AML and PEP checks: Why you need to do both

AML and PEP checks are vital in being able to safeguard your business against any fraudulent activity, especially in a world where fraud is so prevalent. By implementing AML and PEP checks, your business will maintain the trust of your customers and will ensure the integrity of your business. 

Here, we’ll take a look at the difference between an AML and PEP check and why it is essential to undergo both checks as a business. 

What is an AML and PEP check?

AML and PEP checks are two separate processes that need to be implemented to ensure that your business is conducting its due diligence to the best of its ability. 

Anti-money laundering (AML) credit search 

Anti-money laundering checks, also known as AML checks, are extremely important in being able to mitigate the high risk that comes with money laundering. Not only this, AML checks are a legal requirement in ensuring that you abide by money laundering regulations while being able to verify a person’s identity and protect your business from financial crime. 

PEP checks

PEP checks, on the other hand, are implemented to find out whether or not a potential customer is a politically exposed person (PEP). So, a politically exposed person is someone who holds an influential role or public position, either currently or in the past. This can include any government officials, politicians, or high-ranking individuals of international organisations. 

So, naturally, both AML and PEP checks will work hand-in-hand in being able to fully investigate the risk a certain person poses to your company before entering into business with them.  

Why AML and PEP checks are necessary

AML and PEP checks are extremely necessary because they ensure that the highest form of risk is mitigated. PEP checks are a part of the AML check process and will feed information into the process, helping to paint an accurate picture for assessors. 

This then easily provides enhanced due-diligence measures, ensuring that your legal obligations are fulfilled and also ensuring compliance with global financial regulations, such as FATF, EU AML directives, or UK money laundering regulations. Businesses that fail to conduct due diligence risk both reputational and financial harm, so it is always in your best interest to complete both checks. 

Risks of non-compliance

Let’s take a closer look at the risks associated with non-compliance. 

Legal and regulatory penalties

The biggest risks that come with non-compliance of AML and PEP checks are fines, penalties, and legal action from regulatory authorities. 

  • Regulatory bodies such as FCA (UK), FINCEN (US), FATF, and the EU AML directives impose strict compliance requirements.
  • Companies found in violation may face multi-million pound fines or even criminal charges for failing to prevent money laundering and financial crimes.

Reputational damage

As mentioned before, your business will face reputational damage if you decide not to comply with due diligence through the use of AML and PEP checks. 

  • Loss of trust from clients, investors, and business partners.
  • Negative media exposure damages your company’s brand.
  • Difficulties in securing future business deals or banking relationships.

Exposure to financial crime

Without undergoing due diligence, your business will be vulnerable to financial crime, including fraud, corruption, and money laundering schemes. 

  • Involvement with criminal organisations can lead to frozen assets and  business closure
  • Your business may unknowingly be facilitating terrorist financing, bribery, or corruption.

Increased operational costs

Non-compliance can lead to internal investigations, remediation efforts, and legal proceedings, which will significantly increase operational costs.

  • You may need to hire external compliance experts or implement expensive remediation plans to fix compliance gaps.
  • Regulatory audits and investigations drain financial and human resources.

Increased scrutiny from regulators

One violation could result in long-term regulatory monitoring and audits, which will put your business under a large amount of pressure to comply. If your business is flagged for non-compliance, you’ll be placed under enhanced scrutiny and will be required to submit more frequent reports. 

AML and PEP checks best practices

There are a few processes you can implement to ensure that you’re mitigating as much risk as possible efficiently and effectively. 

Implement a risk-based approach (RBA)

Make sure that you assess your high-risk customers versus your low-risk ones. You can do this based on geography, industry, transaction size, and PEP status. Once you have identified your high-risk customers, you’ll be able to apply enhanced due diligence to those transactions. 

Conduct robust customer due diligence (CDD)

Having an enhanced due diligence process will form the basis of your AML and PEP checks. You can do this by implementing your Know Your Customer (KYC) procedures and collecting and verifying your customers’ identification documents, proof of address, and business ownership details. 

Also, ensure that you conduct background checks using global watchlists and trusted databases.  

Use automated AML and PEP check screening solutions

Human error can cost your business unnecessary financial strain, so to avoid this, you can: 

  • Implement AI-driven compliance software that screens customers in real time.
  •  Use automated PEP and sanctions screening tools integrated with regulatory databases.
  • Ensure screening tools are updated regularly to reflect the latest global watchlists and sanction lists.

Perform ongoing monitoring and screening

AML and PEP checks will require continuous monitoring and cannot be left unattended after being completed just once. Make sure that you regularly recheck existing customers so that you keep on top of their PEP status or any suspicious activity. 

Also, make sure that you use transaction monitoring systems to pick up any unusual activity and use alert mechanisms for any immediate risks. 

Training and record keeping

AML and PEP check compliance is ever-changing, so it is best practice to ensure that you keep up to date with any regulatory changes and global AML directives. Make sure that you attend compliance training and industry events to stay informed. 

Further to this, ensure that your AML and PEP check records are kept securely for regulatory review. Maintain detailed audit trails of due diligence processes, too, and ensure timely reporting of suspicious activities to regulatory bodies.

At Creditserve, we offer a range of credit check packages that will help you run credit checks on any company you work with. With our services, you’ll be able to assess the risk efficiently, making informed decisions that allow you to mitigate risks and move your business forward. 

Get in touch with our team of experts at 01992 414222 for more information!