From an intricate perspective of risk management, the politically exposed person (PEP) check stands as a cardinal implementation for discerning and managing high-risk entities. This mechanism becomes indispensable when sailing complex financial environments. In 2023, Mexico’s risk index for money laundering and terrorist financing registered at 5.21, a slight decline from 5.2 the previous year, yet still significant. The index, which peaked at 5.75 in 2017, underlines the persistent risks facing this Latin American nation. With its methodical approach, the PEP check provides a strategic blueprint to scrutinize the potential risks for enhancing due diligence and adherence to demanding global compliance standards.
What is a PEP Check?
A politically exposed person check is the scrutinization protocol against financial fraud, which is mainly conducted for screening potential customers, clients, and related shareholders to govern if they are high-risk entities. This entire operation is a PEP check, which focuses on integrating risk management strategies and background check protocols. This defined strategy is designed in such a way that it assists financial organizations in not being involved in economic illegalities. The effective PEP check detects and oversees customer due diligence on politically exposed entities to combat the potential risks of financial malfeasance and related misconduct. It is executed by inspecting the database and PEP lists given by the government authorities, which can manage the potential risks directly linked to their profiles. These are counted for anti-money laundering and know your customer forces.
Who is a Politically Exposed Person (PEP)?
Politically exposed persons are the entities holding the most prominent positions with notable political clout or those having strong partnerships with executive government officers. According to their standings and alliances, PEPs have intense risks of being associated with doings that expose them to financial fraud. Entities operating in potential positions are considered to be screened as PEP. Given below are the lists of politically exposed persons who can be identified as high-risk entities if found to be in these positions.
- Government and Diplomatic Roles
- Judicial Authorities
- Senior Political Party Roles
- Senior Roles in State-Owned Enterprises
- Central Banks and Financial Institutions
- High-Ranking Military Positions
- Family Members and Close Associates in Business
- Armed Forces Personnel
- Judiciary Members
- Political Party Officials
- Executives in Potential Enterprises
Standard Operating Procedures for PEP Sanctions Check
The complete PEP checklist is comprised of 6 significant steps, which can be accomplished by following the subsequent steps that are given below:
- Identity Assessment: It involves the gathering of credentials that detect the entity or the decision maker in question and their place as the Ultimate Beneficial Owners (UBOs) or Persons of Significant Control within enterprises.
- Authentication of Potentials: This is conducted by authenticating the potential users who claim to be through the integration of KYC and digital ID verification methods.
- Screen for Sanctions: Reviewing against sanctions lists and applying risk scoring involves checking individuals against official lists of sanctioned persons and assessing their risk level. This process helps avoid engaging with individuals who pose legal or financial risks.
If any entity is found to be involved in any type of illegality, further steps should be employed, which are given below:
- Enhanced Due Diligence: It is an updated version of due diligence usually directed to observe high-risk individuals who are laundering money or involved in terror funding.
- Reporting Anomalies: Report any activity by PEPs under sanctions or any suspicions about an individual using a Suspicious Activity Report (SAR).
- Monitoring: Screening lists are constantly changing, so monitoring will highlight and issue alerts about variations to identify suspicious activities under AML PEP check.
Industries Mandated to Implement PEP and Sanctions Screening
Explore the complete tabular form for comprehending the PEP screening and their functionality in diverse industries:
| Industries | Benefits |
| Financial Institutions | Banks, deposit unions, and related financial enterprises are at the vanguard of mitigating economic malfeasance. Owing to their status in assisting financial transactions, these organizations are obliged to perform detailed customer due diligence, including PEP checks, which meet the defined criteria of anti-money laundering protocols. |
| Legal and Professional Services | Court sessions, law firms, and related service providers are usually dealing with high-value entities and corporate clients. The implementation of PEP checks allows these organizations to detect any potential risks related to their clients and regulate regulatory bodies. |
| Real Estate and High-End Asset Markets | Real industry dealing in foreign investments should seek PEPs protocols for encountering the hidden illegal money which are conducted through property transactions. |
| Public Sector Agencies | It has been seen that agencies of the public sector, mostly issuing the legal agreements and licensing, should regulate PEP scrutinization protocols in their vetting process for making the right decisions. |
The Bottom Line
In the contemporary global business environment, the drift of PEP checks is uppermost. The integration of PEP screening into risk management frameworks, such as anti-money laundering (AML) and due diligence, enables enterprises across various sectors to manage the threats associated with politically exposed persons constructively. This integration helps keep effective standards of integrity and compliance alive.
