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How to Identify a Politically Exposed Person (PEP) to Achieve KYC Compliance

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The watchlist screening process in customer due diligence for Politically Exposed Persons (PEP) is an important part of any anti-money laundering (AML) and know your customer (KYC) program. It helps prevent financial crimes and safeguards financial institutions from reputational harm by identifying accounts potentially associated with corruption or bribery.

PEPs are those who have held or are holding an office or position that may eventually expose them to corruption, money laundering, and other related crimes. These include government officials, politicians and heads of state, high-ranking military personnel, and senior management of state-owned enterprises.

Since public money and influential positions are accessible to PEPs, banks and other organizations should monitor the transactions performed by PEPs with close interest. This extra control mitigates the risk posed by these highly exposed persons in providing safety to finances and compliance with regulations.

Politically Exposed Person Meaning

A PEP is someone who occupies a high public office at any time. Considering the nature of these powerful positions, PEPs expose a person to increased risk because most of these offenses are associated with money laundering, corruption, and bribery, among others.

Before establishing whether an individual is a PEP or not, it becomes very paramount to understand  who a PEP is. According to the Financial Action Task Force, the following are categories of the PEPs:

  • Foreign PEPs: These can be heads of state or government, senior politicians, high-ranking government, judicial, or military officials, senior executives holding an important decision-making post in a state-owned company, and important political party officials at the national level in foreign countries
  • Domestic PEPs: PEPs may be classified as domestic PEPs for those who hold important public positions now or have in the past in their country of domicile
  • International organization PEPs: All the persons who are currently or formerly top-ranking in international organizations, including directors, managers, board members, and equivalent occupiers
  • Family members of PEPs: These are persons related to a PEP, which includes consanguinity by marriage or through civil partnership
  • Close associates of PEPs: Persons in close social/professional relationships with a PEP

3 Types of a Politically Exposed Person

PEPs fall into three primary categories:

1. Foreign PEPs

These individuals hold or have held significant public positions in other countries. Financial institutions monitor foreign PEP transactions, as these individuals are at a higher risk for activities like corruption, embezzlement, or money laundering.

2. Domestic PEPs

This group consists of individuals in high-ranking government roles within their own country. This includes presidents, prime ministers, parliament members, and senior government officials. Due to their influential positions, domestic PEPs are under increased scrutiny to ensure their financial dealings are transparent and legitimate.

3. International Organization PEPs

These people occupy top-tier roles in global organizations such as the United Nations, the World Bank, and the International Monetary Fund. Given their influential positions on the world stage, their financial activities are subject to stringent monitoring to prevent any global-scale misconduct.
Additionally, close family members and known associates of PEPs are often included in this watchlist, as their proximity to power can also pose significant risks.

PEP Screening & Lists

A PEP List, or Politically Exposed Persons List, is a compilation of individuals known to hold significant public positions, making them susceptible to bribery or corruption. Regulated companies utilize these lists to assess the risk associated with their customers' influential roles.

Gathering data on PEPs from publicly available sources such as government lists, media, and the Internet is possible but tedious and unreliable. These sources often contain outdated or incomplete information, making manual collection inefficient.

Using an electronic platform to check PEP status is recommended for a more accurate and efficient approach. Free PEP lists frequently lack crucial details like full names, original scripts, birthdates, and comprehensive coverage of roles and countries. They also suffer from slow updates, limiting their effectiveness.

Countries may publish two types of PEP list: one detailing politically exposed positions and another listing individuals holding these roles.

However, these lists have notable drawbacks, including incomplete information (missing names, identifiers, relatives) and rapid obsolescence. Furthermore, few countries provide thorough domestic PEP lists.

Given these challenges, relying solely on public sources for a risk-based approach is not advisable. Financial institutions should consider partnering with third-party risk data providers to enhance PEP screening processes and ensure more robust and up-to-date monitoring.

Leveraging advanced solutions like those offered by Fenergo can greatly enhance the process of identifying politically exposed persons (PEPs) to ensure KYC compliance. Fenergo's KYC solution streamlines client onboarding with automated AML and KYC due diligence, making it easier to detect and manage PEPs. 

Their comprehensive system includes continuous KYC reviews and automated risk assessments, ensuring institutions comply with global regulations. By integrating these solutions, organizations can efficiently identify PEPs and sanction checks, assess potential risks, and maintain robust compliance frameworks. 

PEP Checklists To Identify High-Risk PEPs

Guidelines on red flags are essential for assessing the risks associated with PEPs. These risks are categorized based on several key factors:

  • Use of third parties: PEPs might attempt to conceal their identity and obscure ownership by using corporate entity intermediaries or listing family members and associates as legal owners
  • History of allegations: Previous accusations, investigations, or sanctions for corruption, money laundering, or other illegal activities raise significant red flags.
  • Transaction patterns: Engaging in suspicious financial transactions and unusual financial activities
  • Source of wealth: Involvement in high-risk industries such as banking, finance, mining, privatization, or the arms trade
  • Geographic location: Financial activities linked to countries notorious for high corruption levels, weak PEP regulations in anti-money laundering (AML) controls, or known tax havens
  • Position and role: The level of political exposure, including the individual's seniority and specific job responsibilities, can influence the risk level
  • Complex ownership structures: Using intricate corporate structures, shell companies, or trusts to hide assets or the actual beneficial ownership of funds
  • Refusal to provide information: This could be an aversion or flat-out refusal to provide information necessary for monitoring, such as the source of funds or the purpose behind certain transactions it becomes a big red flag

By considering these factors, organizations can far better realize the potential risks associated with PEPs and make ways for their identification to reduce their threats and secure stronger compliance against financial crimes.

How to Achieve AML & KYC Compliance With PEPs

Organizations like financial institutions are mandated to implement enhanced due diligence for PEPs. This includes comprehensive background checks, continuous transaction monitoring, and suspicious activity reporting.

The definition of a PEP varies globally, and regulated entities often develop their own internal policies to identify and manage PEP-related risks. However, the universal goal is to protect the financial system from potential exploitation by individuals in positions of political power.

Here are some strategies to develop a robust PEP compliance program:

1. Access Comprehensive PEP Lists

Utilize a PEP search that includes global databases and adverse media lists to ensure the information is current. Evaluate the number of sources and the frequency of updates.

2. Customize List Selection to Meet Requirements

Ensure the list coverage aligns with your organization's regional focus and risk-profile criteria.

3. Assess PEPs and the Risk They Pose

Being on a PEP list does not automatically imply criminal activity or necessitate rejection. Conducting thorough due diligence can lead to PEP approval without incurring undue risk.

4. Implement Ongoing PEP Checks

PEP lists are constantly evolving. Simplify the process of identifying new PEPs or suspicious activities through continuous monitoring.

5. Handle Wrong, Missing, or Outdated Information

Errors or outdated information in PEP lists can result in false positives and costly manual KYC reviews. Leveraging machine learning and automated processes can enhance screening accuracy and compliance efficiency.

More on PEPs

How long is someone considered a PEP?

Most countries agree that the PEP status should persist for at least 12 to 18 months after the individual leaves office. Close associates of a PEP should be considered for the entire duration of their relationship with the PEP.

How is a PEP identified?

The first step for companies is to define internally what constitutes a PEP. While many companies and jurisdictions follow the Financial Action Task Force (FATF) definition, individual organizations may develop their own criteria, often considering the local laws of the regions where they operate.

Companies frequently use commercial databases that provide additional sources of information to help identify and detect PEPs. Based on the risk assessment, a company might then request further details from the individual in question.

Is PEP screening mandatory?

Although no specific laws provide for mandatory screening of PEPs, banks and other businesses are expected to institute reasonable mechanisms to protect themselves and their customers. PEP screening is one critical factor in complying with AML and CTF policies. Failure to comply with screening requirements for PEPs can trigger serious financial penalties and sanctions, sometimes suspension of licenses. 

Final Thoughts

Identifying and managing PEPs is a critical component of maintaining robust AML and Counter-Terrorism Financing (CTF) compliance programs. The complexity and variability of PEP definitions globally, as well as the challenges in maintaining up-to-date PEP lists, highlight the necessity for financial institutions to adopt comprehensive and dynamic approaches.

Effective PEP screening and monitoring need electronic platforms, engagement of third-party risk data providers, and compliance with guidelines issued by the Financial Action Task Force. Ensuring protection from the ensuing risks of PEPs to the organization through rigorous due diligence, continuous monitoring, and red flags attended to in a proactive manner can ensure compliance, integrity, and stakeholder trust.

Partner with Fenergo to future-proof your client lifecycle management processes and ensure every step in the client journey is secure and seamless. 

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