What are PEPs and sanctions checks?

Politically Exposed Persons (PEPs) are those who possess a public position of power and influence. Because of their powerful standing, PEPs are seen to be more likely to be involved in financial crimes such as corruption, bribery, or money laundering.

Sanctions and sanctions lists are critical defenses against financial crime. They have emerged as a popular political tool as well as a commercial security precaution. Companies utilize sanctions checks to avoid dealing with sanctioned firms. Businesses may avoid non-compliance fees while simultaneously protecting their brand.

Implementing both PEPs and sanctions checks is critical for organizations to reduce the likelihood of dealing with high-risk persons or entities while still maintaining a strong due diligence procedure.

Continue reading to discover all you need to know about PEPs and penalties, as well as how to use these tools to assure compliance.

What are Sanctions Checks?

Sanctions checks assist businesses in adhering to regulatory requirements. Certain sectors, including the financial industry, are required to incorporate policies for screening sanctions.

Although organizations already conduct adverse media screening and surveillance assessments, sanctions checks are essential for ensuring identity verification. These verifications guarantee that organizations adhere to the Anti-Money Laundering (AML) and Know Your Customer (KYC) mandates.

Sanctions are punitive actions that are imposed on entire nations or, more precisely, on particular individuals or organizations. These safeguards are devised by governments and international organizations to identify and prevent entities from participating in unlawful activities. Sanction lists are also the responsibility of governments to publish and maintain.

What are Sanctions Lists?

Sanctions lists are records of corporations, states, nations, or persons accused of engaging in criminal conduct. Sanctions lists may be used to discourage criminal conduct or to advance political goals.

The United Nations Security Council (UNSC) first imposed penalties in 1966. Since then, we’ve utilized sanctions regimes to protect against a variety of concerns, including human rights violations, global wars, and terrorism.

Several examples of sanctions lists issued by regulatory bodies:

• European Commission
• Government of Canada
• Her Majesty’s Treasury
• Office of Financial Assets Control (OFAC)

Financial sanctions are imposed on individuals or organizations that are added to sanction registries. These sanctions may include asset restrictions or fines. The imposition of a total travel prohibition, which would prevent them from departing the country, is among the additional repercussions.

Challenges of Sanctions Checks

Multiple factors frequently present obstacles for businesses and their compliance officers when conducting sanctions checks. Theoretically, an organization’s internal teams can conduct manual data reviews and scan sanctions lists. However, this form of sanctions verification is deemed ineffective and puts organizations at risk of engaging in business transactions with sanctioned organizations.

Particularly in regard to Russia’s invasion of Ukraine, the intricacy and recurrent modifications of sanctions lists constitute additional obstacles to maintaining current knowledge.

Furthermore, the severity of the data that must be screened may be formidable, resulting in possible inaccuracies or prolonged periods for the sanctions check procedure. The complicated nature of the endeavor is compounded by the diverse regulatory requirements that exist across jurisdictions.

Difficulties may arise in the form of false positives, false negatives, or duplicate outcomes; thus, it is essential to guarantee precise identity verification of sanctioned entities while reducing superfluous notifications.

What are Politically Exposed Persons (PEPs)?

A Politically Exposed Person (PEP) is someone who is more likely to engage in corruption or money laundering due to their high-profile position of power and influence. PEPs, as defined by the Financial Action Task Force, are those who presently hold or have held a substantial position of power. Their prominent positions make them prone to engage in illegal activities or other offenses.

Despite this, not all PEPs are necessarily engaged in fraudulent activity. Companies must do PEP checks and concentrate on the hazards associated with high-risk people’s positions rather than assuming direct participation in any criminal activity.

Who Determines if an Individual is a PEP?

There is no global regulatory authority or comprehensive list of PEPs, and definitions and criteria for PEPs differ across nations. Several aspects should be considered while deciding whether or not to interact with a PEP. These include your region, the peculiarities of your sector, and the various actions that your consumers may take.

Because PEP status is dynamic and continually shifting, especially when discussing individuals associated with PEPs, PEP databases aren’t comprehensive. Furthermore, no database may include high-risk PEPs since they may avoid detection.

How Long is a Person Considered a PEP?

Rigid regulations regarding the time range do not define a person’s position as a PEP. Some PEPs may be declassified after a specific amount of time, while others can retain their classification permanently if they are deemed high-risk.

There should be a 12-to 18-month waiting period after leaving office, according to most nations. For the duration of the relationship, close companions should be treated as PEPs.

Types of PEPs

Members of powerful judicial bodies, those holding positions in government or parliament, and other similar positions may be considered PEPs. But those who are really connected to PEPs are also at a higher risk. Anyone who has a financial interest in the person’s assets, such as relatives or business associates, falls into this category.

Main PEP types:

1. Close associates and family members: Because of their relationship with PEPs, the potential to access and exploit the level of power increases. Spouses or partners, children, their spouses, as well as parents are included in this category.
2. Public officials: PEPs include presidents, top politicians, influential political parties, and other government leaders. People who work in judicial bodies, such as magistrates or Supreme Court members, are also often classified as PEPs.

In accordance with the FATF, PEPs can be divided into domestic and foreign PEPs. Domestic PEPs are those who hold essential governmental or powerful positions in their nation. Due to their heightened risk, foreign PEPs need more due diligence.

The Process of PEPs and Sanctions Checks

PEPs and sanctions checks are an essential component of an anti-money laundering (AML) compliance procedure. Generally, the aim is to identify individuals or entities who hold political positions or are subject to sanctions and then compare them against sanction lists to determine the necessary course of action.

Full PEP and sanction check procedure step-by-step:

• Gather customer IDs: This includes Name, address, tax ID, etc.
• Verify identification: Use digital ID verification software to verify data.
• Obtain business data: Including their registered business name, office location, model, activity, UBOs, funding source, etc. The checks must be used to determine who is a PEP in the company at this stage.
• Perform risk scoring: Assess consumer risks and grade them using data. Your score will decide whether you require customer due diligence (CDD) or enhanced due diligence. EDD is mandatory for PEPs, their colleagues, and high-risk third-country residents.
• Conduct EDD: High-risk consumers should undergo EDD based on past findings. That may need more verification, transaction history analysis, unfavorable media checks, or determining the ultimate beneficial owners’ wealth.
• Report obtained data: Filing a Suspicious Behavior Report is necessary if you suspect illegal behavior or if the company’s owner is under penalties.
• Continue monitoring: PEPs and sanctions checks continue. Both lists are dynamic, so you never know when a consumer could be a danger. Monitoring current clients lets you check them periodically and get real-time warnings regarding questionable consumer behavior like risk-profile changes.

PEPs and Sanctions Checks Recommended Approach

There is more to PEPs and sanctions checks than meets the eye. In addition to meeting their compliance obligations, organizations may protect their financial health and reputation in the market by doing comprehensive automated sanctions and PEPs screening.

Businesses should make thoroughness and accuracy their top priorities when thinking about automated PEP and Sanctions inspections. Reducing the occurrence of false positives and negatives—for example, failing to detect a possible match or incorrectly alerting innocent parties—requires precision. In order to keep the lists as accurate as possible, it is important to keep the screening software current so it reflects any additions or deletions.

On top of that, quickness and efficiency are key components of effective PEPs and sanctions checks. Businesses can quickly identify possible matches or warning signs with the help of automated technologies that evaluate massive amounts of data.

PEPs and Sanctions Screening by KYC Hub

Businesses can rely on KYC Hub’s identity verification and fraud prevention solutions to help them stay in full compliance with all regulations. We are pleased to inform you that our industry-specific set of tools allows you to do comprehensive PEPs and sanctions checks.