Moody’s Analytics Shares Key Steps for Enhanced PEPs Screening

October 10, 2023

In September 2023, the Financial Conduct Authority (FCA) provided fresh guidance about how to treat Politically Exposed Persons (PEPs). In response to this, businesses under regulation might find it beneficial to revisit their existing PEPs screening systems. This not only ensures alignment with the new directive but also makes certain that the screening process remains both effective and efficient.

Moody’s Analytics shared its own advice on the matter of PEPs screening. Here are their recommendations:

Determine the PEPs Definition for Individuals: The Financial Action Task Force’s (FATF) definition of a PEP is the most widely accepted: “A politically exposed person (PEP) is an individual who is or has been entrusted with a prominent function.” For compliance, both new and long-standing clients, along with third-party relationships, should be matched against a database that constantly updates PEP statuses based on this definition. This ensures a thorough understanding of where PEPs are situated in your business network.
Execute Risk Evaluations Proportionately: The truth remains that only a minority of PEPs, their family members, or close business associates will ever engage in financial wrongdoing. But given that a PEP status carries a higher risk of involvement in bribery and corrupt practices, it’s crucial to have an automated system for instantaneous PEPs and associated PEPs detection. This allows for immediate enhanced due diligence. An automated system will also assist in deriving an accurate risk rating, enabling transparent justification for decisions surrounding PEPs.
Enhanced Due Diligence and Continuous Monitoring: Once PEPs are pinpointed, they should undergo advanced due diligence to properly gauge risk and determine the subsequent course of action. Moody’s Analytics suggests automated risk rating based on the following criteria:
- Event risk: Sanctions, negative media exposure, watchlists
- Country risk: Using indices to evaluate corruption and more
- PEP level: Their seniority level
- PEP position: Sector and job role they are in

Using the risk ratings for PEPs or their associates, organisations can strategise the frequency and method of risk monitoring, like periodic reviews or a continuous Know Your Customer (KYC) process.

4. Making Informed Decisions on PEP Accounts: While FATF states clearly that PEPs shouldn’t be declined services solely due to their status, the FCA has expressed that banks aren’t unjustifiably rejecting or de-banking PEPs. This highlights the essence of risk-based decisions that are traceable and accountable. A solution that chronicles data checks, creates risk profiles, and preserves decision history can be invaluable here.

5. Maintaining Transparent Communication with PEP Clients: Financial institutions should employ reliable, global data sources for a holistic view of risks associated with PEPs. This ensures clarity during enhanced due diligence processes and subsequent reviews. This allows PEPs to be part of the screening process and to understand any outcomes, especially if they are declined service, with decisions backed by solid evidence.

6. Regular Reviews of PEP Controls: PEP risk management should be adaptive, considering PEP statuses can fluctuate. Along with assessing the current PEP screening methodology, a perpetual KYC (pKYC) system is advised. pKYC ensures quick identification of new PEPs in the business network. A flexible system can also be updated as required, for instance, in light of fresh or modified sanctions packages.

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