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PEPs and Sanctions Checks: A Vital Step in KYC

In today's complex global landscape, robust politically exposed person (PEP) sanctions screening goes beyond compliance, emerging as a proactive measure crucial for upholding trust and safeguarding the integrity of businesses worldwide. A screening protocol like this acts as an invaluable safeguard against criminal activities.

Financial institutions that overlook PEP identification and violate sanctions expose themselves to significant fines. Throughout 2023, financial institutions (FIs) around the globe received $6.6 billion in enforcement actions for anti-money laundering (AML) violations, including breaches of sanctions and know-your-customer (KYC) regulations.

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?

The definition of a politically exposed person (PEP) varies across jurisdictions. Generally, it includes individuals holding prominent public positions like presidents, prime ministers, senior politicians, members of royal families, senior executives of state-owned entities, and heads of international organizations such as the United Nations and the World Bank.

PEPs are susceptible to external influence, bribery, or corruption due to their ability to control government funds or influence decisions. Identifying a PEP helps financial institutions apply appropriate due diligence, particularly regarding source of wealth checks, in line with a risk-based approach.

An assessment of money laundering and terrorist financing risks primarily guides establishing or continuing a customer relationship with a PEP. However, the definition of PEPs globally needs to be clearer. In the US, the definition differs from EU standards and FATF Recommendation 12

While US authorities define only foreign PEPs under the PATRIOT Act, a joint statement from multiple US agencies acknowledges the increased risk of domestic PEPs. 

What is PEP Screening?

PEP screening aims to identify individuals in prominent public or governmental roles vulnerable to corruption or illicit activities. Screening helps institutions assess transaction risks and prevent unwitting involvement in financial crimes, bolstering the financial system's integrity.

Efficient PEP screening relies on robust processes and technological solutions. Advanced data analytics tools automate scrutiny, analyzing diverse sources like public records and regulatory databases to identify politically exposed individuals. Compliance with evolving regulations, including updates to PEP lists, is crucial, as it demonstrates a commitment to regulatory adherence and combating financial crimes.

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 process 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.

Consequences of Non-Compliance with PEPs and Sanctions Screening Regulations

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.

Understanding Ultimate Beneficial Owner (UBO) Requirements

Understanding Ultimate Beneficial Owners (UBOs) is understanding who owns or controls a business or legal entity. Varying definitions and requirements across jurisdictions make it essential for institutions to verify company details and identify UBOs to comply with AML and KYC laws. 

In the U.S., regulations mandating beneficial ownership disclosures are part of the Financial Crimes Enforcement Network (FinCEN)'s final rule for customer due diligence. This rule requires financial institutions like banks, broker-dealers, and mutual funds to verify the identities of beneficial owners of legal entity customers. 

Under the Corporate Transparency Act, U.S. companies must report to FinCEN the UBO’s full legal name, birth date, current residence or business address, and identifying number from a passport, driver’s license or other state-issued ID.

Identifying PEPs and Ensuring Compliance in Financial Institutions

Identifying PEPs in financial institutions is paramount to maintaining regulatory compliance and safeguarding against potential risks. PEPs hold prominent public positions or have affiliations with high-ranking government officials, making them susceptible to undue influence or involvement in illicit activities.

To ensure adherence to AML and KYC regulations, financial institutions must implement robust mechanisms for identifying and monitoring PEPs within their customer base. This entails thorough screening processes and ongoing due diligence to detect any changes in PEP status or behavior that may warrant further investigation.

Institutions can effectively identify PEPs and mitigate the associated risks by employing advanced technology and comprehensive databases. Moreover, integrating these measures into broader compliance frameworks enhances transparency and strengthens the institution's defense against financial crime. 

Streamline Onboarding: KYB and KYC Screenings

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 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.