Identifying Politically Exposed Persons (PEPs) is crucial for financial institutions as they pose a high-risk of being involved in corruption, bribery, and money laundering. International and local regulators have set various criteria to classify PEPs, making it a challenging task. To aid in this process, FATF and the European Union frequently release updated guidelines on identifying PEPs. PEPs are typically individuals in positions of power and influence, making them more susceptible to committing corruption and bribery crimes.
To prevent financial crimes such as money laundering, terrorist financing, corruption, and bribery, it is essential for organizations to implement Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. These regulations are mandatory for organizations at risk, and companies must identify new customers and screen their existing ones for PEPs. Regulators impose fines on organizations that fail to carry out PEP controls. Financial institutions that failed to comply with PEP screening and sanction check obligations between 2008 and 2018 were fined a staggering $27 billion.
PEP Screening on Customer Onboarding
PEP screening is a critical component of the customer onboarding process, as it enables businesses to identify and manage potential risks associated with Politically Exposed Persons. PEPs are individuals who hold or have held prominent public positions, such as government officials, diplomats, or senior executives at state-owned enterprises. Due to their access to public funds and the potential for corrupt practices, PEPs are considered high-risk customers by financial institutions and other businesses.
During the customer onboarding process, businesses typically perform Know Your Customer (KYC) procedures to verify the identity of the customer and determine their risk level. As part of this process, businesses should conduct a PEP screening to identify whether the customer is a PEP or has any associations with PEPs.
PEP screening involves conducting a thorough search of public records, databases, and other sources of information to identify any connections between the customer and PEPs. This can include identifying family members or associates who may have PEP connections or conducting enhanced due diligence on transactions involving the customer.
Once a customer has been identified as a PEP, the business must implement appropriate controls and monitoring procedures to manage the risks associated with that individual. This may include conducting additional due diligence on the customer's transactions, implementing enhanced transaction monitoring, and conducting ongoing monitoring of the customer's account.
In addition to identifying PEPs during the customer onboarding process, businesses must also ensure that they have adequate measures in place to identify and manage ongoing PEP relationships. This may involve conducting regular reviews of customer accounts and transactions to identify any changes in the customer's risk profile.
PEP Screening On Customer Transactions
Financial institutions must conduct PEP scans on both buyers and senders in financial transactions to identify potential risks associated with PEPs. Transactions involving PEPs should be closely monitored, as their high transaction volume is often indicative of suspicious activity.
Financial institutions must also maintain records of any suspicious transactions and report them to authorized units, such as financial intelligence units or law enforcement agencies. These reports are called suspicious activity reports and are an essential tool in combating financial crime and preventing the abuse of power by PEPs.
The detection of suspicious transactions involving PEPs is crucial to preventing bribery and other financial crimes and protecting the integrity of the financial system. Financial institutions must conduct thorough due diligence on their customers, including PEP screening, to ensure that they are not facilitating illicit activities.
In addition to PEP screening, financial institutions must also implement robust transaction monitoring and reporting mechanisms to detect and report suspicious activity promptly. This includes ongoing monitoring of customer accounts, transaction patterns, and unusual activity.
PEP Screening with Sanction Scanner
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