PEPs and Sanction Screening: A Vital Step in KYC

PEP and sanctions checks are a critical component of KYC, enabling financial institutions to identify high-risk individuals and prevent exposure to money laundering, corruption, and other financial crimes. By screening customers against global sanctions lists and identifying politically exposed persons and their associates, institutions can apply appropriate due diligence and ongoing monitoring. This proactive approach strengthens compliance, protects reputations, and safeguards the integrity of the financial system.

Financial institutions that overlook PEP identification and violate sanctions expose themselves to significant fines, with Fenergo’s Global AML Fines Report showing regulators worldwide issued approximately $4.6 billion in enforcement actions against financial institutions in 2024, underscoring persistent compliance risks.

With economic turmoil leading to an acceleration of illicit activity, regulators are urging FIs to be ever more vigilant, particularly when adequately identifying a PEP is a crucial component of KYC and AML compliance.

What are the Sanctions Lists?

Sanctions lists curated by governments and international organizations identify individuals, companies, or countries subject to economic and trade restrictions due to risks like terrorism or money laundering. Financial institutions use these lists in their AML and KYC procedures to screen clients and transactions, mitigating risks as part of a risk-based approach.

What is Sanction Screening?

Sanction screening ensures potential customers aren't under sanctions themselves or associated with sanctioned individuals or organizations mandated by governments or international bodies to curb illegal activities. Screening identifies potential violations and mitigates risks like money laundering or terrorist financing.

Effective screening requires robust systems capable of processing large data volumes accurately. Technological tools like advanced screening software automate this process by swiftly scanning databases and flagging matches. Continuous transaction monitoring ensures institutions stay updated on sanctions and PEP screening, enabling prompt action to prevent regulatory breaches.

What is a PEP?

A politically exposed person (PEP) is an individual who holds - or has held - a prominent public position, such as senior politicians, government officials, members of royal families, executives of state-owned enterprises, or leaders of international organizations. Due to their influence and access to public funds, PEPs present a higher risk of bribery, corruption, and money laundering, requiring enhanced due diligence and ongoing monitoring as part of a risk-based KYC approach or perpetual KYC approach. While definitions vary by jurisdiction particularly between the US, EU, and FATF standards regulators increasingly recognise the need to assess both foreign and domestic PEP risk.

What are the Risks of Conducting Business With a PEP?

Financial institutions must be cautious when dealing with PEPs who hold influential public positions like government officials or high-ranking politicians. While not all PEPs engage in illicit activities, their power and connections make them susceptible to financial crimes such as money laundering and corruption. 

Notable examples include Roman Abramovich, oil billionaire and former owner of Chelsea football club, whose net worth dropped nearly 60% to $7.51 billion and energy billionaire Gennady Timchenko, who saw his net worth drop by over 45% to $14.1 billion. This was due to the uptick in sectoral sanctions across the Russian oligarchy in response to the war in Ukraine. These sanctions saw a $126 billion loss in wealth across all Russian oligarchs, who bank worldwide and across multiple institutions.

Check out our blog for more on managing PEPs and risk to fight financial crime.

Is it only the PEP that represents a risk?

Family members, including spouses, children, extended relatives, and close associates like business partners and employees associated with a PEP may pose risks to your organization. AML regulations mandate that these individuals undergo the same scrutiny and monitoring as the PEP.

The Relationship Between PEPs, Sanctions Screening, and KYC

PEPs and sanctions screening are integral to the KYC components in finance, verifying sanctioned identities and assessing risks to prevent money laundering and other crimes. PEPs, including government officials and executives, are at high risk due to their influence and access to funds, requiring thorough screening to avoid illegal involvement.

Sanctions screening checks customers and transactions against lists of sanctioned individuals or entities imposed for various reasons, such as terrorism or human rights violations. Compliance with these lists mitigates involvement in prohibited activities.

These screenings enhance KYC by adding layers of security, understanding customers, and detecting suspicious activities. SaaS solutions enable FIs to manage global KYC due diligence, automate screening processes, reduce manual effort, and ensure timely risk detection. Continuous updates and monitoring are essential as new individuals may be added or status changes occur. This dynamic process ensures effective risk management and compliance.

PEPs and Sanctions Screening Non-Compliance Penalties

Financial institutions that neglect to adhere to sanctions regulations can encounter dire repercussions spanning legal, financial, and reputational spheres. Regulatory authorities levy significant fines for non-compliance, with penalties varying based on the gravity of the offense. Moreover, businesses may face legal ramifications or exclusion from specific markets.

The associated reputational harm can be equally - if not more - crippling. Violating sanctions erodes trust among customers, partners, and investors. Financial institutions may witness a decline in credibility, impeding their capacity to acquire and retain clientele.

How to Ensure PEP and Sanctions Screening Compliance

In today's dynamic landscape of KYC and AML compliance, traditional processes strain compliance teams, often leading financial institutions to struggle with meeting their KYC obligations. Embracing automation is pivotal in ensuring thorough KYC processes and compliance with essential AML and KYC regulations.

Fenergo’s automated KYC solution streamlines the initial client onboarding process by enabling swift PEP and sanctions checks on new customers while concurrently monitoring existing ones. By centralizing and automating KYC management, FIs can:

• Establish a unified repository for all customer profiles
• Conduct rapid screenings against sanctions and PEP lists
• Automate repetitive tasks to optimize resource allocation
• Maintain up-to-date risk profiles based on real-time data

The primary objective of KYC initiatives is to empower regulated financial institutions with a comprehensive understanding of their customer base and the associated risk levels.  Automated KYC and Know Your Business (KYB) solutions are invaluable tools for effectively and efficiently achieving this goal.

Request a demo to learn more about how automation could help your compliance team meet CDD, KYC, and AML requirements.

PEPs and Sanction List Screening FAQs

What is PEP and sanctions screening?

PEP and sanctions screening is the process of identifying whether a customer, beneficial owner, or related party is a politically exposed person or appears on global sanctions lists. It helps financial institutions assess risk, apply appropriate due diligence, and comply with AML and KYC regulations.

What is a PEP check?

A PEP check involves screening individuals to determine if they hold - or have held - a prominent public position, or are closely associated with someone who does. If a customer is identified as a PEP, enhanced due diligence and ongoing monitoring are required due to the higher risk of financial crime.

How do sanctions fit into KYC?

Sanctions screening is a core component of KYC and ensures customers and transactions are not linked to individuals, entities, or countries subject to regulatory restrictions. Integrating sanctions checks into KYC processes helps prevent prohibited activity, reduce regulatory risk, and support ongoing compliance.