PEP KYC Process and Compliance Requirements

To comply with anti-money laundering (AML) regulations, financial institutions must implement a robust PEP KYC process. This process involves verifying the identity of politically exposed persons (PEPs) and assessing their risk level.

A PEP is defined as an individual who has held or currently holds a prominent public position, such as a head of state or government official. This includes their family members and close associates.

The PEP KYC process typically involves collecting and verifying documentation, such as government-issued IDs and proof of address.

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Fines for inadequate PEP screening can be staggering, with global regulators handing out around $27 billion in fines to financial institutions between 2008 and 2018.

This is a significant amount of money, and it's a wake-up call for companies to take PEP screening seriously. Failing to do so can lead to fines, prosecution, and even facilitating criminal activity that hurts communities.

Regulators are expanding their net to include Virtual Asset Service Providers (VASPs), which means they will start to face fines too. This is a reminder that PEP screening is not just a compliance issue, but a critical Anti-Money Laundering (AML) tool.

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Here are some recent examples of companies facing fines for neglecting PEP screening:

These examples demonstrate the importance of robust PEP screening and the potential consequences of neglecting this crucial compliance process.

Sanctions lists are a crucial tool in the fight against financial crimes, and they contain references to individuals, businesses, and jurisdictions that have been flagged for committing or being suspected of committing a crime.

These lists are verified against multiple government watchlists and sanctions lists maintained by law enforcement agencies, international regulators, and multinational organizations such as the UN.

The goal of these sanctions is to prevent and detect illegal activities, terrorist financing, and any other activities considered to be a threat to national security.

Sanctions lists are maintained by various national and supra-national regulatory bodies, including organizations such as Interpol, the EU, the US Office of Foreign Assets Control (OFAC), UN, Her Majesty’s Treasury (HMT), and the Financial Action Task Force (FATF).

The sheer number of sanctions lists maintained globally makes it a complex task to keep up to pace with them as they are updated.

Here are some of the most commonly used PEP databases:

Sanctions lists are not limited to searching names, but also account screening can be used to check a bank account’s details against lists of sanctioned bank accounts.

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Corruption is a significant issue facing society today, with estimates suggesting it costs the global economy over $2 trillion annually. According to the World Economic Forum, this is approximately 5 percent of the global Gross Domestic Product (GDP).

The cost of corruption is staggering, with businesses and individuals paying over $1 trillion in bribes every year, as reported by the World Bank. This highlights the need for effective measures to prevent and mitigate the risks associated with corruption.

Conducting business with corrupt PEPs can result in serious damage to a financial institution's reputation, leading to negative consequences for the business. Additionally, if a financial institution or its employees were aware or should have been aware of funds originating from corruption or serious crimes, criminal charges may be filed.

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PEPs are more likely to be involved in illegal activities and financial crimes, such as money laundering, bribery, and terrorist financing. According to the United Nations, $1 Trillion is paid in bribes, and $2.6 Trillion is stolen through corruption. These numbers are a serious concern, and financial institutions and organizations must prevent them.

Here are the three main types of PEPs, as categorized by the Financial Action Task Force (FATF):

It's essential to identify if your customers are PEPs due to the inherent risks associated with their status. Understanding the PEP status of customers helps mitigate risks associated with financial crimes such as money laundering, corruption, and bribery.

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Screening against PEPs and sanctions lists is crucial for risk mitigation, compliance, and preventing financial crimes. This process involves verifying the identity of customers to ensure they are not involved in illicit activities.

Electronic identity verification (eIDV) technology provides a reliable and efficient means of verifying customer-provided details against reputable data streams in real-time. This includes comprehensive sanctions data, including PEPs and related entities.

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To identify PEPs, financial institutions or organizations need to collect sufficient data to screen customers against multiple data sources, including the customer's full name, date of birth, gender, and any political exposure roles they may have held. The minimum data required for PEP screenings should include the customer's full name, date of birth, gender, and any political exposure roles they may have held.

The Financial Action Task Force (FATF) defines PEPs as individuals who have occupied or are currently in a high-level position within a government, international organization, or a company. This includes heads of state or government, high-level politicians, top-tier government officials, judges or military personnel, and senior executives of state-owned companies.

Here are some key factors to consider when screening PEPs:

In the United States, PEP screening is part of the Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) program, overseen by the Financial Crimes Enforcement Network (FinCEN).

The Financial Crimes Enforcement Network (FinCEN) is the regulatory authority responsible for overseeing PEP screening in the United States. This includes foreign PEP screening, in alignment with the Bank Secrecy Act and the Patriot Act.

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In the UK, PEP screening is mandatory, covering both foreign and domestic PEPs, and is regulated by the Financial Conduct Authority (FCA).

The Financial Conduct Authority (FCA) sets out the requirements for politically exposed person screening in the UK, ensuring compliance with Anti-Money Laundering regulations.

To ensure compliance with KYC regulations, financial institutions must conduct customer due diligence (CDD) and enhanced due diligence (EDD) for higher-risk PEPs.

Here are the key requirements for CDD and EDD:

Regularly screening against PEPs and sanctions lists is crucial for risk mitigation, compliance, preventing financial crimes, protecting reputation, and regulatory reporting.

PEP screening is a critical component of a risk-based KYC process, and it's essential to use reliable sources to gather information.

To monitor potential risks related to PEPs, financial institutions and businesses must adopt a risk-based approach.

PEP lists are constantly changing, with new names being added daily, so having an automated and systematic approach to ongoing monitoring is crucial.

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It's essential to keep clean records and perform Customer Due Diligence (CDD) when onboarding PEPs.

To minimize false positives, you can use custom filtering options based on date of birth and country.

Having an end-to-end workflow solution that can run a full suite of PEP, sanctions, adverse media, and other screenings can provide a transparent and informed picture of who your customers are.

Risk Assessment and Monitoring is a crucial step in managing Politically Exposed Persons (PEP) risk. According to FATF guidelines, foreign PEPs are automatically classified as higher risk than domestic PEPs.

Financial institutions must conduct customer due diligence when conducting risk assessments. This involves considering various risk factors, such as geography, type of business, and product, to establish an appropriate level of monitoring for PEPs.

Continuous monitoring and screening of current PEP customers are necessary to detect any changes in their high-risk status. This includes regularly checking their financial activities, verifying their sources of wealth and funds, and ongoing monitoring of their business transactions.

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To ensure compliance with regulatory requirements, it's essential to regularly screen customers against updated PEP status in lists and regulatory databases. This will help identify any changes in their PEP status and associated risks.

Here are the key factors to consider when conducting risk assessments and monitoring PEPs:

By considering these factors and implementing regular checks, you can maintain a robust compliance and internal risk assessment and risk management program.

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Technology has revolutionized the PEP screening process, enhancing efficiency and accuracy.

Traditional manual screening processes are time-consuming and prone to errors, leaving institutions vulnerable to regulatory violations and reputational damage.

Technology-driven systems can automate manual processes, reducing errors and saving time.

Financial institutions require access to comprehensive and accurate sanctions data to effectively identify PEPs and ensure compliance.

Technology-driven solutions provide integrated sanctions technology that consolidates data from various trusted sources worldwide.

This wealth of data includes not only PEP profiles but also information on family members, State Owned Enterprises, and government-owned businesses.

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Implementing technology in PEP screening processes offers numerous benefits, including enhanced efficiency and accuracy.

Automation eliminates manual errors, saves time, and expedites customer onboarding.

Technology provides access to comprehensive PEP databases and sanction lists, ensuring up-to-date and reliable information.

This minimizes the risk of missing crucial data and potential compliance breaches.

Technology-driven solutions facilitate advanced risk assessment through data analytics and algorithms.

By analyzing vast amounts of data, institutions gain valuable insights into the risks associated with PEPs.

HyperVerge offers solutions to streamline Anti-Money Laundering (AML) compliance with its advanced AML Screening module.

This module provides daily updates on sanctions screening, adverse media screening, and PEP lists from organizations like UNSC, OFAC, Interpol, IRDAI, FIU, and UAPA.

HyperVerge’s AML solution is complete with risk assessment, enhanced regulatory compliance, and ongoing monitoring.

Our AML software is designed to minimize false positives by offering custom filtering options based on date of birth and country.

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Working with Politically Exposed Persons requires a thorough understanding of who they are and how to manage the risks associated with them.

A Politically Exposed Person (PEP) is someone who holds or has held a notable public position, such as government officials or a high net-worth individual.

To identify a PEP, you can use the definitions provided by the Financial Action Task Force (FATF): Foreign PEPs, Domestic PEPs, and International Organization PEPs.

Here are the types of individuals who may be considered PEPs:

Additionally, family members and close associates of PEPs may also be considered PEPs due to their potential involvement in circumventing AML controls or concealing the origins of illicitly obtained funds.

If a PEP is detected, companies must get the approval of senior management before establishing a business relationship, verify the Source of Wealth and Source of Funds, and inform staff members about the establishment of a business relationship.

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