One of the most misconceived controls of anti-money laundering (AML) programs is PEP screening. It is being viewed as a mere name check by many teams, whereas regulators and auditors consider it to be a more organized risk control that helps to make more effective decisions. PEP screening assists in determining people who can pose a greater corruption or bribery risk due to their position in society, influence, or access to government resources. It is not aimed at making a person a suspicious individual because he/she is a PEP. This is to identify that the risk profile can be high and implement controls to the extent of the risk.
The way financial crimes are being advanced, and cross-border onboarding is accelerated, organizations should have a feasible, repeatable procedure for determining PEP exposure, recording choices, and tracking risk over time. This guide describes what PEP screening is and how it fits into AML compliance, and how it can be implemented in a manner that is effective and auditable.
What Does “PEP” Mean in AML?
PEP is an acronym of Politically Exposed Person. When it comes to AML, a PEP is typically someone who currently (or formerly) occupies a high-profile governmental role, where the role might be misused to advantage a person. This group usually consists of high government officials, senior judicial officials, senior military officials, senior politicians, and executives of the state-owned enterprises. It can also encompass individuals related to them, including close family members and close associates, since the risk may flow via relationships and indirect structures of ownership.
The most important thing is that being a PEP will not mean he or she is wrong. The majority of PEPs are lawful persons that have lawful functions. The rationale behind the identification of PEPs in the AML is that the risk of money flows in corruption-related situations might exist in bigger proportions in such instances, and that risk demands more robust control.
What Is PEP Screening?
PEP screening refers to the screening of customers and other parties concerned against PEP datasets to identify their exposure to politics. Practically, PEP list screening is commonly done by the organizations, matching names and identifiers with PEP lists that were compiled based on various sources. PEP screening normally occurs during the onboarding process and is maintained throughout the customer relationship via ongoing monitoring or occasional re-screening.
PEP screening is not a technical step, but a risk decision step. An effective PEP screening program links screening outcomes to the next step, e.g., enhanced due diligence, more vigorous monitoring, or approval escalation.
PEP Screening as a Part of an AML Program
The AML compliance is established based on the risk of financial crime identification and management. PEP screening will facilitate it with a special risk lens concerning corrupting and misusing the office of the people. The majority of mature AML programs incorporate screening as an element of a more comprehensive customer due diligence program that can also include identity checks, ownership checks (where the business is involved), sanctions checks, and adverse media checks.
PEP screening must be incorporated into the onboarding and continuous monitoring processes in such a way that PEP screening is not perceived as an isolated incident. The best programs have well-laid policies which stipulate who is screened, how matches are made or resolved, what documentation is necessary, and when enhanced due diligence is necessary.
PEP Screening vs Sanctions Screening: It Matters Why
PEP screening and sanctions screening are frequently mixed up; however, they have other purposes. Sanctions screening is aimed at outlining individuals, entities, and jurisdictions that are forbidden or limited by law or regulation. A sanctions match may imply that it is illegal to conduct business, or the process simply has to be hindered based on the regime and circumstances. Since the stakes and requirements are high, organizations often resort to a specific Sanction screening tool to provide real-time updates, powerful matching, and powerful audit trails.
The difference between PEP screening and the PEP match is that not every PEP match is a prohibition. Rather, it is an indicator of increased risk, which will often necessitate increased due diligence and more attentive oversight. The outcome of the decision is usually proceeded with controls and not blocked except in the presence of other risk factors. This difference can be understood to ensure that compliance teams do not over-block legitimate customers and still stay in line with regulatory expectations.
Who Is at Risk of STI Profiling?
The PEP screening program scope is identified through a practical PEP screening program. In the case of individual customers, the customer is screened during boarding and on a routine basis thereafter. In the case of business customers, the scope of the screening can tend to increase since the risk can be located behind the legal entity. In most KYB systems, organizations do vet beneficial owners, directors, authorized signatories, and controlling persons. This method is useful in cases of indirectness of PEP exposure in which the business per se is not politically exposed, but individuals who own it might be.
One of the most frequent examples of operational failure is the screening of the business name and the omission of the personalities behind it. The other shared failure is that screening is done during onboarding and never repeated, even though the status of a customer may change with time.
The Practice of PEP List Screening
Pep list screening usually begins with a name match against a PEP dataset; a decision cannot be made with reliability based on name similarity. Titles are typical, orthographical forms are different, there is transliteration, and pseudonyms are common in public books. This makes match resolution require other identifiers like date of birth, nationality, country of residence, role title, and public function that is related to the record.
The pragmatic objective is to arrive at a justifiable decision. Either the match is approved, it is classified as a false positive, or it is inconclusive and needs further information. The consistency with which your team reasons and records decisions in matches is commonly used as an indicator of the quality of your PEP program.
A Curable Step-by-Step Workflow of PEP Screening
Screening at Onboarding
PEP screening must be an automatic event at onboarding as a part of customer due diligence. Where there is no match in the screening, the result is to record the screening. In case of a match back, the case is to proceed to a review process where an analyst verifies that the match is true or false.
Match Review and Resolution
In review, the analysts are expected to make comparisons between the known information of the customer and the PEP record information. When the key identifiers match, the match is more probable to be a true positive. In this case, when there is a conflict in the identifiers, clearly, the match can be closed because of a false positive with a record. Where the information is not provided or is vague, then the case might need the gathering of more evidence before the case can be decided.
Risk Rating and Decisioning
The risk rating of the customer should be changed on the policy after a PEP match has been verified. This is not necessarily the case of the highest risk, but it is usually the elevated risk that results in enhanced due diligence. Decisioning process must also be regular and based on a documented risk-based approach, other than ad hoc judgment.
Enhanced Due Diligence (EDD)
PEPs EDDS normally concentrates on the validity of money and on the risk profile of the customer. This may be a source of funds, a source of wealth, an activity to be expected on their accounts, business associations, and any other risk indicator. This is aimed at minimizing the uncertainty and establishing a solid audit trail reflecting why the customer was accepted and what controls had been implemented.
Continued Surveillance and Re-examination
PEP risk is dynamic. Onboarding can result in a customer becoming a PEP or the establishment of new exposure by a close associate. AML good programs deal with it by continually monitoring, re-screening periodically, or by having it re-screened based on a change of customer details. Here, the correspondence with the sanctions screening is also important since the tasks are also to be updated and monitored, although the results of the decisions vary.
Possible Obstacles and the way to cope with them
False positives are one of the largest operational issues in PEP screening. When your corresponding logic is excessively general, the team will experience alert losses and reduced adoption of onboarding. When it is too narrow, you may well miss the actual exposure. Continuous tuning, improved identifiers, and explicit guidelines to the analyst on how to resolve the matches are the practical solutions.
The other challenge is the consistency of the data in global onboarding. Address formats, identity documents, and names are all different in different regions. An established program envisions these problems and provides a purposeful method of gathering identifiers and eliminating ambiguity.
The third issue is policy clarity. Teams find it difficult when the policies are ambiguous on who is considered a PEP, or former PEPs must be given special consideration, and what controls are obligatory. clear definitions, escalation level,s and documentation standards ensure that the program is more defensible.
How to reconcile PEP Screening with a Sanction Screening Tool
PEP and sanctions checks are frequently conducted under the same screening ecosystem, though they should not be perceived as equivalent control in organizations. The average settings of a Sanction screening tool are usually set to strict results, high frequency, and escalation on the spot. PEP screening would be set up to help in risk decisioning, EDD triggers, and monitoring rules.
When both the controls have a similar case management approach, then the best alignment can be attained. That is, match review notes, evidence attachments, approvals of escalation, and final decisions will be documented in such a manner that an auditor can follow. When properly done, your AML program will not only be more compliant but also more operationally efficient.
Conclusion
PEP screening is an essential component of the current AML compliance as it assists an organization to detect and address high-risk related to corruption. It is not just a simple check of names, which, when done properly, is more than a mere name check. It is a procedural process that relates pep list screening results to risk ratings, enhanced due diligence, and continuous monitoring. It is also most effective when it is distinctly separated from sanctions screening,g although they may be comprised by the same screening operations and tools.
The PEP screening program is practical with three characteristics: it is regular, risk-based, and well-documented. By constructing around those principles, you minimize the exposure of financial crime and maintain onboarding and monitoring processes at scale.
