With the increasing complexities in regulatory compliance, organizations must take into account compliance and risk management at the very core of their operations. Such an environment places great emphasis on Political Exposed Persons (PEPs) and sanction screening as a form of control against the stakeholders with whom the organizations would encounter such crimes and also for the sake of globalization compliance.
The fight against financial crimes, particularly money laundering and terrorist financing, has become more coordinated globally. According to the SAS Institute, It is estimated that around 2-5 percent of the world’s Gross Domestic Product (GDP), which is about $800 billion to $2 trillion, every year is laundered. These figures cannot go without saying offer a clear justification for having proper compliance mechanisms in place: PEPs screening and sanctions screening.
In this article, we look at the main features of PEPs and sanction screening and highlight their main advantages and integration within compliance strategy.
What is meant by a Politically Exposed Person (PEP)
A Politically Exposed Person (PEP) is a person who occupies a prominent public function or a position associated with a high degree of political influence. Due to their role, PEPs are more vunulrable to acts of corruption, bribery, or laundering the proceeds of crime. They have the means and the reach which can be and often is used for corrupt purposes.
What are the Types of PEPs
The types of PEPs are distinguished in terms of the functions which they perform and the geographical ranges:
• Foreign PEPs: These are the persons in senior positions in other countries. They include heads of state, ministers, ambassadors, and top military officers.
• Domestic PEPs: These are the senior public figures within the country, including members of the legislature, government ministers, and the higher judiciary.
• International Organisation PEPs: These refer to power brokers associated with international institutions such as the UN and the World Bank.
Also read Importance of PEP Screening
What are the Examples of PEP?
There are several examples including:
• Elected leaders such as presidents, premiers, and even royalty.
• Ministers of defense or other senior warriors active in politics.
• Army commanders, a.k.a four-star generals.
• People working for other countries within companies owned by the state.
• Those with similar connections and PEP's relatives.
How PEPs are Considered High Risk
Factors that make individuals categorized as PEPs high risk are:
1. Risks Associated with Corruption: More often than not, they are in charge of or have access to large sums of money.
2. Risks Associated with Laundering of Illicit Funds: These people may use their power and position to hide the proceeds of crime.
3. Risks Associated with Non-Public Information: Privileged Knowledge can be used for self or external benefits.
4. Risks That Are Related to Political Environment: Individuals in such situations may also have an increased risk of bribery.
5. Risks Created by The International Community: PEPs living in blocked territories may take part in illicit behaviors to protect their wealth or existence.
Read further: Politically Exposed Persons: Who Are They and Why Do They Matter?
What is Sanction Screening?
As the name suggests, sanction screening is about recognizing people or organizations who have been barred from activities by certain countries or international bodies. This entails checking whether any of the clients listed are included in the imposed restrictions that are issued by authorities such as the United Nations and the Office of Foreign Assets Control (OFAC).
This allows the companies to ensure that there would not be any business that would be against the laws of the land and the laws of the majority members of the countries, as well as the safety and security of the people living in those countries.
Why Do We Use Sanction Screening
Sanction screening serves several purposes and for that reason, we can say that it is multifunctional:
1. Preventing financial offenses like money laundering and the financing of terrorist activities.
2. Making sure that international laws are adhered to as a way of avoiding fines.
3. Protecting from negative impacts by not being linked with illegal or criminal persons or organizations.
4. Encouraging righteously doing business.
5. Elevating support infrastructures for peace and security in the world.
Diverse Categories of Sanctions
There are several categories of sanctions which include:
• Freezing the movement of capital.
• Limiting or prohibiting movement of persons.
• Prohibition of certain economic activities.
• Limiting activities in given fields such as economics or technology.
• Prohibition on the supply of arms or weapons of Information Technology.
Importance of PEP and Sanction Screening
Risk is also managed through PEP and sanction screening. It helps organizations to:
• Deter fines for non-compliance.
• Prevent costs associated with adverse publicity arising from eradicating financial GTG.
• Ensure daily operations meet ethical practices across countries.
You might want to read What is Sanction Screening in AML
A Step-by-Step Instruction for PEP and Sanction Screening Process
The steps in the screening process usually follow these patterns:
1. Verification of Client’s Identity
The first stage involves verification of the client’s identity using either government-approved documents or e-KYC methods.
2. Cross-checks
This step involves checking the client’s information against existing databases, such as worldwide PEPs and sanctions databases. Automated systems are essential in distinguishing these users better and improving the processes.
3. Evaluating Risk
Rated the client from the profile and the risks involved, high-risk clients may be subjected to Enhanced Due Diligence (EDD) measures.
4. Constant Oversight
Constantly monitor transactions and activities to try and spot anything suspicious. Review the risk evaluation regularly with the help of automated means.
You might want to read PEP Checks and Sanction Checks
Leveraging Technology for Sanction Checks
Modern technology added speed and accuracy to sanction check
• Machine Learning: Increases accuracy whilst reducing the amount of time needed to carry out the duty.
• Advanced Matching Algorithms: This has enhanced the efficiency of service delivery by lowering the rate of false alarms.
• Update In Real Time: Ensures there is no lag in response to these threats.
Sanction Check in the Workplace: Best Practices
To make screening effective:
• Utilize more than one information source for all checks.
• Apply a risk-based strategy appropriate for your organization.
• Execute Enhanced Due Diligence (EDD) on high-risk individuals.
• Keep appropriate documentation and ensure compliance audits are conducted regularly.
Interesting read: PEP Screening Best Practices
Challenges in Screening of PEPs and Sanction Checks
Other than being useful screening of PEPs and sanction check has challenges as well:
1. Data Quality: Incomplete or irrelevant information may be misleading.
2. Data Privacy: People wish to practice transparency without violating any laws.
3. Domestic Processes: There are numerous flagged cases which, in reality, are null and void issues.
4. Resource Challenges: Cost or technological know-how is a challenge to many small entities.
How to Face and Conquer These Challenges
1. Employing modern equipment
2. Training personnel
3. Working with partners within the industry
4. Presence of well-articulated policies
5. Regular assessments to enhance compliance structures
Conclusion
Screening of PEPs and sanction checks remain among the most effective mechanisms for reducing the risk of financial crimes and maintaining compliance with the applicable global standards. In this way, implementing best practices and incorporating best-in-class technology enables organizations to protect their business without compromising on principles and laws.
To facilitate the whole process of compliance, it is worthwhile to look at products such as Youverify that are aimed at easing the PEP and sanction screening process. Book a demo today.