Every third major fine in Europe over the past three years is related to insufficient scrutiny of Politically Exposed Persons (PEP) and violation of AML procedures. According to FATF, more than 60% of international corruption cases somehow involve PEPs and their surroundings.
In this article, I, Nikita Veremeev, will explain why dealing with PEPs is a high-risk area, the legal requirements applicable in different regions, how the COREDO team implements practical solutions for clients, and what to do to stay within the law.
I recommend reading to the end: you will receive not only strategic ideas but also specific algorithms that will help protect and scale your business internationally.
Who are PEPs and why businesses need to check them
Who are PEPs and why businesses need to check them is a question not only of financial risks but also of compliance with international compliance standards. Politically linked individuals can pose reputational and legal threats to companies, so it is important to understand their status and the reasons for conducting checks.
What is a PEP and international standards
FATF (Financial Action Task Force) defines PEPs as key subjects in the fight against money laundering (AML) and terrorist financing. The European Union and OFAC (Office of Foreign Assets Control, USA) have their own, though similar, criteria for identifying PEPs, including mandatory scanning against national and international PEP lists, and applying the principle of political exposure in client risk assessment.
In COREDO’s practice, we encounter situations where the PEP status is not evident: for example, when registering a company in Singapore or Estonia, where the beneficiary is a family member of a former minister.
Risks of doing business with PEP for foreign companies
Engaging with politically exposed persons carries several risk levels for businesses.
Legal responsibility for companies for AML violations when dealing with PEPs in the EU and Asia involves not only fines (up to 10% of annual turnover) but also criminal prosecution of executives. For example, in 2023, a European bank was fined €83 million for inadequate operation controls involving PEPs from African countries, which led to a large-scale investigation and loss of licenses for certain activities.
COREDO’s experience confirms: even in the absence of malicious intent, a formal approach to checking PEPs leads to financial and reputational losses.
PEP compliance: requirements in the EU, Asia, Africa
PEP compliance: is a key regulatory element for banks and companies dealing with international clients and counterparties, as it allows identifying and controlling risks related to politically exposed persons. PEP compliance requirements vary significantly in the EU, Asia, and Africa, with each jurisdiction setting its own standards and verification procedures. Let’s examine how regional approaches to PEP compliance are formed and differ.
Regional requirements and differences
The European Union has strict and unified PEP identification and control standards enshrined in the AML Directives (5AMLD, 6AMLD). Companies are required to conduct enhanced due diligence, regularly update information about clients and their beneficiaries, and document all control actions related to PEP transactions.
In Asia, approaches vary: in Singapore and Hong Kong, regulators require mandatory KYC procedures for PEPs and automated transaction monitoring systems. UAE emphasizes sanctions compliance and mandatory checks for all related parties.
In Africa, requirements are gradually tightening: leading countries (South Africa, Nigeria) are adopting FATF recommendations, but the level of automation and transparency is still lower, and liability for violations is more lenient.
For clarity – see the comparative table:
| Region | Main Regulators | PEP Identification Requirements | Liability for Violations | Features |
|---|---|---|---|---|
| EU | EU, FATF | Strict, unified standards | High fines | Unified lists, transparency |
| Asia | Singapore, Hong Kong | Variable, by country | Depends on jurisdiction | Local features |
| Africa | National authorities | Limited, evolving | Can be milder | Differences by country |
Liability for AML violations in dealing with PEPs
Companies and their executives are liable for non-compliance with due diligence procedures, insufficient transaction control, and failure to identify PEPs among clients or partners.
Sanctions include heavy fines, business prohibitions, license revocations, and even criminal prosecution. In 2024, a major investment fund in the UK was fined £47 million for the lack of an automated PEP identification system, which led to missing suspicious transactions involving foreign politicians.
COREDO’s practice shows: implementing best practices for AML and regular PEP risk audits not only helps avoid fines but also raises trust from banks and international partners.
How to check a client for PEP and KYC?
The process of checking a client’s compliance with PEP and KYC requirements: is not a formality but a crucial stage in assessing risks when dealing with individuals and legal entities.
Let us delve into organizing due diligence and KYC for clients with PEP indications.
Due diligence and KYC for PEP individuals
Identifying a PEP starts with constructing a client’s risk profile and checking them against national and international PEP lists (e.g., World-Check, Dow Jones, Refinitiv).
An effective due diligence procedure for politically exposed persons includes several stages:
- Initial identification – analyzing profile data, public sources, and corporate registers.
- Checking beneficial owners and associated persons (family, business partners), as family and associated PEP individuals are often used to circumvent sanctions and conceal true control.
- Disclosure of information about the PEP and documenting all verification stages – a mandatory requirement for companies in the EU and Asia.
COREDO’s team frequently encounters cases where a formal check doesn’t reveal PEP status, but a thorough audit of the corporate structure and analysis of connections uncovers hidden beneficiaries with political exposure. This approach minimizes risks and ensures corporate transparency.
Automation of PEP identification and monitoring
Modern digital tools for PEP identification (such as API integrations with global databases, AI algorithms for analyzing corporate connections) allow businesses to automate KYC processes and transactional monitoring.
Automating PEP identification reduces the risk of human error, speeds up data processing, and ensures regular monitoring of PEP operations in real-time.
Investments in digital tools for PEP monitoring pay off by reducing operational and reputational risks and enhancing the efficiency of internal controls.
Risks and control when working with PEP
Risks and controls when working with PEP require special attention: such clients are exposed to increased risks of corruption, money laundering, and other financial crimes. Effective control mechanisms and the implementation of procedures, including conducting AML audits and regular operation monitoring, are crucial for minimizing these risks.
AML audit and implementation for companies
Developing and implementing effective AML policies for companies with an international structure is a task that requires a comprehensive approach.
COREDO’s practice confirms: a successful project starts with a detailed PEP risk audit, corporate transparency assessment, and building an internal control system.
- Regular updating of KYC and due diligence procedures for PEP
- Implementing automated control and reporting systems
- Conducting internal audits of AML procedure effectiveness and adjusting policies based on identified weaknesses
For holdings and company groups in the EU and Asia, integrating international FATF standards, and local requirements, and training staff on AML and PEP compliance is crucial.
Moving on to the next stage – analyzing methods for risk minimization and violation prevention – allows ensuring comprehensive compliance with regulator requirements and stability of the compliance system.
How to minimize risks and avoid violations
Consider this case: when registering a company in Singapore, one of the beneficiaries was linked to a former high-ranking official from a CIS country.
The COREDO team implemented a comprehensive check not only on the beneficiary but also all family and associated persons, identified potential conflicts of interest, and ensured disclosure of information for banks and regulators. As a result, the client successfully passed the compliance check at a Singaporean bank, gaining access to financial services without delays.
Another example: in Estonia, a client faced account blockages due to insufficient control over transactions involving PEP. After implementing automated transaction monitoring and performing regular risk audits, the business regained access to banking services and avoided fines.
How to work with PEP without breaking the law
Step-by-step plan for businesses
If a PEP is identified among your clients or partners, follow a clear algorithm:
- Conduct enhanced identification and due diligence, including checking all related persons and beneficiaries.
- Integrate international FATF standards and EU requirements into corporate KYC procedures, automate operation monitoring.
- Ensure staff training on AML and PEP compliance issues, implement escalation procedures for suspicious operations.
- Document all stages of verification and interaction with PEP to be ready for regulator inspections.
COREDO’s experience shows that timely implementation of best practices for AML and legal support in transactions involving PEPs is the key to business sustainability on international markets.
Reporting and interaction with regulators
Companies are required to maintain detailed reporting on all operations involving PEPs, including disclosure of information on beneficiaries, family, and associated persons.
Interaction with regulators during inspections requires transparency of the corporate structure and readiness to provide all necessary documentation upon request.
The COREDO team supports clients at all stages, from report preparation to interaction with international regulators and sanction checks.
Frequently asked questions on business compliance
Use international and national PEP lists, analyze public sources and corporate registers, conduct thorough due diligence of all beneficiaries and associated persons.
In the EU, fines up to 10% of turnover, in Asia: business prohibitions and license revocations, in Africa – restrictions on access to financial services.
Implement digital tools for PEP identification and monitoring, integrate them with corporate KYC and AML systems.
Check not only direct beneficiaries but everyone who may be linked to a PEP through family or business ties and document the results of the verification.
Disclose information about ultimate beneficiaries, implement internal control and regular audits of corporate connections.
Practical steps for businesses
- Dealing with politically significant persons requires a systematic approach based on international AML standards and best compliance practices with PEP.
- Effective identification, monitoring automation, and regular risk audits are the basis of legal safety and business stability.
- Implementing comprehensive AML policies, training staff, and ensuring corporate structure transparency can minimize reputational and financial risks.
- If you plan to register a company, obtain a financial license, or scale your business involving PEPs: the COREDO team is ready to offer strategic solutions based on international experience and deep expertise.
For consultations and legal support, contact us directly, as COREDO’s experience guarantees reliability and transparency at every stage of your international business.