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 globalisation 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 per cent of the world’s Gross Domestic Product (GDP), which is about $800 billion to $2 trillion, every year is laundered. Can you believe it? This is why having proper compliance mechanisms in place such as the peps and sanctions screening is very important.
In this article, we discuss what PEP and sanctions screening are, why PEP and sanction checks are important and the processes involved.
Let's dive in!
What is a Politically Exposed Person (PEP)?
What does politically exposed person mean? or who is a 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 exposed than others 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 3 types of PEPs As Determined by FATF?
The types of PEPs are distinguished in terms of the functions which they perform and the geographical ranges:
1. Foreign PEPs: These are the persons in senior positions in a foreign country. They include heads of state, ministers, ambassadors, and top military officers.
2. Domestic PEPs: These are the senior public figures within their home country, including members of the legislature, government ministers, and the higher judiciary.
3. 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 Politically Exposed Persons?
When is someone considered a PEP? There are several examples of politically exposed persons including:
- Elected leaders such as presidents, premiers, and even royalty.
- Ministers of defence 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
What are the factors or conditions that make an individual categorized as PEPs high-risk ? They include
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 behaviours to protect their wealth or existence.
What is a PEP Screening or PEP Check?
Before we begin, you should know that PEP screening and PEP checks are often used interchangeably.
Now, what are PP checks? PEP checks are the processes or screening a politically exposed person (PEP) often undergoes to ensure financial institutions are not involved with suspicious financial activities such as money laundering. Before a PEP can own a financial account or be involved in a business with a company, the financial institution or business ensures they carry out robust PEP checks and sanction screening that usually include a series of processes which will be discussed as we go further.
Before, we go any further, let's define what is sanction screening.
What is Sanction Screening in AML?
As the name suggests, sanction screening involves 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.
What is the Purpose of Sanction Screening?
Sanction screening serves several purposes and for that reason, we can say that it is multifunctional. The purpose of sanctions screening includes but are not limited to:
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. Elevating support infrastructures for peace and security in the world.
Sanctioning a PEP can take any form including
• 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.
Interesting read: PEP Screening Best Practices
Importance of PEP and Sanctions Screening
Why are sanctions and PEP screenings necessary? PEP and sanctions checks are important for several reasons including:
1. Legal and Regulatory compliance:
pep and sanctions screening ensures that businesses and financial institutions comply with AML regulations and sanctions compliances.
AML laws such as the USA PATROIT Act, the EU's 6th Anti-Money Laundering Directive, and the FATF guidelines mandate PEP and sanctions screening for every financial institutions and businesses as part of the KYC processes.
Also, government and international organizations like UN or EU impose sanctions on individuals, entities and countries. Hence, PEP and sanction checks ensure these laws and regulations are complied with.
2. Mitigating Financial Risks
PEP and sanction checks helps to identify high-risk individuals who may pose financial treats such as money laundering or corruption, hence preventing fraud. Also, when an organization carries out PEP and sanction screening, they escape being fined and penalized as a result of non-compliance with PEP and sanction screening regulations.
3. Protecting Reputation
Carrying out PEPs and sanctions checks helps businesses prevent their reputation from being damaged, hence demonstrating a commitment to ethical practices and compliance, fostering trust with customers and stakeholders.
What is the Process for PEP and Sanction Screening?
What are the processes of PEP and sanctions checks? The steps in the screening process usually follow these patterns:
1. Gathering of Customer Data:
The first step in PEP and sanction checks is the collection of data. This includes their full name, date of birth, country of residence, occupation, and other relevant information that may help identify the potential PEP status.
2. Identifying Potential PEPs:
This process involves analysing the collected information and checking if the customer meets the criteria for being a PEP. This may include checking their information against government databases, public records, and PEP list such as the domestic PEP list.
3. Conducting Enhanced Due Diligence:
This is usually done when the customer is identified as a PEP that presents a high risk. They are called high-risk pep. It includes conducting more thorough checks such as obtaining additional documentation, verifying sources of wealth, and conducting background checks.
4. Screening Against Sanction Lists:
This process of PEP and sanction screening involves comparing customer's information against the global abd country-specific sanctions lists to ensure they are not associated with sanctioned individuals or entities.
5. Ongoing Monitoring:
This process involves continuously monitoring the customer's activities and updating information as needed to ensure compliance and mitigate risks.
Related: PEP Checks and Sanction Checks
Challenges in Screening of PEPs and Sanction Checks
Other than being useful screening of PEPs and sanction checks 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.
Solutions to the Challenges of PEP and Sanction Screening
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
How to Ensure Compliance with PEP and Sanction Screening Requirements with Youverify
Screening of PEPs and sanction checks is one of 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.
Stay ahead of compliance challenges and protect your business from risks. Learn how Youverify can help simplify and streamline your PEP and sanction screening process today. Book a demo today.