All About: PEP Checks

PEP checks or screening for politically exposed persons (PEPs) and those on the sanctions lists are an important component of the KYC and Anti Money Laundering regulations.

PEP checks are specifically tailored to identify PEPs, their relatives, and close associates, to ensure they are not knowingly or unknowingly party to illegal or corrupt activities.

Read on to get an in-depth understanding of PEP checks, what they encompass, how they help mitigate risks, enable businesses to stay compliant with diverse regulations, and drive business growth.

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What is a PEP Check?

Businesses, across industries, such as financial services, online gambling, and more, are mandated to conduct stringent Know Your Customer (KYC) checks and comply with AML (anti-money laundering) regulations. This is with a view to protect businesses from engaging with high-risk clients or those who may be involved in illegal activities. An important component of the KYC and AML processes is PEP checks. A PEP check is a specific type of check that helps identify politically exposed persons (PEPs). A PEP check involves examining individuals against PEP databases and restricted lists for potential risks. A PEP, as defined by the Financial Action Task Force (FATF) is any person who is currently, or in the past, entrusted with a prominent function. These include government officials, high-ranking military officers, senior judges, executives of central financial institutions or international sports committees. The United Nations Convention Against Corruption (UNCAC) also classifies relatives and close associates of such persons as PEPs. By virtue of their position and influence, PEPs are more at risk of corruption, bribery, money laundering and terrorist financing. Broadly, PEPs can be categorized as:

Foreign PEPs:

People with prominent roles in a foreign country, such as ambassadors, highly placed government officials, or executives at top positions in international organizations.

Domestic PEPs:

People appointed at influential public positions in their own country, such as government officials, judges, or executives in state-owned businesses. 

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Why is a PEP Check Important?

‍PEP checks are crucial for fighting corruption and mitigating the risks associated with money laundering and other illegal financial activities.According to the KYC and Anti Money Laundering regulations, it is mandatory for businesses to perform PEP checks and screen out risky customers. Businesses must conduct additional due diligence for PEPs to determine and mitigate potential risks such as money laundering, bribery, or corruption in any form.That said, it does not imply that businesses cannot serve PEPs. These checks are required just to ensure that they do not deal with individuals or entities who may unknowingly be involved in unethical practices that may cause reputational damage to the business. For example, sports betting regulations in Brazil mandate online gambling operators to conduct PEP checks to ensure such individuals are prevented from accessing these platforms. It is important to note that the PEPs need not necessarily be involved in illegal activities themselves; even if they are affiliated with a person or entity being investigated, they can pose a risk to a business.With robust PEP checks, businesses, especially financial institutions, can efficiently manage risks, ensure regulatory compliance, and avoid penalties, additional scrutiny, and potential legal action.

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‍Challenges Associated with PEP Checks

‍There are several challenges that PEP checks present for businesses. These include: 

• Data: The PEP lists may be low-quality, incomplete, inconsistent, or contain outdated information. This can affect the accuracy of these checks and result in false positives.
• Complexity of Identification: Misspelled names or individuals with same names may make it harder to identify the appropriate PEP, causing false positives.
• Global Variations: Inaccurate translation of names and titles from one language to another can adversely impact identification of intended individuals. Lack of standard global regulations and varying definitions about PEPs across countries can make it harder for businesses to navigate regulatory complexities and maintain compliance.
• Infrastructure: Screening large amounts of consumer data for thousands of individuals every day requires robust systems. Further, to keep up with PEP lists that are continually being updated requires businesses to maintain a strong infrastructure.
• Costs and Investments: Creating and maintaining an effective PEP screening system, requires businesses to make significant investments. To manage and interpret complex data and regulatory requirements, businesses must hire skilled personnel. Both these requirements significantly add to the operational costs for businesses.
• User Privacy: Businesses face a challenge trying to balance thorough PEP checks with an individual’s privacy. They must also ensure compliance with prevailing data protection laws that can impede sharing and processing of an individual’s personal information.
• False Positives and Negatives: False positives, identifying someone as a PEP incorrectly, and false negatives, failure to identify a PEP, are both undesirable consequences for businesses, as they can lead to unnecessary scrutiny, legal action, financial losses, and reputational damage.
• Integration with Existing Systems: Businesses face complex technical challenges integrating PEP screening systems with existing IT infrastructure. Often, these disparate systems and databases may face interoperability issues that can impede the quality of PEP checks.
• Ongoing Monitoring: PEP databases are frequently updated. Businesses therefore cannot rely on one-time PEP checks and must continually monitor the updated status of the PEPs to adapt risk profiles to evolving threats and regulatory changes.

‍Steps for PEP Checks

‍Robust PEP checks involve several checks and measures to ensure accurate identification of PEPs. Usually, the steps involved in a PEP check include:

Defining the PEP Criteria:

Understand who qualifies as a PEP, according to the industry of the business. 

Collecting Information:

Gather comprehensive customer data including personal information such as full name, date of birth, nationality, address, occupation, and identification documents such as driver’s license or passport. If applicable, also obtain information on family members and close associates.

Risk Assessment:

Evaluate the risk associated with the customer being a PEP. Perform enhanced due diligence (EDD) for high-risk customers. These may include scrutinizing transaction history, and sources of wealth and funds.

Using PEP Databases:

Use specialized PEP databases that can provide deep information about PEPs, their relatives and close associates. Integrate these databases into customer onboarding and monitoring systems for real-time checks.

Sanctions Lists:

Check whether individuals are subject to any sanctions imposed by the United Nations Security Council (UNSC), the European Union (EU), the United States Office of Foreign Assets Control (OFAC), or other national authorities. The sanctions subject included individuals, entities, and countries to economic or trade restrictions, travel bans, asset freezes, and more, for activities such as terrorism, money laundering, or human rights violations.

Adverse Media Coverage:

Look for negative media coverage or news articles related to the PEPs in question to assess the person’s background or activities that may pose a risk. 

Continuous Monitoring:

Continuously monitor user behavior and transaction for unusual or suspicious activity. Monitor changes to customer information to identify new PEPs, keep the status of the existing PEPs updated, and add any additional potential risk factors.

Reporting and Documentation:

‍Maintain records of PEP checks, the methods used, information gathered, and the risk assessments conducted. If any suspicious activity is identified, report it to the relevant authorities, such as Financial Intelligence Units (FIUs).

Training:

‍Conduct training for staff members to ensure they are adequately equipped to identify PEPs and appreciate the importance of PEP checks in AML/CTF compliance.

Audits:

Conduct regular internal and external audits to adhere to the PEP check process and ensure regulatory compliance.

Review and Update Policies:

‍Periodically review and update existing PEP checks policies and procedures to adapt to the changes in regulations, emerging risks related to PEPs, and the best practices.

Optimizing PEP Checks:

Use technology-driven solutions, such as Caf BetID, to improve the quality of PEP checks, while reducing false positives, maximizing the efforts and costs invested, and staying compliant.

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PEP Check in Action

‍Regardless of the industry a business operates in, PEP checks are required to ensure compliance with KYC and anti money laundering regulations. Here’s a snapshot of how PEP checks are used across different industries:

• Banking and Financial Services: Financial institutions conduct PEP checks during the account opening process to assess the associated risks and classify customers according to their risk levels. High risk PEPs are subjected to enhanced due diligence. Financial services providers also use PEP checks for continuous transaction monitoring and reporting any suspicious activities to Financial Intelligence Units (FIUs).
• Cryptocurrency and Fintech: From user onboarding to transaction monitoring using blockchain analytics tools and regulatory reporting of suspicious activities to appropriate regulatory bodies, PEP checks find multiple uses in this industry.
• Gaming and Gambling: Regulations in the online gambling industry prohibit operators from allowing PEPs access to their platforms. Gambling platforms use PEP checks to screen players during the sign-up process, monitor transactions such as deposits and withdrawals for suspicious activity, and perform extended due diligence for gamers identified as PEPs. 
• Telecommunications and Technology: Screening customers during the onboarding process, transaction and usage monitoring for unusual patterns indicative of abuse, and reporting all suspicious activities to relevant authorities are the major uses of PEP checks in the telecommunications and technology industries.
• Healthcare and Pharmaceuticals: Businesses in this sector use PEP checks for scrutiny of supplier, partners, and contractors; as well as the recipients of grants and research funding. PEP checks help these businesses with ongoing monitoring to regularly review and update PEP statuses and compliance records.
• Insurance: Insurance companies screen applicants and beneficiaries against PEP lists before issuing a policy and to monitor telltales of potential fraud during claims processing. Insurance companies also use PEP checks to update the status of PEPs and review existing policies for potential refinement.
• Real Estate: PEP checks are useful to identify PEPs involved in buying, selling, or renting properties. With extended due diligence on risky PEPs, they can verify the source of funds used in transactions. Real estate companies periodically conduct PEP checks to audit transactions and customer records to ensure regulatory compliance.
• Legal and Accounting: Firms in this industry leverage PEP checks to screen new clients and their associates during the intake process. By adopting a risk-based approach, they can determine the level of due diligence required and maintain compliance by regularly reviewing and updating PEP statuses, especially for long-term clients.
• Luxury Goods and Art Dealers: One of the biggest uses of PEP checks in this industry is customer verification of users purchasing high-value items and verifying the legitimacy of the funds used for these purchases. With ongoing monitoring, businesses in this industry review transactions and customer records to remain compliant with prevailing regulations.
• Non-Governmental Organizations (NGOs) and Non-Profits: Use PEP checks to screen significant donors and contributors, monitor the use of funds to ensure they are not being misused, and audit financial records and donor lists to ensure compliance with regulatory requirements.

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How a Good PEP Check Drives Revenue

‍PEP checks, when conducted efficiently, can significantly contribute to revenue growth. Because PEP checks help businesses mitigate risks and remain compliant with regulatory requirements, they help strengthen business relationships, enhance an organization’s reputation and trust among stakeholders, including customers, partners, and investors. In regulated industries like financial services and online gambling, PEP checks help businesses prevent costly financial crimes and penalties associated with regulatory non-compliance. By effectively identifying and managing risks associated with PEPs, businesses can demonstrate their commitment to robust compliance with regulatory requirements, avoid fines, additional scrutiny, and legal repercussions. This fuels financial stability and allows businesses to direct resources towards growth and innovation. Such credibility can help these businesses secure long-term contracts, partnerships, and investment opportunities. It also helps attract and retain more customers who prioritize strong anti money laundering (AML) practices, build business relationships, and expand business opportunities, thereby directly contributing to increased revenue and market share.Robust, automated PEP checks can help businesses optimize operational efficiency by streamlining the processes. Automated PEP checks not only improve accuracy by eliminating probability of human errors, but also reducing the time and resources spent on manual compliance processes. This enables businesses to focus on core business activities, enhance overall productivity, and improve profitability.Enhanced due diligence conducted as part of PEP checks also enable businesses to explore new markets and opportunities. Effective PEP checks provide businesses with the much-needed confidence of compliance with global regulations, enabling expansion of their operations to new territories. This proactive approach to compliance helps these businesses mitigate risks, gain a competitive advantage over peers in the market, safeguard existing revenue, and create a stable environment for sustainable growth. 

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Conclusion

‍PEP screening is a crucial component of risk management and compliance. It enables businesses to mitigate risks associated with PEPs, protect against reputational damage, financial losses, and regulatory non-compliance.Although PEP checks present several challenges, including the differences in jurisdiction-specific regulations, handling vast amounts of customer data for effective screening, along with variations in regulatory definitions of PEPs across different countries, businesses can leverage technology to overcome these challenges and streamline their PEP checks processes.Technology-driven PEP check procedures help organizations quickly query multiple databases, sanction lists, and adverse media coverage to perform comprehensive screening needed to effectively protect their business interests.Advanced algorithms and AI-powered tools help businesses efficiently analyze large datasets. With the ability to cross-reference multiple sources, these solutions can help businesses identify PEPs and the associated risks with greater accuracy and fewer false positives. Furthermore, automated PEP screening systems reduce the amount of manual effort required to monitor and keep pace with frequent regulatory updates and PEP statuses, ensuring continuous compliance and sustained business growth.