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Why Identifying PEPs is Crucial for Financial Compliance?

• wordility
• November 19, 2024

Do you know who Politically Exposed Persons (PEPs) are in the financial sector? A compliance expert stated that a company might face severe financial, reputational, and regulatory repercussions if PEPs are not correctly recognized.

PEP screening  are those persons who have taken or are still occupying a senior public position, such as politicians, civil servants, and military officers. 

As they exert a certain influence in society, PEPs are more willing to engage in bribery and corruption or money laundering activities. 

These are high-risk customers and independent of processes that various financial institutions must have to monitor these customers.

In this article, we will discuss why identifying PEPs is important for compliance with AML and CFT regulations.

Regulatory Requirements for PEP Identification

Governments and financial regulators expect companies to establish methods by which they can identify PEPs. 

As most people involved in PEPs are believed to be engaged in risky ventures such as bribery or money laundering. 

To start with, owners of business enterprises have to employ PEP screening solutions and databases that help them identify their customers with PEP profiles. 

Monitoring and risk assessment equipment is also repeatedly used from the ongoing viewpoint of the demands of PEP.

Bonus: Contact us today to find out how PEP identification and monitoring will strengthen your PEP Risk assessment for compliance,

Risks Associated with Unidentified PEPs

The inability to identify a PEP customer can be very detrimental to a business. This is another risk as the PEP stands a high chance of using the company to launder their ill-gotten wealth.

This can lead to fines, legal challenges, and damages to the business’s reputation if the problems are unraveled. 

These risks can be minimized if the appropriate PEP identification and screening have been conducted. 

The state and local regulations that regulate the identification process of PEPs also present increased penalties. It was due to failure to identify PEPs, with endorsements in 2023 standing at several billion dollars.

Compliance Consequences of Failing to Identify PEPs

Authorities pay much attention to the identification of PEPs. Lack of proper PEP screening creates repercussions for an organization, and the business might face severe penalties for noncompliance. 

This ranges from large fines and loss of license to criminal charges against the managerial teams of the organizations. 

The compliance implications of PEP identification failings are potentially fatal to any financial institution. 

Several regulatory authorities across the world have enhanced the fines on those organizations that fail to implement PEP.

Reputation Damage from PEP-Related Scandals

If a business is identified as facilitating a PEP to undertake illicit activities, then the risk to the business is great as the business may suffer major reputational loss. 

There have been instances where a company is involved in a PEP-related scandal, and this will make the customers lose confidence in that business. 

When a business or company loses its reputation, it is very hard to regain its reputation. Evaluating potential emerging publics and paying attention to them will help prevent such repute-staining occurrences. 

According to a study conducted in 2023, organizations that get involved in PEP scandals experience their stock value drop by 25% in a week.

Effective PEP Screening Solutions for Businesses

Business organizations are required to implement PEP screening solutions to accomplish efficient PEP recognition. 

This includes recording customers through PEP database scans. PEP screening solutions can feed directly into a business’s customer onboarding processes. 

High-risk PEP scanning solutions can also track the change in the status of a customer’s PEP over time. 

The right PEP screening process is crucial to banking compliance. By 2024, more than 80% of financial firms use automated PEP screening solutions to improve efficiency as well as minimize errors.

Ongoing PEP Monitoring and Risk Assessment

A person’s PEP status can change, and regular PEP risk assessments are necessary. Businesses can make effective use of PEP data by deciding upon the level of risk for each PEP customer and amending procedures accordingly. 

Due care in PEP monitoring will ensure the business complies and avoids nasty shocks later. As of 2023, the FATF recommends that a business perform enhanced due diligence if it has been placed on its list of high-risk persons or beneficial ownership PEPs and reviews its risk profiles on a regular basis.

Incorporating PEP Data into Customer Due Diligence

Financial firms are required to run Enhanced due diligence checks on a new customer during the onboarding stage. 

It consists of PEP screening solutions that scroll through different PEP Databases and retrieve data about politically exposed persons. 

The retrieved PEP information must be incorporated into the customer’s profile. Companies must use this type of information to consider the potential risks.

The identity of PEP must be incorporated into the customer due diligence process. By 2023, over 60% of financial institutions were using automated PEP screening tools to enhance their due diligence practices.

Benefits of Proactive PEP Identification for Firms

A proactive approach to PEP identification offers sizable benefits to financial firms. Under the right PEP scanning solution, firms can identify politically exposed persons in their customer base.

It allows for monitoring those high-risk accounts with proper maintenance of regulatory compliance. 

Proactive PEP identification also helps firms avoid serious consequences such as heavy fines or reputational damage from scandals involving the PEPs. Prudent attention to PEP screening is a good business practice that pays rewards.

Read more about the best ways of implementing an efficient PEP screening solution on our website