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PEP Screening

Last Updated: 2025-12-28 Status: Complete

This page covers Politically Exposed Person (PEP) identification and screening requirements for KYC processes.

What is a PEP?​

Politically Exposed Person (PEP): Individual who holds or has held a prominent public position, or their immediate family members/close associates.

Examples​

  • Heads of state, government ministers
  • Senior politicians, judges, military officers
  • State-owned enterprise executives
  • Central bank officials
  • Ambassadors, consuls
  • Family members: Spouses, children, parents
  • Close associates: Business partners, advisors

PEP Screening Requirements​

PEP Screening is NOT Mandatory Under BSA/AML

Unlike sanctions screening (OFAC), PEP screening is voluntary and risk-based under U.S. regulations.

FinCEN/Regulators Guidance:

  • Due diligence must be "commensurate with risk"
  • No blanket requirement to screen all customers for PEP status
  • Focus on Foreign PEPs (higher corruption risk)
  • Domestic PEPs optional but best practice

Distinction:

  • PEP (general): Broader term, risk-based screening
  • Senior Foreign Political Figure (SFPF): Specific EDD requirements under 31 CFR 1010.620

When to Screen for PEPs​

Risk-Based Triggers​

  • High transaction volumes (>$100k/month)
  • International transactions (cross-border payments)
  • High-risk industries (money services, jewelry, art)
  • Unusual activity patterns (large cash deposits)
  • Geographic risk (countries with high corruption indices)

Screening Frequency​

  • Onboarding: Initial screen
  • Ongoing: Annual refresh for high-risk merchants
  • Event-driven: When suspicious activity detected

PEP Screening Process​

Enhanced Due Diligence for Foreign PEPs​

When a Foreign PEP is confirmed, you must:

  • Source of wealth documentation: Where did their money come from?
  • Purpose of business relationship: Why do they need payment processing?
  • Expected transaction patterns: What volume and type of transactions?
  • Senior management approval: Documented sign-off from compliance leadership
  • Ongoing monitoring: Quarterly or more frequent review

False Positive Handling​

Common False Positives​

  • Common names (e.g., "John Smith" matches thousands)
  • Partial name matches (e.g., "Robert Johnson" vs "Bob Johnston")
  • Family name matches without relationship
  • Historical PEPs (no longer in office, low risk)

Resolution Process​

  1. Review match details (name, DOB, nationality, position)
  2. Request additional information if unclear
  3. Document decision (cleared or confirmed PEP)
  4. Retain documentation for audit (5 years minimum)

Documentation Requirements​

For each PEP screening decision, document:

  • Match details: What triggered the alert
  • Investigation steps: What you reviewed
  • Decision rationale: Why cleared or escalated
  • Reviewer information: Who made the decision
  • Date and timestamp: When decision was made

Adverse Media Screening​

Adverse media screening often accompanies PEP checks and provides additional risk context.

What is Adverse Media?​

Negative news coverage indicating potential financial crime risk:

  • Fraud allegations
  • Corruption charges
  • Money laundering investigations
  • Terrorism connections
  • Regulatory actions

Why It Matters​

  • Identifies reputational risk before onboarding
  • Detects fraud not yet reflected in sanctions lists
  • Required for Enhanced Due Diligence (EDD)
  • Industry Spending: $274.1 billion annually on financial crime compliance

Challenges​

  • High false positive rates: Common names trigger irrelevant news
  • Language barriers: Foreign-language news sources
  • Context understanding: Distinguishing victim vs. perpetrator
  • Operational burden: Manual review of flagged articles

AI Solutions (2025)​

Modern adverse media screening uses:

  • Natural language processing (NLP) to understand context
  • Entity resolution (disambiguate individuals)
  • Sentiment analysis (positive vs. negative coverage)
  • Automated risk scoring

Providers​

  • Moody's Analytics (advanced NLP)
  • Siron®One (AI-powered false positive reduction)
  • World-Check (Refinitiv/LSEG)
  • Dow Jones Risk & Compliance

Best Practices​

  1. Screen all merchants at onboarding (even if not required)
  2. Apply risk-based EDD to confirmed PEPs
  3. Document all screening decisions for audit trail
  4. Refresh high-risk merchants annually
  5. Train staff on PEP identification and escalation
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