PEPs: Screening High-Risk Individuals in Compliance

A politically exposed person (PEP) is an individual who holds or has held a prominent public position, which increases their susceptibility to bribery, corruption, or financial crime. These individuals may wield significant influence or access financial systems, making them higher-risk parties under Anti-Money Laundering (AML) and Know Your Customer (KYC) frameworks globally.

Examples of PEPs include:

• Current or former heads of state (e.g., presidents or prime ministers),
• Senior politicians such as members of parliament,
• High-ranking judges in judicial systems,
• Senior military officers or executives in public institutions.

Why monitoring matters: Recognising PEPs is critical given the heightened risk of their abusing positions for illicit financial gain or engaging in corrupt practices. Global regulators like the Financial Action Task Force (FATF) mandate stringent checks to uphold transparency.

PEPs fall into various categories based on their public position and roles. Financial institutions must carefully identify and monitor each type:

These are individuals holding prominent positions within their home country, such as local parliament members, mayors, or senior government officials.

Individuals holding distinguished roles in foreign governments or bodies, such as diplomats or embassy officials, fall into this group.

Leaders in international institutions like the United Nations, IMF, or World Bank are also classified as PEPs.

Immediate family members or associates who are linked to a PEP may also pose risks. For instance, the spouse of a prime minister or business associates should undergo enhanced due diligence.

PEPs are categorised as high risk due to their potential involvement in financial abuse. Regulators require comprehensive oversight for these reasons:

• Exposure to Bribery & Corruption: PEPs often manage high-stakes public resources, which creates opportunities for misuse.
• Money Laundering Risks: Their access to global assets may be exploited as a channel for illicit funds.
• Regulatory Mandates for Transparency: Institutions must identify PEPs to ensure an equitable and corruption-free global market.

Example in practice: A PEP using their influence to award government tenders to friends or associates could lead to uncovering hidden layers of corruption.

Accurately identifying and screening PEPs forms a cornerstone of risk management for compliance teams. The process includes:

1. PEP Databases & Watchlists: Utilising global resources such as LSEG World-Check to aid them in flagging risky connections.
2. Adverse Media Monitoring: Regular screening for negative news offers an additional compliance layer.
3. Automation with AI: Advanced AI systems integrated with platforms like LSEG World-Check reduce false positives and speed up screening processes.

LSEG World-Check promotes effective PEP tracking with tools that access secondary identifiers, verify connections, and generate streamlined match results across jurisdictions.

Compliance obligations vary by geography but globally converge on enhanced due diligence:

The FATF recommends stringent protocols, including independent audits and enhanced customer vetting techniques to guard against financial crime.

• UK/EU Regulations: Guidelines set by the FCA and AML Directives emphasise ongoing due diligence.
• US Frameworks: Organisations must comply with FinCEN’s policies under the Bank Secrecy Act.
• Asia-Pacific Standards: Nations like Singapore (MAS) and Hong Kong require robust PEP due diligence.

By adhering to these standards, organisations can shield against steep penalties for compliance breaches.

EDD involves applying stricter controls during activities such as onboarding or fund movement. Key steps include:

• Investigating the source of funds tied to PEPs,
• Mandating senior-level involvement in client decisions,
• Frequent screening adjustments based on risk changes.

For organisations, LSEG’s due diligence services enable swift decision-making while tailoring filters to align more closely with regional regulations.

Technology can mistakenly flag benign connections, overburdening compliance teams. LSEG solutions can actively mitigates this by leveraging targeted AI solutions.

Country-by-country screening policies create discrepancies. LSEG’s robust countries and territory coverage, offering location-based risk insight as part of a best-practice, risk-based compliance approach—helping unify screening across geographies.

Managing vast data pools while ensuring compliance leads to expenses that demand scalable automation.

Failure to implement robust PEP measures results in:

• Hefty Fines: Banks missing sanctions controls faced regulatory penalties or billion-dollar fines.
• Reputational Harm: The financial downturn from association with high-profile embezzlements.
• Trust Deficits with Regulators: Non-compliance may lead to either bans or operational limits.

For example, the fallout faced by Deutsche Bank following allegations demonstrates the importance of resilient PEP lists.