A guide to conducting effective PEP checks

Understanding the importance of conducting effective PEP (Politically Exposed Persons) checks is crucial for financial professionals in AML (Anti-Money Laundering) compliance roles.

Given their influential positions, PEPs pose significant risks related to bribery, corruption, and money laundering. Therefore, you must implement robust PEP checks to manage these risks and uphold AML compliance.

In this guide, we provide insight into the necessity of PEP checks, the steps involved, and tips for effective implementation.

What is a PEP check?

A PEP check is a process used to identify and assess the risks associated with PEPs (Politically Exposed Persons), individuals who are or have been entrusted with prominent public functions. 

As a financial professional in an AML compliance role, your understanding and execution of this process are vital components of a robust Anti-Money Laundering (AML) programme.

Due to their influential positions and potential involvement in bribery, corruption, and other illicit financial activities, PEPs pose significant risks. 

Therefore, conducting effective PEP checks is essential for your institution to manage these risks and comply with AML regulations.

Why are PEP checks necessary for your AML work?

PEP checks are essential for your company's AML work for several reasons:

1. Mitigate the risks associated with PEPs: PEPs hold influential positions and can potentially abuse their power for illicit financial activities. Identifying high-risk PEP helps you mitigate illegal activities, such as money laundering, corruption, and bribery.
2. Comply with regulatory frameworks: AML regulations and authorities mandate financial institutions to conduct due diligence on PEPs, such as determining the origin of possessed assets. Non-compliance can lead to severe penalties and irreparable reputational damage for your company.
3. Conduct enhanced monitoring: PEPs' transactions and relationships need continuous monitoring due to their high profiles and influence. This ongoing vigilance can help detect and identify suspicious activities early and, ultimately, prevent financial crimes.
4. Protect your company's reputation: Diligent execution of effective PEP checks is crucial for your institution to maintain trust with clients and stakeholders.
5. Maintain a holistic risk assessment: PEP checks contribute to a comprehensive risk assessment, allowing your institution to tailor risk management strategies effectively.

What are the necessary steps to conduct a PEP check?

Conducting a PEP check involves several key steps to ensure thoroughness and compliance with Anti-Money Laundering (AML) regulations:

1. Identification: The very first step is to determine whether an individual is a PEP. This involves checking their identity against known lists and databases of PEPs during the customer due diligence (CDD) process.

When conducting a PEP check, you must collect information necessary for identification, such as:

• Full name.
• Date of birth.
• Gender.
• Country of political exposure.
• Politically exposed roles: Details about the person's roles or appointments, including dates and years of service.
• Current status or departure date: If the individual is no longer in the position, the date they left the post should be recorded.

2. Risk assessment: Once you verified a PEP, you must assess the level of risk they pose based on factors such as their country of origin, the nature of their political exposure, and their known financial transactions.

3. Enhanced Due Diligence (EDD): To gather more in-depth information, you must conduct enhanced diligence on individuals assessed as high-risk PEPs. This may include understanding their source of wealth, the purpose of their transactions, and their business relationships.

4. Continuous monitoring and reviewing: To identify any suspicious activity, implement ongoing monitoring of the PEP's transactions and business relationships. Regularly review the PEP's status, as their risk level can change over time.

5. Record-keeping: Maintain detailed records of all the steps taken during the PEP check process, including how decisions were made and any additional information gathered. This is crucial to demonstrate compliance to regulators.

6. Decision-making: Based on the information gathered, decide whether to proceed with a business relationship, apply additional controls, or file a report with relevant authorities.

7. Training and awareness: Ensure that all relevant staff are trained in identifying PEPs and know the procedures to follow when a PEP is detected.

7 tips for effective PEP checks

To ensure a successful PEP check, consider implementing the following tips:

1. Use reliable databases: Use reputable and updated databases that contain lists of politicians, government officials, and their family members.
2. Automate the PEP screening process: You can implement automated screening tools to check customer data against PEP databases. Make sure the databases are updated regularly for accuracy.
3. Implement a risk-based approach: Tailor your PEP checks based on risk by considering factors such as the individual's position, country of origin, and the nature of their exposure.
4. Identify politically exposed family members: Extend the checks to include family members and close associates of PEPs, as they may also pose a high risk due to their association.
5. Enforce clear policies and procedures: Establish well-defined internal policies and procedures for PEP checks and document the steps to follow when a PEP is identified.
6. Document the process: For audits and regulatory reviews, maintain detailed records of PEP checks, including the rationale behind decisions.
7. Stay informed: Follow regulatory updates and changes related to PEPs to ensure compliance requirements are met and processes remain effective.

How Trapets can help you with your PEP check work

Financial crime is evolving, making it essential to diligently screen customers and assess their risk levels before onboarding them. Additionally, continuous monitoring is necessary to comply with regulations and prevent financial crime.

With Trapets Screening, you can utilise secure technology and current data sources to screen customers against sanctions, PEP/RCA lists, UBO information, and adverse media.

It also minimises manual screening efforts, allowing you to focus on identifying and reporting suspicious activity to safeguard your business.