PEP Check: Politically Exposed Persons Screening Explained | Certn

A politically exposed persons check (PEP check) serves as a crucial safeguard against financial crime. In this article, we outline the importance of running a PEP check, shedding light on why industries such as financial services, legal and professional services, and real estate integrate them into their risk management strategies and background screening practices.

What is a PEP Check

Politically exposed persons (PEPs) are individuals who hold prominent public positions or have close associations with such figures. Examples include:

While not inherently indicative of wrongdoing, their positions expose them to potential risks, such as bribery, corruption, and money laundering.

A PEP check serves as a preventive measure, allowing businesses to assess the risk associated with engaging with individuals or entities linked to PEPs.

What’s the value to you?

By identifying PEPs within your customer base or transactional networks, you can implement enhanced due diligence measures to mitigate potential risks and safeguard your reputation and financial integrity.

What’s Checked in a PEP Check

A PEP check, also called a PEP and sanctions check, looks for connections to other PEPs or entities and whether the person is subject to any sanctions imposed by government authorities or international bodies.

The Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction, has more specific guidance on risks and considerations, but here’s what typically gets checked in a PEP and sanctions check:

  1. Politically Exposed Persons (PEPs): PEP checks involve identifying whether the individual being screened holds, or has held, a prominent public position or role that exposes them to potential risks of corruption, bribery, or money laundering.
  2. Family Members and Close Associates: PEP checks also extend to the family members and close associates of politically exposed individuals. Relatives and associates of PEPs may also be subject to enhanced scrutiny due to their proximity to individuals in positions of power.
  3. Sanctions Lists: Sanctions checks involve verifying whether the individual is listed on any sanctions lists maintained by government agencies or international organizations. These lists typically include individuals, organizations, or countries subject to economic or trade restrictions due to their involvement in activities such as terrorism, money laundering, or violations of human rights.
  4. Global Sanctions Regimes: Sanctions checks cover a range of global sanctions regimes imposed by various jurisdictions, including the United Nations Security Council, the European Union, the United States Office of Foreign Assets Control (OFAC), and other national authorities. These regimes may impose asset freezes, travel bans, or other restrictions on designated individuals and entities.
  5. Adverse Media Coverage: In addition to formal sanctions lists, PEP and sanctions checks may involve screening for adverse media coverage or negative news articles related to the individual. This specific media monitoring helps identify any reputational risks associated with the individual’s background or activities.

An effective PEP screening process should include:

Industries That Should Use A PEP and Sanctions Check

PEP and sanctions checks aim to identify individuals who may pose elevated risks of financial crime, corruption, or reputational damage to organizations. Given this, the following industries use a PEP and sanctions check to mitigate risks associated with engaging with politically exposed individuals or entities subject to sanctions:

  1. Financial Institutions: Banks, credit unions, and other financial entities are at the forefront of combating financial crime. Given their role in facilitating monetary transactions, these institutions are obligated to conduct thorough customer due diligence, including PEP checks, to comply with anti-money laundering (AML) regulations.
  2. Legal and Professional Services: Law firms, accounting firms, and other professional service providers often deal with high-net-worth individuals and corporate clients. Conducting PEP checks enables these firms to identify any potential risks associated with their clients and ensure compliance with regulatory requirements.
  3. Real Estate and Luxury Goods: The real estate sector, particularly in cities known for attracting foreign investment, may encounter PEPs seeking to conceal illicit funds through property transactions. Similarly, dealers in luxury goods, such as art and jewelry, must exercise caution to prevent their products from being used for money laundering or corruption.

In Canada, a study by Transparency International Canada alleges that billions of high-value real estate transactions in Toronto, Ontario involve individuals with potential links to PEPs, which got coverage in the national news and the Ontario Legislature and was the topic of many political debates in 2019 and 2020. The Toronto Real Estate Board says there are already mechanisms to detect and deter money laundering in the real estate market, the PEP and sanctions checks, and that everyone involved must comply with federal rules, which are regularly audited by FINTRAC. Whether you agree with the allegations or not, it underscores the importance of due diligence measures in the real estate sector. 4. Government Agencies: Government agencies responsible for issuing licences, permits, or contracts should incorporate PEP checks into their vetting processes to prevent undue influence or corruption in decision making.

Benefits of Using PEP Checks

In today’s global business landscape, the importance of PEP checks can’t be overstated. By integrating PEP screening into your risk management frameworks (such as AML screening), businesses across many sectors can effectively mitigate the risks associated with engaging with politically exposed individuals and uphold the highest standards of integrity and compliance.

As a trusted background screening company, we’re dedicated to providing comprehensive PEP screening to empower you in their fight against financial crime and corruption.

Risk Mitigation

Identifying and assessing PEPs helps you to evaluate the potential risks associated with engaging with these individuals or entities and implement appropriate risk mitigation measures.

Regulatory Compliance

Compliance with anti-money laundering (AML) regulations is mandatory for many sectors, and conducting PEP checks is often a key requirement. By adhering to regulatory guidelines, you can avoid penalties and legal repercussions.

Protecting Reputation

Proactively screening for PEPs demonstrates a commitment to ethical business practices and risk management, enhancing trust and credibility among stakeholders and customers.

Questions About PEP Check

We’ve compiled 20 frequently asked questions about a PEP check and put them to our screening team to answer:

What does PEP stand for?

PEP stands for politically exposed person, referring to a person who holds or has held prominent public positions that may potentially be exploited for financial gain or illicit purposes.

Why are PEPs high risk?

PEPs are considered high risk because their positions of power and influence make them vulnerable to corruption, bribery, and illicit financial activities. As a result, engaging in transactions with PEPs can expose your organization to reputational damage, financial losses, and/or regulatory scrutiny.

Why are PEP accounts high risk?

PEP accounts are considered high risk because they may be used for money laundering, embezzlement, or other financial crimes due to the influence and authority wielded by politically exposed individuals. Financial institutions and businesses often subject PEP accounts to enhanced due diligence measures to mitigate associated risks.

When do you legally have to run PEP?

The legal requirement to a PEP check varies depending on the jurisdiction and the industry. In many countries, financial institutions and certain businesses are obligated by anti-money laundering (AML) regulations to perform PEP screening as part of their customer due diligence process. The specific circumstances triggering mandatory PEP screening typically include when establishing new business relationships, conducting financial transactions above a certain threshold, or on a periodic basis to monitor existing clients.

What is a PEP check for AML?

A PEP check for AML purposes involves screening individuals against databases containing lists of known or suspected politically exposed persons. This screening helps financial institutions and businesses identify customers who hold or have held prominent public positions and assess the associated risk of involvement in money laundering, corruption, or other financial crimes. The goal is to prevent illicit funds from entering the financial system and ensure compliance with regulatory requirements.

How do you conduct a PEP screening?

Conducting a PEP screening involves collecting relevant customer information, such as name, date of birth, and nationality, and then comparing this information against PEP lists or databases. This screening process can be conducted manually by compliance officers or automatically using software like Certn’s online background screening designed to identify matches between customer data and PEP profiles. If a potential match is found, further due diligence measures, such as enhanced scrutiny of the customer’s financial activities, may be necessary to assess the risk level accurately.

What does PEP mean in banking?

It means the same thing! In banking, PEP stands for politically exposed person, referring to individuals who hold or have held prominent public positions that may potentially be exploited for financial gain or illicit purposes. Financial institutions are required to conduct PEP screening as part of their AML compliance efforts to identify and mitigate the risks associated with serving politically exposed customers.

Who needs to carry out AML checks?

Anti-money laundering (AML) checks need to be carried out by a wide range of entities, including financial institutions such as banks, credit unions, and money services businesses, as well as non-financial businesses such as casinos, real estate agents, lawyers, accountants, and dealers in high-value goods. Additionally, AML regulations may apply to certain professionals like notaries, jewelers, and art dealers, depending on the jurisdiction and specific industry requirements.

How are PEP and AML checks carried out?

PEP and AML checks are carried out through a process known as customer due diligence (CDD), which involves collecting and verifying customer information to assess the risk of money laundering or terrorist financing. The steps involved in conducting AML checks typically include:

  1. Customer Identification: Collecting basic information about the customer, such as name, date of birth, address, and identification documents like passports or driver’s licences.
  2. Risk Assessment: Evaluating the customer’s risk profile based on factors such as their business activities, geographic location, and transaction history.
  3. Enhanced Due Diligence (EDD): Conducting additional scrutiny for higher-risk customers, such as politically exposed persons (PEPs) or customers from high-risk jurisdictions.
  4. Screening: Checking customer information against various watchlists, sanctions lists, and politically exposed person (PEP) databases to identify any matches or red flags.
  5. Monitoring: Continuously monitoring customer transactions and behaviour for suspicious activities or unusual patterns that may indicate money laundering or terrorist financing.
  6. Reporting: Reporting any suspicious activities or transactions to the appropriate regulatory authorities as required by law.

AML checks may be carried out manually by compliance officers or automated using specialized software and screening tools to streamline the process and enhance accuracy and efficiency.

What is PEP clearance?

PEP clearance is the process of conducting due diligence on politically exposed persons (PEPs) to assess their risk level in terms of potential involvement in financial crimes or corruption.

Why are PEP checks important?

As outlined above, PEP checks are important because they help organizations mitigate the risk of being unwittingly involved in money laundering, bribery, or corruption schemes. By identifying individuals with political influence, your business can better evaluate the potential risks associated with engaging in financial transactions with them.

What is an example of a PEP?

An example of a PEP is a government official, high-ranking politician, or senior executive of a state-owned enterprise who holds significant influence or authority over government decisions and policies.

Is PEP screening mandatory?

PEP screening may be mandatory in certain industries or jurisdictions as part of regulatory requirements aimed at preventing financial crimes and maintaining integrity in the financial system. However, the specific regulations governing PEP screening vary depending on the country and industry.

What are the three types of PEP?

The three types of PEPs typically categorized in PEP screening are domestic PEPs (DPEPs), foreign PEPs (FPEPs), and international organization PEPs (IOPEPs). Certn’s PEP check screens all three types.

What is PEP list screening?

PEP list screening involves cross-referencing individuals against databases containing lists of known or suspected PEPs compiled by regulatory authorities, government agencies, or reputable third-party providers.