Sanctions and PEP screening: a critical step in the KYC process
Keeping the tainted funds of corrupt politicians and their networks out of the legitimate financial system is a vital outcome of effective Know Your Customer (KYC) procedures. Organizations need to perform a detailed politically exposed person (PEP) and sanction check when onboarding new customers, as well as during the ongoing review of clients, to ensure that the organization’s reputation, revenue and capital are protected.
In the past, many financial institutions (FIs) have been fined for sanction breaches and their failure to identify PEPs. These penalties demonstrate the need for tightening KYC AML policies and various changes in the regulatory landscape. The implementation of the 5th Money Laundering Directive (5AMLD) in the European Union and the G20 summit are a few examples of this. Regulators across North America, Europe and Asian Pacific regions have issued nearly $27 billion in watch list related fines from 2008 to 2018. Famously, BNP Paribas was fined $9 billion in 2014 for sanction violations and followed by a leading French lender, which agreed to settle $1.3 billion in 2018 for sanctions and AML violations.
Types of screening
The two main objectives of any robust screening program are:
- Sanctions screening — to not allow financial transactions with any parties on various global law enforcement and sanctions list
- PEP screening — to undertake CDD on high-risk customers such as government officials
These watch lists are continually updated with new names. So both the sanctions and PEP screening should be done in real time to adhere to KYC requirements and to create a seamless customer onboarding process.
What are the sanctions lists?
Sanctions lists were put in place by governments and international authorities to combat criminal financial activity. They help businesses identify countries, individuals or entities involved in financial crime and work to restrict or prohibit trade with said foreign targets suspected of engaging in illegal activities across the globe.
These sanctions lists are a compilation of various regulatory and enhanced due diligence lists from major sanctioning bodies around the globe, such as the Office of Foreign Assets Control (OFAC), UN sanctions, EU sanctions, Her Majesty’s Treasury and thousands of other regulatory and law enforcement lists like Interpol.
What is a PEP (politically exposed person)?
FATF Recommendation 12 defines a PEP is an individual who is or has been entrusted with prominent public functions either domestically or abroad, such as, for example, a head of state or senior politician. The PEP list also includes close business associates and family members. As these individuals have influence, or potential influence, over government contracts and oversight functions, their ability to enable corrupt activities requires special attention. Financial institutions have an obligation to check their customers against sanctions and PEP lists for potential matches.
PEP requirements in the U.S. and UK
Both the United States and the United Kingdom have regulations concerning identifying accounts for PEPs, which are to be applied on a risk-assessed basis. In the United Kingdom, senior management approval is also required to accept a PEP account. In the United States, the Federal Financial Institutions Examination Council Bank Security Act/Anti-Money Laundering Examination Manual has noted that management should be involved in the decision to accept a PEP account.
The definitions of a PEP in both the United States and the United Kingdom refer only to foreign PEPs and include immediate family members and close associates of PEPs. However, the definitions in each country also have some notable differences.
In the United States, PEP is broadly defined and includes any current or former senior foreign government official, a senior official of a major foreign political party or senior executive of a foreign government-owned commercial enterprise, or an entity that has been formed by or for the benefit of one of the foregoing.
In the United Kingdom, the definition of a PEP has more specific parameters: a PEP is any individual who is or has been at any time in the preceding year entrusted with a prominent public function. The 2007 regulations provide specific categories of individuals that are categorized as PEPs, including heads of state, ministers and members of Parliament. Unlike in the United States, a PEP cannot be an entity.
Why screening against PEPs and sanctions lists is valuable
Financial or business relationships with individuals or entities on PEPs and sanctions lists pose a higher risk:
- Non-compliance with watch list screening may expose an FI to steep regulatory fines
- Failure to identify sanctions evasion, bad actors or a PEP involved in organized crime may lead to potential reputational damage
Standard AML/CTF compliance by businesses does not reveal threats associated with “high-risk individuals and entities.” Therefore, there is a need to conduct separate checks against PEPs and sanctions lists to protect FIs from exposure to the menace of financial crimes.
Integrate with high quality and wide range of trusted data sources
To ensure you are identifying sanctions from all relevant bodies, the data you screen your customers against must be comprehensive and up to date and, ideally, consolidated all in one place with other watch list databases.
Perform a risk-based approach
When dealing with PEPs, the FATF recommends a risk-based approach to each phase of the process. An internal risk assessment, for example, will help define what does and doesn’t constitute politically exposed according to an FI’s policies and risk appetite.
Conduct ongoing monitoring
Automate ongoing monitoring of individuals and entities against up-to-date PEPs and sanctions lists to monitor your customers daily and alert you immediately of any changes to a customer’s circumstance or status, helping to ensure ongoing compliance with AML regulations.
Rely on best-in-class technology platforms
To improve the effectiveness of sanctions and PEP screening processes, and to automate much of the associated workload, financial institutions can also implement AML/KYC solutions designed to help mitigate AML risks. A single API-led solution can pull information from various sources to help screen customers against sanctions and PEP databases. With cutting edge technologies such as artificial intelligence and machine learning, FIs can also reduce false positives and thereby increase efficiencies in their screening process.
Automatic watch list screening and ongoing monitoring, coupled with a global identity verification platform, is a smart and economical way to make it more difficult for corrupt people to launder their illicit fund and thus safeguard an FI’s reputation and integrity.
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Disclaimer: Trulioo provides no warranty that the information contained in this document is accurate, up to date or complete and in no circumstance does such information constitute legal advice. Any person who intends to rely upon or use the information contained herein in any way is solely responsible for independently verifying the information and obtaining independent expert advice if required.