Understanding PEP screening requirements

Politically Exposed Persons (PEPs) present elevated compliance risk due to their access to public funds and decision-making power. The FATF Recommendations (Recommendation 12) require regulated businesses to determine whether a customer or beneficial owner is a PEP and, if so, to apply enhanced due diligence measures.

PEP status extends beyond the individual to include family members (spouses, children, parents, siblings) and known close associates (business partners, advisors). This creates a significantly larger screening universe than sanctions lists alone.

Categories of PEPs

The rules treat PEPs differently depending on where they hold office and how they are connected to it.

Foreign PEPs

Individuals holding prominent public functions in a foreign country. The FATF treats foreign PEPs as automatically higher risk, requiring EDD in all cases.

Domestic PEPs

Individuals holding prominent public functions domestically. Risk assessment should be applied on a case-by-case basis, with EDD required where higher risk is identified.

International organisation PEPs

Senior figures in international organisations such as the UN, EU, World Bank, or IMF. Similar risk considerations apply as for foreign PEPs.

Implementing effective PEP screening

PEP screening has to happen at two points: when the relationship starts, and for as long as it lasts.

Screening at onboarding

All customers and beneficial owners should be screened for PEP status at the point of onboarding. FirmScreen's screening engine checks against comprehensive PEP databases alongside sanctions lists in a single operation.

Ongoing PEP monitoring

PEP status can change - individuals may enter or leave public office at any time. Ongoing monitoring ensures that PEP status changes are detected during the business relationship, not just at onboarding.

Risk-tiered approach

Not all PEPs present the same level of risk. A domestic local councillor presents different risk than a foreign head of state. Apply a tiered approach that considers the level of public function, the jurisdiction, and the nature of your business relationship.

EDD measures for PEPs

When a customer is a PEP, standard due diligence isn't enough. The regulations expect, at a minimum:

  • Source of wealth verification: Understand how the PEP accumulated their overall wealth
  • Source of funds verification: Verify the origin of funds for the specific transaction
  • Senior management approval: Require sign-off from the MLRO or senior management before establishing the relationship
  • Enhanced ongoing monitoring: More frequent rescreening and transaction review

Common pitfalls

Research from the European Journal on Criminal Policy and Research identifies several common failings: relying solely on self-declaration, failing to screen family members and close associates, treating all PEPs identically regardless of risk level, and not maintaining PEP screening records. Automated screening with comprehensive databases addresses these gaps.