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Businesses are becoming increasingly exposed to the risk of financial crimes such as fraud, money laundering and terrorist financing. In response, the intergovernmental group, Financial Action Task Force (FATF) has steered a regulatory framework for combating the use of businesses and financial systems for illicit activities. Every country therefore, implements strict anti-money laundering (AML) compliance processes, with penalties for violation.
A key requirement is that the business be fully aware of the individual or entity they deal with. Know Your Customer (KYC) has thus emerged as a norm today. Part of the compliance process is ongoing Customer Due Diligence (CDD), which means a business must conduct ongoing screening processes for monitoring of business transactions and entities.
The two important elements of screening are the checking of a customer against a Politically Exposed Persons (PEPs) list such as the Thomson Reuters World-Check database, as well as Sanctions Lists of individuals and entities. This may be done during the customer onboarding or KYC process – a preventive measure against dealing with individuals associated with dubious activity or financial crimes. Screening can also be done at any point in time. When unusual trends in transactions or red flags are created it can create a lack of confidence in a customer or entity.
What is a PEP?
A PEP is defined as someone who has held a public or prominent position sometime, and through the position or influence, may potentially be involved in bribery, corruption or dubious deals and payoffs. Such public figures are often found to use their family members or associates to hide the link and money trails. Therefore, the PEP list also includes close business associates and family members. PEPs can be political figures/heads of government, individuals performing diplomatic or judicial roles, or functioning on the board of state-owned enterprises, financial institutions and international sports committees. With risks of terrorist financing coming to the fore, the PEP list has also extended its interpretation. Thus high-ranking officials of the armed forces or homeland security who may be exposed to inducements in return of official secrets and documents, also come within its purview. “Close associates” of PEPs include those individuals or entities who are in business or profitable relationship with the PEP. “Family members” embrace immediate family likes siblings, spouse, children and parents; as well as extended family members like cousins and in-laws.
What is a Sanction Check?
Sanctions Checks are necessary to assess the risk of individuals, companies and countries. A specialised list including “Specially Designated Nationals and Blocked Persons”, “Foreign Sanctions Evaders” is maintained by national regulators or international watchdogs such as the Office of Foreign Assets Control (OFAC) to prevent the exposure of businesses to money laundering. Sanction Checks are performed so that businesses can identify individuals as a part of the required AML legislation put in place by governments. This ensures that businesses do not deal with individuals who are restricted from certain industries or activities.
It is by law illegal to engage in business with a sanctioned company, this is why sanction checks are important. The aim is to protect businesses from being used for money laundering and other financial crimes.
Why screening against PEPs and Sanctions Lists is valuable
Financial or business relationships with individuals or entities on PEPs and Sanctions Lists are very highly risky. Firstly, every country sets out AML/CTF compliance regulations that include ongoing CDD (including screening) as part of continuous financial checks and monitoring. Non-compliance may lead to high penalties running up to thousands or even millions of dollars. Secondly, there is the risk of getting on the wrong side of the law by associating with discredited people and being pulled-into their financial crimes. Thirdly, companies that do not perform screening compliance run the risk of having their business reputation corroded and finances collapse.
Standard AML/CTF compliance by businesses does not reveal threats associated with “high-risk individuals and entities”. Therefore, there is a need to conduct separate checks against PEPs and Sanctions Lists to protect you and your firm from exposure to the menace of financial crimes.
NameScan – facilitating the AML service of Sanctions Screening
NameScan is an innovative SaaS (Software as a Service) that offers sanctions screenings for Watch List filtering and PEP screening. It provides real-time access to state-of-the-art world databases, on an easy pay-as-you-go model. The NameScan service is ideal for small and medium businesses, compliance “reporting” professionals and organisations; who want to do away with high overheads of ongoing compliance or onboarding compliance.