How ComplyAdvantage defines and classifies a PEP

The accuracy and reliability of data used in politically exposed person (PEP) screening are paramount to its effectiveness. High-quality data ensures relevant PEP profiles are identified accurately, minimizing false positives and negatives. It involves collecting comprehensive and up-to-date information from reliable sources, verifying the data for accuracy, and ensuring proper integration into screening systems. Poor data quality, on the other hand, can lead to missed or misidentified PEPs, undermining the effectiveness of the screening process and exposing financial institutions (FIs) to regulatory non-compliance and reputational risks. 

Therefore, maintaining and improving data quality is essential for robust PEP screening and effective risk management. This article explores how ComplyAdvantage defines and classifies a PEP, helping firms stay compliant when working across multiple jurisdictions with regulations that vary on who is, and who isn’t, considered a PEP. 

FATF PEP categories

The Financial Action Task Force (FATF) defines a PEP as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that can be abused for the purpose of committing money laundering (ML)  and related predicate offenses.

The FATF distinguishes between three main categories of PEPs:

1. Foreign PEPs: Individuals who are or have been entrusted with prominent public functions by a foreign country, for example: 
   • Heads of State or of government.
   • Senior politicians.
   • Senior government.
   • Judicial or military officials.
   • Senior executives of state-owned corporations.
   • Important political party officials.
2. Domestic PEPs: Individuals who are or have been entrusted domestically with prominent public functions, such as those listed above.
3. International organization PEPs: Persons who are or have been entrusted with a prominent function by an international organization. This may refer to members of senior management or individuals who have been entrusted with equivalent functions, i.e., directors, deputy directors, and members of the board or equivalent functions.

ComplyAdvantage’s PEP taxonomy

One of the key challenges PEP data providers face is the lack of a universal definition of a PEP. The ComplyAdvantage taxonomy is the result of the analysis of more than 40 anti-money laundering (AML) regulations worldwide. This includes:

• National regulations
• By-laws
• International guidance from:
  • The FATF
  • Wolfsberg Group
  • The European Union
  • The World Bank

It aligns with the FATF recommendations as it links PEP status and risk to the level of influence that a particular public function holds. 

In contrast with the FATF approach, ComplyAdvantage’s database does not use a domestic versus foreign label. This is due to the fact that a domestic PEP in Russia will be a foreign PEP in India. Instead, ComplyAdvantage’s International Affairs Research Analysts (IARA) team label each entity relative to the jurisdiction where their PEP status derives from. This ensures the data is presented objectively and neutrally.

ComplyAdvantage categorizes PEPs in four classes according to the scope of their influence: 

• National
• International
• Regional
• Local

Each PEP class contains several taxonomies that are purposely granular, enabling analysts to select the relevant PEP categories for countries with varying levels of robust regulations. 

“Our coverage of national requirements for Canada and Germany has been acknowledged in external audits of our PEP data. We have achieved that for over 30 jurisdictions and are currently working to increase that number.”
– Alia Mahmud, Regulatory Affairs Practice Lead at ComplyAdvantage

pep-class-1

The first PEP class contains all taxonomies with national-level PEPs such as:

• National legislatures
• National cabinets
• Central banks
• Armed forces, police, fire service, and intelligence agencies

pep-class-2

The second PEP class includes:

• Members of regional governments, parliaments, and judiciary.
• Senior officials and functionaries of international and supranational organizations and diplomatic missions.

pep-class-3

The third PEP class related to:

• National level state-owned enterprises.
• Public sector institutions under regional level administration (eg regional agency, regional state-owned enterprises).

pep-class-4

And the fourth PEP class contains:

• Mayors and members of local, county, city, and district assemblies.
• Senior executives of local governmental bodies (agencies, state-owned businesses)
• Judges of local courts.

Subdivided taxonomies

To allow for differences between governance structures, such as federal versus unitary, and for a finer distinction between various institutions, ComplyAdvantage subdivides its taxonomies into institution types, where necessary. 

For example, the taxonomy of ‘national agencies’ distinguishes between an agency under the authority of a ministry, an independent agency, or a specialized agency, such as a public prosecution agency or a court of accounts. 

In ComplyAdvantage’s database, institution types are visible in the search results and serve as an additional data point for the users in their risk-based approach (RBA) assessment.

Advantages of ComplyAdvantage’s PEP taxonomy

Increase accuracy and reduce false positives

The taxonomy is designed to help users reduce false positives and negatives by narrowing down the screening to a particular category. 

If a user screens against national level PEPs from a certain country, they will get all the political positions from that country that influence events at a national scale. If a user screens against international level PEPs, they will get all the PEPs from that country whose actions and decisions have impact on multiple countries. Each search result will render the institution type and political position of the PEP. 

Consistent and predictable coverage

The unique value added consists in attributing a standardized set of definitions to a range of political and governance systems, which help the analyst assess their clients’ risk vis-a-vis the relative level of power they hold. 

For example, the Superior Court of Justice of the State of Mexico differs in terms of PEP risk from Malaysia Superior Courts Judges. The former is a regional-level court in one of the 32 federal entities in Mexico. Hence we attribute it to the institution type Regional Supreme Court and pep-class-2. The latter is a national-level institution, and the judges will have pep-class-1 risk category with institution type National High Court.

This standardized model provides consistent and predictable coverage across jurisdictions. It also ensures sufficient granularity to understand the level of influence a PEP might have depending on the institution type and how it fits into the governance structure of a country. The information on the jurisdiction where the person is a PEP is a starting point for an individual analysis of how that jurisdiction fits into a firm’s risk appetite and cascades down to the risk level of the PEP: e.g., a PEP from a country on the FATF grey list may or may not warrant additional scrutiny.