Know your customer (KYC) and Anti-Money Laundering (AML) screenings are essential for any firm to remain compliant with international regulations and avoid costly penalties. Regulated businesses are required to run sanctions lists and PEP data screenings on a regular basis.
What are PEP and Sanctions Lists Screenings?
Politically Exposed Persons, or PEPs, include the following individuals: those who hold or have held a position as the head of state or government, military officials, senior politicians, senior executives of government-owned corporations, or high-ranking political party officials. The list many times also includes family members and close business associates.
A PEP screening is a critical step in the Know your Customer process and allows a business to understand the risk potential of a customer. Since these individuals have public influence and oversight of government contracts, it is important to pay special attention to their ability to engage in corrupt activities.
A Sanctions List Screening is performed to ensure that a customer is not prohibited from certain activities or industries. The information is verified against multiple government watchlists and sanctions maintained by law enforcement agencies, regulators, and the UN. The goal of these sanctions is to prevent and detect illegal activities, terror financing, and any other activities considered to be a threat to national security.
An example is an Office of Foreign Assets Control (OFAC) check, which verifies someone is not forbidden from conducting business in the US (for example terrorist organizations, drug traffickers, or designated nationals). It also identifies entities that are subject to special requirements because they proliferate weapons of mass destruction.
PEP and Sanctions Lists Screening Requirements
All businesses that are considered high-risk, such as those in the financial industry (Money Services Businesses MSB), Insurance industry, Law firms etc. must perform sanctions lists and PEP data checks and screenings. The Financial Action Task Force (FATF) requires that these checks be completed when onboarding customers and establishing a new business relationship while it is also recommended to do a regular scan and check for the entire customer base.
While many industries are not regulated in this regard and not legally required to do sanction or PEP screening, violating sanction programs, or being involved in a bribery situation with a PEP will have severe consequences for all organizations.
Each regulated business is responsible for performing the risk assessment themselves, as this ensures from being used as a channel for illegal activities like money laundering. This is especially important for financial institutions, legal professionals, and real estate agencies that operate across borders and act on behalf of a wide variety of clients.
If a potential customer is considered a PEP, enhanced due diligence must be applied while onboarding and throughout the business relationship. You are still able to conduct business with them, but you have to perform extra verification as they are considered high-risk clients.
If someone appears on a sanctions list, however, you may not be able to establish a business relationship with them and the rules vary by country:
In the US, you are prohibited from working with a person on a sanctions list. The US Patriot Act mandates this, and the sanctions screenings must be completed against the SDN (Specially Designated Nationals And Blocked Persons) list and all other watchlists published by OFAC. Canada maintains a similar list that is maintained by the Office of the Superintendent of Financial Institutions (OSFI).
The European Union also requires businesses to complete know your customer procedures at the time of onboarding, and any customer that appears on a list from a high-risk country according to the EU Commission requires additional due diligence. If a financial institution does not identify PEPs or breaches regulations regarding sanctions lists, they will be subject to substantial penalties and fines. These fines can be significant – in 2014 BNP Paribas was fined a staggering $9 billion.
Business Benefits of Sanctions and PEP Screenings
The primary benefit of using automated sanctions lists and PEP data screening programs is meeting compliance requirements as required by your country and avoiding the costs and penalties associated with not doing so. There are an immense number of lists to choose from when performing screenings, and it can be difficult to properly identify someone if they have different name spellings or aliases. Rules for domestic clients can also be very different from those relating to foreigners. False positives can be a challenge as well, and dynamic databases make this an ever-changing process.
By using an automated screening system, businesses can eliminate manual work and minimize the administrative burden. Screenings can also be customized to meet the specific needs and risks associated with your firm. Documentation is also simplified and easily accessible when compiling evidence during a compliance audit.
Similarly, clients who do have a PEP designation can be subject to ongoing due diligence requirements, and these screenings can help you safeguard the interests of your firm. If the checks reveal suspicious money trails you also have the opportunity to submit a suspicious activity report (SAR) to de-risk your business relationship.
Choosing a PEP and Sanctions Screening Solution
When choosing a PEP and sanctions screening solution it is important to consider the scope of the system, the sources and lists included in the database, and how the tool filters a match in order to reduce false positives.
You want to ensure that you are identifying PEPs and Sanctions from all relevant areas, so the database used must be integrated with high quality and comprehensive data sources. It must also be able to automate the ongoing monitoring of clients so that you can remain up to date and be made aware of any changes to an individual’s circumstances.
REMEDYNE has been partnering with sanctions.io to provide sanctions and PEP data and the sanctions.io data subscription is included in the REMEDYNE license (up to 50k calls per year). However, other data providers can be used as well, and the scope of screening can be extended to include data from company registers or filings, e.g. for bankruptcy.
(This blog post has been adopted from our partner’s sanctions.io post, https://sanctions.io/why-sanctions-lists-and-pep-data-screenings-are-important-for-any-business/).