AML/CTF compliance begins with mandatory client verification and screening for Politically Exposed Persons (PEPs)/Sanctions. According to the Financial Action Task Force (FATF) Directives, all businesses considered high-risk, must screen their clients at the time of onboarding to check for PEP, Relative and Close Associates (RCA), or Sanctions. This is mandated at the time of client onboarding, and the establishment of a new business relationship.
A robust screening program includes both types of checks:
PEP screening to identify and conduct due diligence on any PEPs or high-risk customers;
Sanctions screening to ensure that entities on Sanctions lists are not allowed to make financial transactions.
Screening solutions screen customers against various PEP lists, to understand the risk potential of a customer and assign a risk scoring for ongoing customer due diligence (CDD).
The following are categorised as PEPs, although definitions vary for countries:
- individuals who hold or previously held a prominent public function,
- head of state or government,
- senior politicians,
- senior government, judicial or military officials,
- senior executives of state-owned corporations,
- high-ranking officials of a political party.
Sanctions screening involves specialised searches against national and global databases to identify individuals, entities or countries prohibited from certain business activities or transactions. Sanctions are aimed to curb illegal activities, terror financing, nuclear and arms proliferation, and activities considered a threat to the security of a nation, generally.
Checks are made against multiple databases of Sanctions and Watchlists maintained by the UN, country regulators and law enforcement agencies.
As PEPs and Sanctions lists are periodically updated, it is important to conduct PEP and Sanctions Screening as part of your ongoing compliance program.
Why you must screen for PEP and Sanctions?
As a regulated business, you are ultimately responsible for risk assessment of your clients based on geographies, industry, nature of business, type of clients, country of transaction and operation; size or pattern of transactions; and business relationships.
Some businesses like financial institutions, real estate agencies, money service businesses, and cryptocurrency exchanges, operate across borders and serve various types of clients. Vigilance around PEP accounts helps to prevent the business or firm from being used as a channel for money laundering or terror financing.
There are also legal professionals and accounting firms who may be at risk to this kind of activity because they act on behalf of domestic or foreign clients and, receive payments, manage client funds or purchase real estate on their behalf. Having an effective PEP/Sanctions screening program in place, helps to mitigate the risk of potential financial fraud.
As a business following FATF Recommendations, you must maintain business compliance. To begin with, check if your clients fall under the local/foreign PEP definitions or feature in any of the various Sanctions lists enforced by your country. If a client is a PEP, you must treat the client as high-risk, and apply enhanced due diligence (EDD) at the time of onboarding as well as on an ongoing basis. This is necessary to establish any changes in risk assessment during new relationship formations. If you are a bank or other financial institution, this must be done during the Know-Your-Customer (KYC) process as part of customer due diligence (CDD). Although you are not prohibited from providing services to a PEP in the case of a positive alert, enhanced scrutiny is required of the PEP’s banking account and business relationships.
However, for Sanctions screening, the rules differ. If the client falls in a Sanctions list, you must follow the rules of your country. Some like the USA do not allow you to onboard a client that is found sanctioned, under any of its lists.
Benefits of PEP and Sanctions screening for your business compliance
The huge number of lists, spellings, aliases, and the massive volume of global alerts; make it difficult for businesses to correctly identify a person or company on the PEP/Sanctions or Watch lists. The challenges of the high number of false positive alerts and dynamic databases also make compliance a cumbersome process. Despite this, the benefits of an automated PEP/Sanctions screening system are many, and outdo the minor irritants.
- Screenings are carried out at a reasonable cost, whether you are a SMB or a large corporation.
- Performing automated checks with a PEP/Sanctions screening tool cuts down the manual process, and eases the administrative burden.
- Screenings can be customised to the requirements of your business, and risk assessment.
- Customers who generate a positive alert from a PEP/Sanctions screening can be subjected to ongoing EDD or country-rules, to safeguard the interests of your business.
- At any stage, you can consider submitting a SAR or de-risking of your business relationship, if the EDD checks reveal illicit sources of wealth or dubious money trails.
- By following a system of compliance as per the laws of your country, and checking for PEP and Sanctions as mandated, you can prove compliance and waive off any potential penalty if the customer is found guilty of malpractices.
- You can document all alerts in a case management system for your internal compliance audits.
- National PEPs can be screened differently from Foreign PEPs, to accommodate different compliance regulations.
- Screening is a part of KYC/IDV services and establishes that suitable measures have been taken by your business to validate a customer and create appropriate risk profiles.
- In the case of high-risk industries or businesses, screening helps to strategise and measure the regulatory impact of business decisions.
- In a rapidly changing environment of tax rules, screening additionally helps to measure the tax impact of client relationships.
PEP and Sanctions screening compliance by region
Although, most countries are required to screen for PEP and Sanctions as a KYC procedure, some countries have different or specific rules.
Here are some of the key PEP/Sanctions screening laws by region:
Under the USA PATRIOT Act, the customer identification programme (CIP) and CDD compliance makes PEP/Sanctions screening compulsory.
PEP screening includes screening for senior foreign political figures, and immediate family members and their connections, as well as for beneficial owners (BOs).
The OFAC places embargo on foreign terrorists, international narcotics traffickers, and those engaged in activities that are considered a threat to the national security of the U.S.
As a business in the USA, you must therefore conduct Sanctions screening checks against the SDN List and all other lists published by OFAC, like the Foreign Sanctions Evaders List, the Non-SDN Iran Sanctions Act List, and so on.
Any business registered or operating out of the USA is prohibited from dealing with a person or account holder belonging to a Sanctions list.
Under Canada’s Regulator, FINTRAC:
The period for PEP and sanctions check is from the beginning of the business relationship.
Businesses must check whether the account is opened for a Foreign or Domestic PEP, or a member of close association.
Periodic monitoring is mandated based on risk product lines, and activities.
Where an entity is found to be a PEP, EDD and ascertaining the source of their funds is expected. Stricter transaction monitoring controls are compulsory for foreign PEPs.
Sanctions lists are maintained by the Office of the Superintendent of Financial Institutions (OSFI).
Every business conducting financial transactions within Canada or with Canadian citizens is required to search against Designated Persons listed in the Justice for Victims of Corrupt Foreign Officials Regulations.
Monetary transactions, property dealings and financial services are not permitted with Designated Persons found in Sanctions screening.
KYC checks at the time of client onboarding include PEPs, Sanctioned/High-risk Countries screening and Beneficial Ownership checks.
Any PEP or customer from high-risk third countries listed by EU Commission require enhanced due diligence.
Sanctions screening includes checks against the EU sanctioned countries and High-risk countries that EU considers deficient in their AML/CTF regimes.
The rules apply to financial institutions and individuals within the territory or jurisdiction of the European Union.
Financial institutions, tax professionals, providers of virtual currencies and those trading in luxury goods such as art dealers, are included within the definition of ‘obliged entities’ for PEP/Sanctions screening compliance.
The use of digital identity and automated screening in the customer onboarding process wherever possible in the customer onboarding process IS ADVISED wherever possible.
The UK consolidated list of financial sanctions targets applies to:
- All UK citizens, wherever they are in the world, and
- Corporate entities trading in, or constituted in the UK
The Office of Financial Sanctions Implementation (OFSI) administers sanctions in the UK.
What are the considerations for selecting an anti-money laundering solution for PEP/Sanctions Screening?
So now that you know why you must conduct a PEP/Sanctions screening as part of your new client onboarding process, what must you do?
As a business looking for solutions for your PEP/Sanctions screening, you will need to have your risk assessments in place before you shop for the perfect tool.
Consider the following criteria:
What is the scope of the tool? Does the database contain information about PEPs, their families and their associates? Does it also include other high-risk individuals or those named on government Watch lists?
How does the tool filter matches? How frequently is it updated?
What sources and lists does the vendor database use?
We at NameScan use the most sophisticated methods for screening and filtering our database for PEP/Sanctions checks. What’s more, we update our screening tools against the lists daily. We invest considerably into designing algorithms to minimise false matches, which makes NameScan the perfect go-to tools for your business’ AML/CTF compliance.