PEP Screening
If a company has a business relationship with “politically exposed persons” (PEPs), there is an increased risk of criminally relevant activities such as corruption, money laundering, and sometimes tax evasion. Conduct the PEP screening regularly to reduce your risk.
The screening of politically exposed persons
For the reasons mentioned, such business relationships (customers, suppliers, employees, etc.) must be treated with increased care and caution. In order to identify any politically exposed persons in current or future business relationships, a PEP screening must be conducted at regular intervals. In comparison to sanction regulations, it is indeed permissible to enter into or maintain a business relationship with individuals who are listed as politically exposed persons.
Another factor that complicates the identification of PEPs is that PEP lists are not officially published by any government or overarching entity (such as the European Union or United Nations) at the current time. However, there are a few specialized providers who research PEP lists and their members and offer them in structured lists. The PEP lists integrated into CYC comprise more than one million PEPs or their relatives. These can be checked either through individual searches or automated matching.
What is meant by PEPs?
The definition of politically exposed persons (PEPs) is established in the 4th EU Anti-Money Laundering Directive and § 1 (12) of the Money Laundering Act (GwG). Individuals are considered PEPs if they hold or have held an important public position during the past 12 months (§ 15 (7) GwG), regardless of whether it is in domestic or foreign jurisdiction. But why is the status of a public position crucial for considering someone as a PEP?
Due to their influential position, politically exposed persons are believed to pose a higher risk of corruption and money laundering. PEPs have access to government funds and can often influence or steer decisions through which companies receive lucrative contracts. It is not uncommon for PEPs to be involved in the payment of bribes to influence decisions or contract awards, launder illegal funds, evade taxes, or finance terrorism. In addition to the actual politically exposed persons, their immediate family members are also affected. This includes spouses and registered partners, children, children’s spouses, parents, and siblings. They too are considered as PEPs.
Here are the individuals who are considered PEPs according to EU legislation:
- Heads of state, government leaders, ministers, deputy ministers, and state secretaries.
- Members of parliament or members of comparable legislative bodies.
- Members of the executive boards of political parties.
- Members of supreme courts, constitutional courts, or other high courts, whose decisions,
- except in extraordinary circumstances, are not subject to appeal
- Members of audit offices or the governing bodies of central banks.
- Ambassadors, chargés d’affaires, and senior officers of the armed forces
- Members of the administrative, management, or supervisory bodies of state-owned enterprises.
- Directors, deputy directors, and members of the executive body or a comparable function in an international organization.
“Family members” includes, among others:
- The spouse of a politically exposed person or a person considered equivalent to the spouse of a politically exposed person.
- The children of a politically exposed person and their spouses or persons considered equivalent to spouses.
- The parents of a politically exposed person.
As is well known, closely associated persons include:
- Natural persons who are known to be joint owners, along with a politically exposed person, of legal entities or legal arrangements, or who maintain other close business relationships with a politically exposed person.
- Natural persons who are the sole beneficial owners of a legal entity or legal arrangement that is known to have been de facto established for the benefit of a politically exposed person.
If a person holds a public position that is not at the national level, that person is considered a politically exposed person (PEP) only if the scope of their activities is comparable to that of a similar position at the national level.
The need to screen PEPs
Since politically exposed persons hold influential and powerful positions, they are presumed to have a particularly high susceptibility to financial crimes. Numerous examples from the past demonstrate politicians who have exploited their positions for personal gain, accepted bribes, exerted influence over contract awards, and laundered illegally acquired funds.
If it is later discovered that a company maintains business relationships with a person who is a PEP with a criminal record, the company may be involved in investigations by law enforcement authorities. In less favorable cases, this may result in reputational damage, while in more severe cases, it can lead to criminal sanctions (such as fines). Companies that do not subject their business partners to regular or only partial PEP screenings are taking an unnecessary high economic risk.
Who needs to perform a PEP screening?
According to the Anti-Money Laundering Act, the PEP screening is among the internal due diligence obligations of companies that must be implemented without fail. The screening must be conducted before establishing a business relationship if there are grounds to believe that assets related to the business relationship are linked to terrorism financing or money laundering. Generally, this applies more to larger companies than to small businesses or shops.
However, there are also special regulations for certain industries, such as goods traders and real estate agents. Goods traders only need to screen their business partners if they intend to make cash payments of at least 10,000 euros. On the other hand, real estate agents must verify both the buyer and seller of a property as soon as the party with whom a brokerage agreement has been concluded expresses serious interest in concluding a purchase contract.
If there is an obligation to identify politically exposed persons, a simple questioning of the contracting parties is usually sufficient. However, if a company’s activities indicate that it may have regular contact with PEPs, it is recommended to conduct regular and comprehensive checks against databases or lists.
What happens in case of a positive PEP screening?
If a match is found during a PEP screening, it indicates an increased risk of money laundering readiness on the part of the business partner. This must be reported to a law enforcement authority after further investigation. Failure to comply with this obligation may result in fines of up to 100,000 euros.
Identifying a politically exposed person does not necessarily mean that business contacts with that person must be terminated. An increased risk in this business relationship does not imply that the person has actually committed or will commit any crimes in the future. However, the company must establish an efficient risk management system and fulfill the enhanced due diligence obligations specified in the Anti-Money Laundering Act. These obligations include, among others:
- Regular personal meetings with the politically exposed person
- Thorough investigation of all transactions
- In-depth analysis of their (business) environment
The legislator further emphasizes that politically exposed persons (identified business partners) have a legally mandated obligation to cooperate. Upon request, the person must provide comprehensive information, such as the origin of funds they have introduced into the business relationship.
If the cooperation obligation is not adequately fulfilled, the continuation of the business relationship should be reassessed and, ideally, terminated. The risk of concealing illegal activities through the withholding of information would be too high. In such cases, it is also advisable to make a suspicion report to the relevant law enforcement authority. A suspicion report is also necessary whenever financial irregularities or other alarming information is encountered during the business relationship.
Implementing PEP screening successfully with CYC