KYC

What Are PEP Checks? A Guide for Beginners

Businesses and organizations may screen a customer, client, and any other stakeholder, to determine if they are a politically exposed person (PEP). The process is called a PEP check. In this essential introduction for beginners, you will learn what it is, how it works - and how regulation technology (RegTech) is increasingly making the process more accessible.

Paul Dixon
,
June 15, 2023

First and foremost, though, it's crucial to remember why companies perform PEP checks. The answer to this is simple: financial crime. And it's precisely the risk of money laundering that PEPs present to a business or organization that is the glaring issue.

After all, the monetary penalties and reputational damage for money laundering violations can be staggering - and in 2022, there was a 50% surge in money laundering fines.

But before we dive into what it means to identify potential PEPs within your business, we need to remind ourselves what they are.

What Are Politically Exposed Persons (PEPs)?

A PEP is an individual who holds a prominent public position; the most obvious example is a politician. But the following are also included:

  • Civil Servants
  • Military Personnel
  • People in Judicial Roles
  • Political Party Members
  • Executives at State-Owned Corporations

The closest official definition of a PEP comes from the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, who state that a PEP is "an individual who is or has been entrusted with a prominent public function."

PEPs may have under their control that a regular person doesn't - state funds (collected through taxes). And the following is a crucial point: PEPs will likely influence and control government coffers. 

Therefore, the potential for illegal activity is a real risk. According to the United Nations Office on Drugs and Crime (UNODC) corruption remains a widespread issue affecting societies worldwide.

But how does global corruption present risk to businesses worldwide? 

The answer is in more ways than many realize. 

Corruption, bribery, and stealing state funds lead to the same problem: Money laundering is the only option for individuals such as corrupt politicians and bribe-taking civil servants to clean their ill-gotten gains.

But laundering dirty money is never simply a national affair - to get it done, especially in the layering stage of money laundering, illegal funds will zigzag through numerous jurisdictions worldwide (potentially your accounts if there are weaknesses) before being integrated into the legitimate financial system. 

Returning to what a PEP is, it's also essential to remember that being identified as one does not indicate wrongdoing or illegal activities. The same applies to relatives and close associates (RCAs) of PEPs. 

However, PEPs (and often their RCAs) are considered a higher risk because of the potential for criminal activity, such as laundering dirty money with origins in corruption and bribery, due to their position and influence within public bodies.

What Is a PEP Check? And What Are PEP Lists?

When a business or organization performs a PEP check, also known as PEP screening, they search to see if their customer, client, or any stakeholder appears on any PEP list.

Remembering that this process is part of a risk-based approach is essential. Why? Because identifying an individual as a PEP - and putting them into a category of high, low, or medium risk - is not a case of something being black or white. 

An apt analogy is car insurance. The insurance provider creates a high or a low quote for the customer based on data (such as the driver's age, the postcode where they live, and the type of car). Identifying PEPs, and their risk levels, is not the same as car insurance.

But both do utilize a risk-based approach. 

We will expand on the different types of PEP checks and how they practically operate, but before that, it's essential to understand how PEP lists, also known as PEP databases, work. There are two kinds:

Named or Documented PEPs Databases

All individuals included in these databases have already been identified as a PEP, usually by a governmental organization. For example, the US's Office of Foreign Assets Control (OFAC) Specially Designated Nationals And Blocked Persons List (SDN) contains PEPs subject to economic sanctions. 

A minority of countries worldwide also publish national PEP databases that are publicly accessible. 

But the reality is this: Companies and organizations cannot rely solely on these lists when determining if a customer, client, and any other stakeholder is a PEP. Why? Because the data is not broad enough, nor may it be up-to-date. 

And what does this mean? It means additional checks and due diligence are necessary when assessing PEP status in the PEP screening process. And this is where functions, positions, and roles databases come into play.

Functions, Positions, and Roles Databases

These databases are primarily open-source lists created by governmental and non-governmental bodies. It's worth noting that many of these lists are not designed explicitly for PEP checks. They often have a different primary use. For example, making information about elected officials publicly available to the electorate.

Here is an example of a governmental list: The European Parliament publishes data about all European Parliament members (MEPs) made available in a user-friendly search format and as an XML file for developers. And it's a list that is especially useful in PEP screening, given that the EU is currently engulfed in a 2023 corruption scandal involving numerous MEPs.

An example of a non-governmental entity containing PEP data is Wikidata (part of Wikipedia). Identifying PEPs worldwide is possible through its extensive collection of structured data. Again, the primary use of Wikidata is not checking for politically exposed persons, but the data is used in a risk-based approach to identifying PEPs.

Summarizing PEP Lists

We now know there are two types of lists utilized in PEP checks. But now for the elephant in the room: How do businesses and organizations fully committed to identifying PEPs even get close to managing countless lists and databases?

The answer is that they increasingly use regulation technology (RegTech) service providers, such as sanctions.io, that pool lists into one central database that's constantly updated. For example, sanctions.io's PEP global database contains one million+ data records, including family members and close associates (RCAs).

When Are PEP Checks Performed? 

A PEP check is an increasingly important facet of the Know Your Customer (KYC) process. It's often performed in the initial stages of a relationship with a customer, client, or any other stakeholder.

Unlike sanctions, where situations change quickly in the rapidly evolving global political landscape, the PEP environment is less volatile. However, companies committed to reducing the risk of unknowingly aiding a PEP in nefarious activity may perform checks on existing customers weekly or monthly.

The following is an important point: It's often difficult for companies and organizations to know when PEP checks are necessary - depending on the type of business, jurisdiction, and product.

Seeking professional help, whether they are in-house compliance experts or external consultants, in a risk-based approach to PEP screening is imperative. 

How Are PEP Checks Performed?

As with sanctions screening, clients perform PEP checks with RegTech PEP database providers in various ways. Broadly they fit into the following categories:

  • During transactions in real-time 
  • In automated batches (e.g., daily)
  • Manual checks (e.g., .csv file upload)

For example, with sanctions.io, clients can do all of the above depending on their specific needs. And the key takeaway is this: The incredible advancements in RegTech mean PEP checks can now occur in real-time or at particular time intervals through APIs.

Next Steps: Discover Potential PEPs Right Now

If you would like to perform a PEP check in your business right now, we offer a free 7-day trial (no credit card is required). You can get to know sanctions.io's service even with basic technology skills - for example, by simply uploading a .csv file with your client and business partner data.

We would also be delighted to walk you through our service and answer all your queries regarding the sanctions.io API, integrations, and more. Book a free Discovery Call now

sanctions.io is a highly reliable and cost-effective solution for PEP checking. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons customers globally trust us with their PEP screening needs. 

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Paul Dixon
Paul is a RegTech content writer & strategist with extensive experience in digital marketing and journalism. His work has appeared in the Guardian newspaper. He also holds a degree in International Relations, where he studied global sanctions compliance and cross-border finance.‍
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