What is Pep Checks and Sanction Checks: A Guide

Politically Exposed Persons (PEP) are people who occupy significant roles; they include but are not limited to:

• Chief Executive 
• ⁠Deputy President 
• ⁠Secretaries 
• ⁠Legislators 
• ⁠Members of the House of Representatives 
• ⁠Justices of the Supreme Court 
• ⁠Head Justice
• ⁠Leaders of central banks and major financial organizations.

PEP might use their roles for money laundering or funding unlawful activities, which is why PEP checks and PEP screening are critical , banks and financial institutions must put in extra caution.  Hence, PEP and sanction checks are crucial for anti-money laundering (AML) compliance, assisting organizations in managing regulatory risks, protecting their reputation, and avoiding costly fines. 

If you are a financial institution, real estate company, or any enterprise dealing with high-risk clients, it's essential to know who you are interacting with. Not following regulatory standards increases financial penalties for affected organizations. 

Hence, this guide outlines what PEP checks and sanction checks are, the processes involved in performing them and how to implement PEP and sanction checks.
 

Read Also: Sanction and Embargo: Definition, Types and Differences

What Are PEP and Sanction Checks? 

What is a PEP Check: PEP Check Meaning

PEP checks involve identifying individuals in notable public positions or those with significant political influence, known as politically exposed persons. Because of their roles, PEPs encounter a high involvement in financial offenses like money laundering. 

The terms "PEP screening" and "PEP checks" are often used interchangeably, but there are slight differences.  

PEP Screening encompasses the entire process of identifying and assessing the risk associated with politically exposed persons (PEPs). It includes:

•  Initial screening of customers against PEP databases   
• Ongoing monitoring of existing customers for changes in status   
• Risk assessment of identified PEPs   
• Implementation of enhanced due diligence (EDD) measures for high-risk PEPs   

PEP checks are a crucial component of PEP screening, but they don't encompass the entire process.

What are Sanction Checks: Sanction Check Meaning
 

Sanction checks ensure that businesses do not engage with individuals, organizations, or countries that are subjected to sanctions imposed by governmental bodies or international entities like the United Nations or the European Union. Sanctions are imposed because of worries about national security, international relations, or violations of global laws. 

What are the Processes for Performing PEP and Sanction checks?

The process involved in PEP checks and sanction checks includes:
 

1. Determine the Risk Level: 

Evaluate the organization’s vulnerability to PEP and sanction risks in relation to its activities. Financial institutions typically encounter greater levels of risk than other sectors, requiring stricter screening procedures.

2. Deploy AML and Sanction Screening Solutions:

Numerous AML software options automate PEP and sanction verifications by persistently overseeing worldwide watchlists, governmental records, and news outlets. This real-time method allows companies to remain compliant with changing regulations and reduce risks. Our article here explains how to implement anti-money laundering software.

3. Perform Continuous Ongoing Monitoring:

Risk profiles may evolve; hence, it is crucial to regularly monitor clients. For instance, a client with low risk might turn into a PEP if they take on a government position. Continuous monitoring enables companies to recognize emerging risks and respond appropriately to maintain compliance.

A risk-based approach is usually the best and proactive approach to achieving AML compliance. Our article here covers a guide to adopting a risk-based approach to AML compliance.

4. Keep Records and Report Results: 

Documenting is an essential aspect of the compliance procedure. Organizations need to keep comprehensive records of their PEP and sanction checks to show due diligence and assist with any inquiries.

How to Select the Right Solution for PEP and Sanction Checks?
 

As regulatory requirements increase, businesses require effective tools to help with PEP and sanction checks. When choosing a solution, take into account the these characteristics: 

 1. Real-Time Monitoring: Guarantees that data remains up-to-date, even as clients risk levels evolve. 

 2. Global Watchlist Access: Facilitates extensive screening across global databases, such as OFAC, EU, UN, and Interpol. 

 3. Automated Oversight: Decreases the burden on compliance teams by autonomously refreshing risk evaluations and producing notifications when new information becomes available. 

Youverify provides straightforward real-time PEP and sanction screening solutions, aligning customers with an updated worldwide database. 

How to Implement PEP and Sanction Checks 
 

Here is a step-by-step guide for businesses to implement PEP (Politically Exposed Persons) and sanction checks:

Pre-Implementation

1. Conduct a risk assessment to identify areas vulnerable to PEP and sanction risks.

2. Develop an AML (Anti-Money Laundering) policy and procedures.

3. Designate a compliance officer responsible for PEP and sanction checks.

Step 1: Customer Identification Program (CIP)

1. Collect customer information (name, address, date of birth, etc).
2. Verify customer identity using reliable documents (passport, ID, etc).
    

Step 2: PEP Screening

1. Use automated software solutions to screen customers against global PEP lists.
2. Check customers against domestic PEP lists (if applicable).

Step 3: Sanction Screening

1. Screen customers against international sanction lists (example: OFAC, EU, UN).
2. Check customers against domestic sanction lists (if applicable).

Step 4: Ongoing Monitoring

1. Regularly update customer information and risk assessments.
2. Continuously monitor customers against PEP and sanction lists.
3. Generate alerts for changes in customer risk profiles.

Step 5: Reporting and Record-Keeping

1. Report suspicious transactions to relevant authorities - Financial Intelligence Unit).
2. Maintain detailed records of PEP and sanction checks.
    

By understanding the risks associated with high-profile and high-risk clients, businesses can protect themselves from financial crime, regulatory fines, and reputational damage. Investing in effective screening solutions and continuously monitoring compliance practices not only meets regulatory requirements but also builds trust with clients, partners, and regulators.

Case Studies: Execution of PEP and Sanction Checks 

Case Study 1: Penalties for Non-Compliance at Standard Chartered Bank 

In 2019, Standard Chartered Bank faced fines totaling $1.1 billion . by authorities in the U.S. and UK for breaches concerning AML and sanctions. The bank was unable to stop transactions involving high-risk clients, revealing problems in its compliance program concerning PEP and sanctions verifications. 

This situation highlights the possible financial and reputational harm that may result from inadequate PEP and sanction screening, even for well established organizations. It highlights the importance of financial institutions establishing strong compliance protocols.

Case Study 2: Deutsche Bank’s Improved Due Diligence for PEPs

Deutsche Bank encountered multiple situations where inadequate due diligence resulted in significant fines and harm to its reputation. In response, the bank then put in place its due diligence and compliance procedures, placing a significant emphasis on identifying high-risk clients, particularly PEP. The bank funded cutting-edge compliance technologies to effectively spot and track PEP, thereby enhancing its compliance program and ultimately minimizing its risk of potential fines and regulatory scrutiny.

Perform PEP Checks with YouVerify PEP and Sanction List
 

Identify high-risk customers with our real-time Pep and sanction screening solution. Perform FREE Domestic PEP List Check in Nigeria with Youverify. The procedure of having your client verified via the global PEP database can be made as effortless as possible. 

Schedule a FREE DEMO  with our AML compliance specialist to observe its functionality.