power. It requires effective checks and balances to avoid the concentration of power in the hands of few and prevent the absolute exploitation of power who possess it absolutely. Individuals holding prominent public offices end up possessing enormous social influence. Therefore, are categorized as Politically Exposed Persons by the regulatory authorities. The financial institutions are mandated by the international regulatory authorities.Government organizations and law enforcement agencies to conduct pep list screening and screen. Their potential clients against the updated PEP lists issued by the credible authorities, before conducting any business relationship with them. 

Smart Practices To Conduct PEP Screening Process

Prefer High Quality Data

Employing Google searches or other ad-hoc strategies for screening potential customers before conducting any business relations with them would be a poor choice for the compliance officers and usually results in wastage of their time. It also leads to inaccurate and imprecise results. These problems can be effectively eliminated by employing pep compliance that offers an up-to-date. The comprehensive database to screen their customers against the PEP lists.

Employing a Risk-Based Approach

Compliance officers should customize their risk-based approach by taking into account the PEP status of their PEP clients. Not all Politically Exposed Persons carry the same level of risk of committing financial crimes. Politically exposed Persons are usually categorized into four PEP levels that help determine their PEP status. Individuals falling into the high-risk category are the world leaders, cabinet ministers, senior military officials, top executives of multinational corporations, royal family members, Forbes 50 billionaires, and top religious leaders. 

Individuals falling into the low risk levels are usually members of the local districts, judges working in the local courts, mayors and local district members. Compliance officers should also customize their risk-based approach when it comes to foreign Politically Exposed Persons as foreign PEPs carry high risk of committing financial crimes such as money laundering, tax evasion, corruption and beyond. 

Politically Exposed Persons who are classified as high-risk should go through Enhanced Due Diligence, whereas PEP clients with low risk of committing financial crimes should be subject to Due Diligence procedures by the compliance officers.

Conducting Training Sessions For Employees

The battle against financial crimes and the compliance procedures are a whole different world. A firm has different departments such as the human resources, the IT department, the finance department, the cash management, the auditors, employer services sector, the risk management and the marketing department. All your employees need to be educated on why compliance is essential, the cost of non-compliance for a financial firm. Examples of financial firms that ended up paying for the crimes of their clients. Moreover, the employees must be trained on compliance tools and technologies and PEP screening procedures. 

A firm’s endeavors to comply with regulatory guidelines and its efforts to avoid getting embroiled in the financial crimes. Their clients hangs on their employees’ understanding, abilities and dedication to prevent frauds, money laundering and counter-terrorist financing. The importance of effective compliance technology comes later. Therefore, all the relevant employees must be trained well in risk categories, compliance regulations, and internal processes. 

Frequent Reviews of the PEP status of PEP client

The compliance officers must frequently review the PEP status of their clients. For example, a politician who was once categorized as a low risk client, may at some point become a cabinet minister which is a powerful position. He is now more prone to commit financial crimes given the immense political power he now holds and huge social standing he now enjoys. Therefore, the compliance officers should immediately update his PEP status and must put him under the PEP screening protocol and Enhanced Due Diligence procedures. 

Even when a high risk Politically Exposed Person finishes his tenure and leaves his position, he still carries a high risk of committing financial crimes like money laundering, tax evasion, bribery, and others. This is especially true in developing countries where corruption is usually high. And financial crimes are way more prevalent. 


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