For financial institutions today, it’s more important than ever to ensure the security of your customers and transactions. One responsibility is ensuring that finances are legitimate and your business defends against money laundering. One of the essential AML methods is PEP screening, and every financial institution must have a thorough PEP screening process. 

To ensure your system is effective at preventing financial crime and corruption, your company needs an in-depth understanding of the PEP screening process. Let’s take a deep dive into the PEP process, what it looks like for your company and the best practices for regulatory compliance.

Looking for an easy compliance solution? Our SmartSearch AML software automates the process with speed and accuracy whilst helping to detect threats before they become an issue. 

What is a PEP?

Before diving into the PEP process, you need to understand PEPs and what screening means. Without this information, your screening process won’t be informed, and this can lead to potential breaches and a weakened defence against financial crime.

A PEP is a Politically Exposed Person and is an individual who holds political influence or has a prominent public position. These figures are deemed higher risk of corruption and involvement in financial crime. Examples of PEPs include government officials, judges or senior judicial officers or board members of bank governors. 

Family members and close friends of these individuals are also counted as PEPs due to their proximity to those in power. A PEP classification by no means implies guilt or corruption; it is simply an indicator that Enhanced Due Diligence checks are required to ensure the legitimacy of funds. 

The PEP screening process

1. Data collection

The process begins with collecting data during customer onboarding. This includes all the significant details about a customer, including: 

• Name
• Date of birth
• Home or business address
• Employment information
• Identity documents, including a passport or a driver’s licence
• Source of wealth and funds

2. PEP database screening

Once all of this customer information is collected, it’s run through the global PEP database when the information is compared against a number of different known PEPs and watchlists. The most commonly used database and the one we use here at SmartSearch is the Dow Jones watchlist, which compiles thousands of global lists into a single source. 

If a match is found, the system will flag the customer for further review, where further checks will take place. 

3. Verification and Risk Assessment

Once your system has flagged a potential PEP, the next step is to verify this. Your internal compliance team or Money Laundering Reporting Officer will conduct manual checks to assess the level of risk. When assessments are conducted, institutions need to evaluate: 

• How much power or authority the person has
• The type of political role they have
• Where they operate (some countries have a higher risk of corruption)
• Transaction data, including the size and purpose of transactions
• Source of wealth and funds

From these factors, a risk rating can be created and EDD carried out.

4. Enhanced Due Diligence 

Enhanced Due Diligence is then conducted, where deeper investigations are used to determine the legitimacy of finances. This process involves:

• Verifying the source of funds or wealth
• Investigating the purpose of transactions or the relationship between accounts
• Assessing the company, assessing and beneficial owners
• Checking news and public records for information on PEPs 
• Documenting findings and sharing findings with senior management

Once the level of risk is determined, the next steps for reporting and escalation can be put into place.

5. Escalation and SARs

If suspicious transactions are identified, the next step is to escalate this. This usually involves filing a Suspicious Activity Report to the relevant authorities. If money laundering or illegal activity is proven, an internal investigation may also be recommended alongside freezing funds to keep your company and associates protected.  

6. Ongoing Monitoring

PEP statuses can change at any point, and the screening process doesn’t stop after onboarding. This is why ongoing monitoring is used to continue to track transactions, and the process involves:

• Periodic checks against PEP lists every week, month or as required
• Monitoring transactions for unusual activity and high-risk behaviour
• Regularly reviewing customer profiles
• Set up automated software and alerts for any suspicious activity

Continuous monitoring and awareness of changes in customer behaviour will help to keep your company on top of compliance and keep your business safe. 

Why Is PEP Screening Important?

PEP screening is a crucial part of AML compliance and is a requirement for all financial institutions. Here are the main reasons that PEP screening is crucial:

• Compliance - All banks, fintech companies and other financial institutions are required by law to comply with AML laws and conduct PEP screening and due diligence. Failure to comply can not only result in legal action and fines but can also damage your firm’s reputation. 
• Risk management - Identifying threats and corruption early with PEP processes can help prevent risks and issues like embezzlement and bribery.
• Protect your business - Solid PEP screening processes will protect your business against scandal and help instil the trust of your customers. 

What are the challenges of PEP screening?

Even with a sturdy PEP system in place, there are still challenges that your institution needs to overcome:

• Volume of alerts - If you’ve got a large organisation, you could be processing hundreds or thousands of PEP matches daily. You’ll need a reliable automated system to help your team save you time, alongside several dedicated AML officers to handle manual checks.  
• Data Inconsistencies - Errors with documentation, like spelling or translated documents, can result in false positives or criminals slipping through the cracks. Technology like SmartDoc, paired with careful manual checks, is the best way to ensure accurate data.
• Limited resources - If you’re a smaller company, investing in premium software and professionals can be costly. Utilising your sources with a risk-based approach should help to channel resources where they’re needed most and prevent overspending. 

The most effective PEP screening practices

Now that you know how the PEP screening process works, it’s important to formulate a system that ensures maximum efficiency and effectiveness:

Focus on a risk-based approach

Tailor your approach to the highest risk customers and transactions. This will help save resources and ensure attention is directed where it matters most.

Utilise screening software or tools

Investing in reliable and automated software like TripleCheck can help fill gaps from manual checks and speed up the compliance and verification process. These tools can verify identities from global databases and register multiple languages. 

Stay on top of compliance regulations

New AML laws are being brought into play each year, and keeping on top of rules and regulations is essential to ensuring your PEP and KYC processes are up to date.

Train staff regularly 

With new processes comes the need to educate staff on any changes. Regular refresher sessions and new training for all staff need to be implemented to help teams recognise red flags and handle suspicious activity escalation. 

Keep detailed documentation 

Maintain detailed documentation, keeping accurate records of customer data, all screening results and risk assessments. Not only will this help with audits, but this data will be regularly reviewed for ongoing monitoring. 

Make compliance quick and simple with the right PEP system

PEP screening isn’t just about ticking boxes to avoid penalties; it’s a crucial process that helps protect your organisation from financial and reputational harm. In order to create an effective PEP process, there needs to be a balance between strict control, customer checks and customer satisfaction. With our SmartSearch PEP and Sanction Screening technology, your checks will become effective and efficient for both your customers and compliance team.

To explore how we can help transform your Anti Money Laundering system, get in touch today or request a free demo of our software.