In the financial industry, the acronym PEP stands for “politically exposed person.” Regulations regarding PEPs are designed to prevent financial crimes like money laundering schemes and terrorism financing.
In this blog, we’ll explain what a PEP is, why they are significant, and how this knowledge applies to watchlist screening in the financial industry. Essentially, once you understand the meaning of a politically exposed person, you’ll better understand the need for effective watchlist screening to combat criminal activities. For more information on watchlist screening, visit the website.
What is a PEP?
A PEP or politically exposed person is an individual who may be more likely than others to be involved in criminal activities such as bribery, corruption, or money laundering due to their position of influence.
Financial regulation professionals divide PEPs into categories, based on their position of power and influence. These categories include:
Foreign PEPs such as heads of government or politicians
Domestic PEPs like executives of state-owned corporations or military or judicial officials
Anyone else tasked with important duties by state-owned or international organizations such as board members, directors, or upper-level managers
What is PEP watchlist screening?
Watchlist screening gives financial institutions the ability to identify high-risk customers and PEPs so they can perform due diligence mandated by law. The screening process is an essential part of AML and KYC compliance, which protects businesses from risks associated with criminal activities like money laundering, fraud, or terrorist financing.
To meet PEP watchlist requirements, many companies use KYC/AML screening software that automates the process to enhance efficiency, accuracy, and prevent human error. This is one of the best ways financial institutions can identify PEPs before doing business with them.
Once an institution identifies a PEP customer, they must also proceed with the recommended best practices to minimize risk and adhere to regulatory requirements. This includes performing ongoing monitoring for all identified PEPs and consistently screening customers whose status could change.
Knowing what a PEP is and understanding the importance of watchlist screening can help protect financial institutions from serious risks that could result in hefty fines, reputational damage, and the harmful effects of financial crimes on other customers and the community as a whole.
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