Bolstering financial integrity through PEP screening in KYC processes


Moody’s Analytics recently took the opportunity to explain how screening for politically exposed persons can strengthen KYC processes. 

Screening for Politically Exposed Persons (PEPs) is an integral element of Know Your Customer (KYC) procedures, owing to the increasing possibility of associated risks.

Entities, in accordance with the Financial Action Task Force (FATF) guidelines, are recommended not to refuse services to PEPs solely due to their status. Instead, the aim is to accurately identify PEPs to execute proper customer due diligence and risk control actions, thereby curbing any potential risk and empowering organisations to make informed decisions about their business partnerships.

PEPs are generally defined as individuals entrusted with a prominent public role. Those who are relatives or close associates of PEPs can also be recognised as PEPs by association, as defined by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR). This demographic typically occupies significant positions of power in government, public institutions, or international organisations.

The necessity for PEP screening arises from their roles of power, influence, and financial access which make them prone to being exploited for bribery, corruption, and money laundering. PEP screening is carried out to mitigate such risks and focusses on individuals with political influence or access to public funds, who could potentially present financial or reputational risks.

Benefits of conducting PEP screenings include heightened risk detection, regulatory compliance, robust protection against financial crime, and safeguarding against reputation damage. It’s pertinent to note that there are varying screening guidelines for domestic and foreign PEPs, with some entities advocating for enhanced due diligence for all PEPs, irrespective of their location.

The process of PEP screening is embedded within a risk-based approach to due diligence. This procedure aids organisations in making informed decisions about client onboarding and performing continuous risk monitoring. With political statuses frequently changing globally, the PEP lists are continuously updated. Companies can optimise their screening process by utilising technologies that sync with regularly updated PEP databases, ensuring continuous risk assessment.

An effective risk profile comprises various data inputs. Alongside PEP screening, organisations often include adverse media screening and sanctions and watchlist data to craft a comprehensive risk-based approach to compliance. Adverse media screening plays a crucial role in KYC processes for compliance with anti-financial crime regulations.

Adverse media refers to unfavourable news or information about an individual or entity which can signal additional risk. By monitoring adverse media and integrating alerts into KYC procedures, organisations can gain insights into any public involvement a PEP may have had with illicit activities.

However, both PEP and adverse media screening can generate “false positives”, potentially resulting in time-consuming and resource-heavy manual investigations. False positives typically occur when legitimate individuals or entities are incorrectly flagged as potential risks.

Advanced technologies like AI can help to efficiently manage these false positives. By incorporating AI and machine learning in PEP screening, processes can be automated, alert accuracy improved, and a fuller risk profile developed. This technological intervention allows institutions to allocate highly skilled analysts to enhance due diligence and more precisely investigate PEP-associated risks.

Read the full post here.

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