What is a pep check ?

A PEP check (Politically Exposed Person check) is a compliance screening process used by financial institutions and regulated businesses to determine whether a customer, beneficial owner, or business partner is classified as a Politically Exposed Person under anti-money laundering (AML) regulations. Because PEPs are considered to present a higher risk of corruption, bribery, or misuse of public funds, AML frameworks such as the EU AML Directives and FATF recommendations require enhanced due diligence (EDD) whenever a PEP is identified. In practice, a PEP check involves screening an individual’s name against continuously updated global PEP databases, verifying identity information, assessing potential matches, and evaluating the level of risk exposure.

With a solution like 1stKYC, a PEP check is not limited to a one-time database search. The platform automates identity verification, cross-checks customers against international PEP lists, screens for adverse media and sanctions exposure, and applies a risk-based scoring model to support compliance teams in their decision-making process. If a match is detected, 1stKYC enables enhanced due diligence workflows, including documentation of source of wealth, senior management approval, and ongoing monitoring obligations. This ensures that companies comply with AML regulations while reducing false positives and manual workload. By integrating automated PEP screening into the onboarding and continuous monitoring process, businesses can perform compliant, efficient, and auditable PEP checks that align with regulatory expectations across the European Union and beyond.

What is a PEP (Politically Exposed Person)?

Article 3(9) defines a PEP as “a natural person who is or has been entrusted with a prominent public function.”

The Directive states that PEPs present a higher risk of financial crime because of their position and influence. Therefore, obliged entities must apply enhanced due diligence when dealing with PEPs.

This does not mean that business relationships with PEPs are prohibited. Rather, it establishes a legal obligation to apply stricter monitoring and vigilance in accordance with anti-money laundering (AML) and counter-terrorist financing (CTF) requirements.

Official classification of PEPs under the EU Directive

The Directive considers the following persons to be Politically Exposed Persons (PEPs):

• Heads of State, Heads of Government, ministers, deputy ministers and secretaries of State,
• Members of parliament or of similar legislative bodies,
• Members of the governing bodies of political parties,
• Members of supreme courts, constitutional courts, or other high-level judicial bodies, whose decisions are not subject to further appeal except under exceptional circumstances,
• Members of courts of auditors, or of the boards or governing bodies of central banks,
• Ambassadors, chargés d’affaires, and high-ranking officers of the armed forces,
• Members of the administrative, management, or supervisory bodies of state-owned enterprises,
• Directors, deputy directors, and members of the board of an international organization, as well as persons holding equivalent positions within such organizations.

PEPs by Association and Beneficial Owners

Regulators also classify individuals closely connected to a PEP as PEPs themselves.

Beneficial owners and associated persons

AML rules treat people closely linked to a PEP as beneficial owners, whether through family or professional relationships. These “close associates” are often referred to as “PEPs by association”, and financial institutions are required to apply enhanced due diligence when dealing with them.

This category includes family members and known business partners. Their transactions may appear suspicious and trigger a report to the financial intelligence unit. (e.g. TRACFIN in France).

International Definitions

FATF and UNCAC

The Financial Action Task Force (FATF) defines a PEP as an individual who is or has been entrusted with a prominent public function.

FATF Recommendations 12 and 22 require countries to ensure that financial institutions and DNFBPs implement specific risk-mitigation measures.. These measures aim to prevent the misuse of the financial system and detect potential abuse by PEPs.

• In 2003, the FATF issued the first mandatory requirements covering foreign PEPs, their family members, and close associates.
• In 2012, the FATF extended these requirements to include domestic PEPs and PEPs of international organizations, in line with Article 52 of the United Nations Convention against Corruption (UNCAC).

UNCAC Article 52 defines PEPs as:

“individuals who are or have been entrusted with prominent public functions, their family members, and close associates.”

The main objective of Article 52 is to combat corruption. However, the FATF broadened its scope in 2012 to include AML efforts against predicate offenses such as corruption, tax fraud, and terrorist financing.

The EU Definition

The 4th EU AML Directive provides a precise definition of the functions covered by the notion of PEP in Article 3(9), and Articles 3(10) to 3(13) further specify the concept of family members and close associates for enhanced due diligence purposes.

France transposed this Directive into the Code Monétaire et Financier. The ACPR and the AMF supervise its implementation and require strong procedures for managing PEP risks. These include:

• ongoing knowledge of the source of funds,
• continuous risk assessment,
• enhanced monitoring of transactions.

Enhanced Due Diligence Measures

Managing PEP-related risks requires additional vigilance compared to ordinary clients. Key measures include:

• Collecting detailed information on the source of funds,
• Real-time monitoring of transactions carried out by PEPs and their associates,
• Detecting atypical transactions requiring suspicious activity reports (SAR/STR).

FATF Recommendations in Practice

FATF Recommendation 12 requires financial institutions to obtain senior management approval before establishing a business relationship with a PEP. Institutions must also assess the origin of wealth and the economic rationale of transactions.

High-Risk Sectors and Jurisdictions

Certain sectors pose higher risks when linked to PEPs, such as mining, construction, public procurement, and energy. PEPs from high-corruption jurisdictions (as measured by Transparency International’s Corruption Perceptions Index) are also subject to heightened scrutiny. The FATF maintains and regularly updates a list of high-risk jurisdictions.

Consequences of Non-Compliance

Failure to comply with PEP due diligence obligations exposes institutions to heavy financial penalties. In 2019, several European banks were fined over €70 million for deficiencies in PEP monitoring. Institutions also face severe reputational damage if authorities link them to money-laundering cases involving public funds.

1stKYC’s Risk-Based Approach

At 1stKYC, our global Watchlist database goes beyond the EU definition by introducing PEP Levels 1, 2, and 3 for better risk assessment of ultimate beneficial owners (UBOs):

• Level 1 PEPs: those explicitly listed under Article 3 of the 4th EU Directive. They are subject to systematic suspicion reporting in case of unusual transactions.
• Level 2 PEPs: those holding regional political functions.
• Level 3 PEPs: those holding local political functions.

While Levels 2 and 3 do not represent the same level of risk as Level 1, they still require enhanced due diligence in business relationships.

Our risk-scoring grid allows compliance officers to:

• adjust the system’s default risk rating (up or down),
• justify their professional judgment within the AML/CFT framework.

At 1stKYC, we believe human expertise should prevail over automation when assessing financial crime risks, in line with regulatory expectations and financial sector best practices.