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

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To identify a Politically Exposed Person (PEP) and achieve KYC compliance, financial institutions must implement enhanced due diligence measures, including screening against up-to-date global PEP lists, assessing associated risk factors such as position, geography, and transaction behavior, and conducting ongoing monitoring. Leveraging automated solutions enables accurate identification, continuous risk assessment, and regulatory compliance while minimizing false positives and operational burden.

Politically Exposed Person (PEP) 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 

Politically Exposed Person (PEP) Lists 

Once you understand what a PEP is, the next step is learning how to identify them using PEP lists. These lists compile the names of individuals in politically exposed roles, along with their close associates and family members, to support risk assessment during onboarding and ongoing client monitoring. However, free or publicly available lists can be outdated, incomplete, or lack essential context, increasing the risk of false positives or missed matches. To ensure effective screening, organizations need access to reliable, up-to-date data sources that support a risk-based compliance approach.

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 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:

  1. 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
  2. History of allegations: Previous accusations, investigations, or sanctions for corruption, money laundering, or other illegal activities raise significant red flags.
  3. Transaction patterns: Engaging in suspicious financial transactions and unusual financial activities
  4. Source of wealth: Involvement in high-risk industries such as banking, finance, mining, privatization, or the arms trade
  5. 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
  6. Position and role: The level of political exposure, including the individual's seniority and specific job responsibilities, can influence the risk level
  7. Complex ownership structures: Using intricate corporate structures, shell companies, or trusts to hide assets or the actual beneficial ownership of funds
  8. 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. 

Why Does PEP Identification Matter for KYC Compliance?

PEPs and KYC The watchlist screening process in customer due diligence for PEPs 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.

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.

PEP Screening & Lists

Screening for PEPs is essential for AML and KYC compliance. Public sources often lack accuracy and completeness, making electronic, regularly updated screening tools far more reliable. Learn more about best practices for PEP and sanctions checks in this blog post.

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.

How to Achieve KYC Compliance With Fenergo

Managing PEPs is vital to maintaining strong KYC and CTF compliance. Given the complexity of global PEP definitions and the limitations of manual screening, financial institutions need a dynamic, risk-based approach.

Fenergo simplifies this process with automated KYC solutions that enable accurate PEP identification, continuous monitoring, and seamless regulatory compliance. By integrating trusted third-party data and real-time risk insights, Fenergo empowers firms to protect their reputation, ensure compliance, and accelerate client onboarding.

Request a demo to see how Fenergo can transform your compliance strategy through innovation, automation, and data intelligence.

More on PEPs

What is a PEP?

A PEP is an individual who holds or has held a prominent public position, such as a government official, senior politician, or military leader, making them more susceptible to involvement in financial crimes like bribery or corruption.

How to check if someone is a politically exposed person?

To check if someone is a PEP, organizations typically screen client information against trusted PEP databases, which include individuals in high-risk roles along with their family members and close associates. This process is often integrated into the KYC and onboarding workflow. 

What is PEP screening?

PEP screening is the process of identifying whether a client or related party is a Politically Exposed Person. It involves checking names against up-to-date PEP lists and assessing the associated risk to ensure compliance with AML regulations. 

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.