PEP Screening – Steps to Stop Financial Crimes   

Why Should Financial Firms Employ PEP Screening Protocol?

Financial crimes, in particular money laundering, cause a staggering  $800 billion to $2 trillion loss for the international economy every single year. This colossal amount of money lost is the reason why governments around the world are forced to bring stringent Anti Money Laundering compliance regulations. And it explains why financial institutions are compelled to spend $274.1 billion in compliance costs. One of the essential components of AML compliance is the PEP Screening. The staggering amounts of laundered money lands in the offshore accounts of filthy rich every year. 

Therefore, the law enforcement agencies and the international regulatory authorities have mandated PEP screening measures for the financial institutions to take on a risk based approach and alleviate the risks associated with initiating business relationships with powerful clients that may abuse their influence and power to commit financial crimes. 

The Financial Action Task Force (FATF) has described Politically Exposed Persons (PEPs) as people who hold powerful public offices and carry huge social influence due to their high-powered public position. These individuals can easily commit bribery, corruption, embezzlement of government funds and other financial crimes due to their wide influence. Financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) can easily get embroiled in legal penalties and hefty fines due to the crimes of their clients. Therefore, they must be vigilant and employ effective PEP compliance programs to make sure they don’t end up facilitating the financial wrongdoings of their customers.

Both banking and nonbanking institutions must implement an effective  PEP Screening method to stay away from unnecessary legal penalties and costly reputational damage. An effective PEP screening must comprise the following steps:

Step 1: Collect Essential Data

Before engaging in a business relationship with a PEP client, financial institutions must collect all the necessary and accurate information about their customer. This is the most fundamental step and a lot of risks can be mitigated if an effective approach is employed. 

Client’s Full Name

Financial firms must take into account the local conventions when it comes to client’s names. In some areas, people are given multiple names and they use those multiple names for official purposes as well. Verify your clients exact name by using various sources. 

Client’s Date of Birth

A financial firm must verify the accurate date of birth of their clients using multiple databases. This can help avoid being mistaken for people of similar names yet different dates of births.

Client’s Nationality

Verifying clients nationality is fundamental to further steps of PEP check. It will help analyze the PEP status or circle of influence your client may have in their country.  

Client’s Occupation

Knowing your client’s occupation is the most essential step in PEP screening. It will help the compliance officers to analyze their current role and the influence it carries which further aid in determining their PEP status.

Client’s Close Associates and Family

In the world of Politically Exposed Persons (PEP), nepotism is as common as sand in the dust. All powerful families in the world tend to take advantage of their influential family members and close associates. Therefore, financial firms must take into account whether their customers belong from a prominent family or have friends in the realms of power corridors. 

Precision is the key. Financial institutions must employ effective PEP screening solutions to minimize false positives. 

Step 2: Valid Databases

Valid and reliable databases must be used while doing the PEP list screening. These databases must be updated regularly and carefully record all the latest developments on the changing status of PEPs globally. 

Step 3: Run PEP Check Process

This is the primary step in the whole PEP screening process. Start by putting the clients provided data and screen it against your chosen database. It will result in potential matches, also known as ‘hits’. Carefully go through and analyze the suggested matches, verifying each detail. Be cautious of similar names. This may result in a number of false positives. Carefully take terrestrial consideration into account. Don’t just rely on results from a single database. Always cross-check your results using various credible databases. This will help you avoid false positives. 

The primary purpose of running a pep check is to evaluate the risks associated with developing business relationships with potential customers. Therefore, always craft a risk profile of potential clients that will assist in determining their PEP status.

Step 4: Periodic Monitoring

Given the changing nature of geopolitics, financial firms must stay vigilant and carefully monitor the unstable  status of their PEP clients. This is essential. Because sometimes, a PEP status may shift from low-risk to high-risk category.