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 detailed politically exposed person (PEP) and sanction screening checks 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.

Financial institutions (FIs) that neglect to identify PEPs and breach sanctions put themselves at risk of fines, which can be quite significant. Between 2008 and 2018, regulators around the globe levied almost $27 billion in fines related to watchlist screening. Notable offenders include BNP Paribas (fined $9 billion in 2014), Societe Generale (settled for $1.3 billion in 2018) and Standard Chartered (fined $1.1 billion in 2019).

A thorough screening program includes checks on sanction and PEP lists. 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 are established to help reduce financial crime by flagging people, businesses and countries that have committed illegal acts (or are suspected of committing them). By screening customers against sanctions lists, organizations can lower their risk of doing business with sanctioned entities.

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 organizations like Interpol.

What is Sanction Screening?

Sanction screening checks people or organizations against global law enforcement and sanctions lists to determine the risk of performing financial activities with these parties.

It’s imperative to minimize the risk of doing business with a person or organization on a sanctions list. Ongoing programs that reevaluate the status can better implement a risk-based approach, as there are many lists and the lists are constantly changing. With such a complex data set, there are bound to be omissions, false positives and other errors. So, analyzing and understanding sanction data is crucial.

Account screening and transaction screening are two significant areas to consider when creating your sanction screening program. For account screening, taking list information and matching it with submitted account information will help identify real risks or simplify scrutiny on accounts that aren’t actual matches for the sanction lists. As the Wolfsberg Group, an association of thirteen global banks that aims to develop frameworks and guidance for the management of financial crime risks, states

“While this concept sounds simple, it can be complex when it comes to determining what actually constitutes a “true match” across a range of variables such as alphabets, languages, cultures, spelling, abbreviations, acronyms and aliases. When screening is automated, additional complexities are introduced such as “fuzzy matching” algorithms, workflows and match rules.”

To maximize your ability to screen new customers, your identity verification processes should be able to consider all these possibilities using effective match engine technology.

What is a PEP (Politically Exposed Person)?

FATF Recommendation 12 defines a PEP as 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.

What is PEP Screening?

PEP screening is a process to identify and conduct customer due diligence on any politically exposed person as part of a robust Anti-Money Laundering and Know Your Customer (AML/KYC) program.

PEP screening during the account opening process helps determine if an applicant is a PEP and the potential level of risk of doing business with that person. Depending on the jurisdiction and the risk profile of the financial institution, an account may still be opened but careful analysis and enhanced due diligence are warranted.

As with sanctions screening, ongoing monitoring of PEP status for accounts is advisable. The ever-changing nature of politics and people who have influence means that PEP lists are always evolving. Systematic ways to keep PEP status current help keep AML/KYC programs effective.

PEP Screening Requirements in the U.S. and UK

Taking measures to identify the accounts of PEPs and the associated risk is a requirement in both the U.S. and UK Accepting such accounts should be a decision of senior management.

In the United States, the broad definition of PEP is someone who holds a senior position of public trust or people close to them, such as family members, professional associates, or people who conduct transactions on their behalf.

In the UK, however, the term PEP only applies to people who hold high public office. However, family members or close associates of PEPs are considered high-risk, and thus Enhanced Due Diligence procedures are called for.

Why it is Important to Screen Against PEPs and Sanctions Lists

Transacting with customers who appear on PEPs and sanctions lists puts organizations at greater 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 compliance procedures don’t generally involve “high-risk individuals and entities.” Running watchlist checks that examine occurrences on PEP or other sanction lists helps protect your organization.

PEP and Sanction Screening Best Practices

Integrate with a wide range of high-quality 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

The FATF recommends taking a risk-based approach to PEPs. 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 individuals to launder illicit funds and thus safeguard an FI’s reputation and integrity.