How to Tackle PEP Screening Challenges: Best Practices and Expert Tips
Financial institutions daily onboard new customers, engage with counterparties and process transactions. In each instance, they must comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations—including screening Politically Exposed Persons (PEPs).
Contrary to sanctions, law enforcement most wanted or similar watchlists that are issued directly by a government authority, the definition of a PEP changes between jurisdictions. Additionally, commercial PEP databases are riddled with inconsistent and unstructured data. This leads to a flood of false positives and forces compliance teams to spend valuable time reviewing unproductive alerts.
We explore the key challenges in screening politically exposed persons and outline best practices to implement a compliance strategy that aligns with a risk-based approach and enables compliance teams to reduce false positives associated with PEP screening.
What is a politically exposed person (PEP)?
A politically exposed person (PEP) is defined by the Financial Action Task Force (FATF) as an individual who holds or has held a prominent public position, including domestic and foreign officials, public figures as well as senior executives of international organizations. PEP screening also covers screening politically exposed person’s relatives and close associates (RCAs), who may have access to the PEP's resources and influence.
PEPs are often in positions that could be exploited for money laundering, bribery or corruption. Doing business with a PEP isn’t prohibited, but institutions must take steps to identify and monitor PEPs to ensure they are not engaged in illicit activities. Identifying PEPs and implementing additional compliance controls is an essential party of a risk-based approach to compliance. For example, banks should flag PEP as higher risk than non-PEPs within their customer risk rating (CRR) process.
When should you screen PEPs and related parties (RCAs)?
Regulatory bodies like FATF mandate PEP screening at critical touch points throughout the customer journey to prevent financial crime.
This begins at customer onboarding, where thorough checks help identify higher-risk individuals before starting a business relationship.
Ongoing monitoring is essential for institutions to regularly reassess existing customers for any changes in their PEP status that could increase the organization’s risk exposure.
Transactions by high-risk clients, like unusually large transfers or dealings with flagged jurisdictions, also require immediate attention.
Challenges in PEP screening
Screening politically exposed persons is a challenge for many firms based on the dynamic nature of PEP lists, data quality issues and high occurrence of false positives. These challenges include:
Challenge 1: High false positive rates
False positives that mistakenly flag a customer, counterparty or transaction slows down customer onboarding and transactions. This is especially true for PEPs as the size of these databases are significantly larger than sanctions or other regulatory watchlists. A simple name match could trigger an exhaustive inquiry, only to reveal no real risk. Additionally, the quality of PEPs data varies significantly by provider. A high rate of false positives increase operational costs due to unnecessary investigations that divert compliance teams’ attention from other critical compliance tasks.
Challenge 2: Outdated PEP data
PEP lists are in constant flux based on a jurisdiction’s election cycles, political appointments to non-elective roles and other political changes. Many commercial and government PEP databases do not maintain up-to-date and comprehensive records. Different languages and dialects can also create challenges in screening, particularly when non-Latin characters are involved. As a result, organizations frequently rely on inaccurate data for a critical component of their compliance program.
For PEP screening to be truly effective, financial institutions and fintechs must leverage data that accurately reflects changes in the political environment. Without a robust system that can dynamically update client information and promptly flag changes in PEP status, organizations are exposed to unnecessary risk and aren’t alerted to important changes impacting a customer or counterparty’s risk profile.
Challenge 3: Inconsistent PEP definitions
The definition of politically exposed persons varies significantly across different jurisdictions. For instance, some countries include mid-ranking officials, such as local mayors, in PEP definitions. Similarly, the Bank Secrecy Act and Patriot Act in the United States requires institutions to screen for foreign officials but not domestic PEPs. For organizations with international operations, it is a challenge to maintain compliance across multiple regulatory regimes.
PEP screening is further complicated by different databases storing data in different formats. Unstructured or incomplete identifying information, such as wrong dates of birth, reduces the accuracy of PEP screening.
Challenge 4: Identifying relative and close associate (RCA) relationships
Relatives and close associates (RCAs) linked to PEPs are of high value, as they may be used as a conduit for illicit activities. However, determining these connections is imprecise and legacy solutions frequently rely on analysts to manually generate profiles and relationships between PEPs and RCAs. As a result, RCA coverage within PEPs databases is often incomplete and organizations are exposed to risk through false negatives.
These challenges highlight the need for better screening methods to boost accuracy and ease the burden on compliance teams.
How to improve the efficiency of your PEP screening process?
Managing risks associated with politically exposed persons is essential for financial institutions to protect their operations and ensure compliance throughout the customer relationship. Here are 5 ways you can mitigate PEP risks and improve screening efficiency:
Strengthen KYC and ongoing monitoring
For financial institutions, identifying politically exposed persons (PEPs) starts with robust customer due diligence (CDD) during onboarding. This means collecting essential details about clients, including their occupation and income sources.
A client’s PEP status can change—someone may not be a PEP when they open an account but could become one later if they’re elected to a significant position. Implement real-time monitoring or rescreening procedures to proactively identify changes in risk exposure.
Screen additional identifying information
Leveraging additional identifying information during the screening process, such as dates of birth, further reduces false positive rates.
Organizations should ensure that their PEPs data provider has complete profiles that include this information whenever publicly avaiable, along with other secondary data points such as position and location data. These secondary identifiers narrow down potential matches in PEP databases. This improves the accuracy of screening to distinguish between individuals with the same or similar names and reduces the rate of Level 1 to Level 2 alert escalation.
Apply jurisdictional filters
Using jurisdictional filters allows you to focus PEP screening on relevant jurisdictions. By targeting screening to align with your organization’s risk exposure, you can avoid generating irrelevant alerts.
Adopt risk-based PEP screening
Not all politically exposed persons have the same risk profile, so it’s critical to evaluate their background and influence. For instance, a former mayor turned corporate executive poses different risks than a sitting cabinet minister with significant influence over government contracts.
Implementing a robust risk-scoring system that accounts for the PEP’s geographic location, political influence and financial exposure can help determine compliance efforts. To reduce false positives, tailor your scoring system to reflect your institution's specific risk factors. This way, you can prioritize resources on genuinely high-risk individuals, ensuring they undergo more frequent scrutiny than their lower-risk counterparts.
How Castellum.AI streamlines PEP screening
In the financial landscape where time is of the essence, the right tool not only speeds up customer onboarding but also makes PEP screening more robust and reliable.
Castellum.AI improves the accuracy and efficiency of the AML screening process, with guaranteed reductions in false positives—allowing banks and financial institutions to focus on what matters most. With Castellum.AI you get:
Global PEP coverage: Our PEP data includes coverage across 250+ countries and organizations, including diplomats and leaders from the UN, NATO, FIFA and IOC, and is rich in secondary identifiers, including dates of birth.
Reduced false positives: Our Jgram search algorithm minimizes false positives by analyzing text at a granular level. It assigns higher scores for relevant results and solves frequent false positive issues like gluing, reversal and character variations.
Automated data enrichment: We automatically clean and standardize data, extracting critical details like IDs, addresses and DOBs to enable structured data screening.
Real-time alerts: We pair real-time monitoring with customizable search filters so you can quickly cross-reference updated PEP lists and instantly flag changes in risk.
Integrated screening: Alongside global and local PEPs, our database lets users screen global sanctions, adverse media, sanctioned beneficial ownership and other financial crime risk data—all in a single screen—enabling organizations to quickly make an informed decision.
Don’t let compliance challenges to slow your growth
Castellum.AI’s compliance platform provides comprehensive, global PEP screening with 88% fewer false positives
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