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PEPs and Sanctions: The Importance of Screening & Best Practice

For many organisations it is imperative to carry out thorough checks for politically exposed persons (PEPs) and sanctioned individuals – both when onboarding new customers and during ongoing client reviews. In this article SQR’s Head of Commercial, Steven Webster, explains why this process is vital not only to safeguard the organisation’s reputation, but also to protect its revenue and capital.

For organisations, it is imperative to carry out thorough checks for politically exposed persons (PEPs) and sanctioned individuals, when both onboarding new customers and during ongoing client reviews. This is vital not only to safeguard the organisation’s reputation but to protect its revenue and capital.

Financial institutions (FIs) that fail to identify PEPs or violate sanctions expose themselves to substantial fines. Between 2008 and 2018, global regulators imposed nearly $27 billion in fines related to watchlist screening. Prominent examples include BNP Paribas, which incurred a $9 billion penalty in 2014, Societe Generale, which settled for $1.3 billion in 2018, and Standard Chartered, which was fined $1.1 billion in 2019.

An effective screening program encompasses checks against both sanctions and PEP lists. These watchlists are continuously updated with new entries, necessitating real-time screening to adhere to KYC requirements and ensure a seamless customer onboarding process.

Understanding Sanctions Lists

Sanctions lists serve the crucial purpose of reducing financial crime by flagging individuals, businesses, and countries involved in or suspected of illegal activities. Screening customers against these lists enables organisations to mitigate the risk of engaging with sanctioned entities. 

At SQR We check against the big 4 sanctions (UN, EU, OFAC and OFSI) for new releases continuously, as well as various news and email alerts issued directly by the sanctioning bodies. As well as internationally recognised sanctions, we also monitor and provide feedback on locally-enforced sanctions lists that help you to stay compliant wherever you’re operating.

We use multiple sources for PEP data including global PEPs, Financial Regulators, Law Enforcement, Adverse Media sources; England &; Wales Charities Commission; Insolvents &; Bankrupts lists; and the Disqualified Directors Database.

Significance of Sanction Screening

Sanctions screening involves scrutinising individuals and organisations against global law enforcement and sanctions lists, to assess the risk associated with conducting business involving these parties. Ongoing monitoring is advisable due to the ever-evolving nature of these lists, which can result in omissions, false positives, and other errors. Hence, a comprehensive understanding of sanction data is critical.

Politically Exposed Persons (PEPs)

Financial Action Task Force (FATF) Recommendation 12 defines PEPs as individuals who have held or currently hold prominent public positions either domestically or abroad, including heads of state, senior politicians, and their close associates and family members. These individuals, due to their potential influence over government contracts and oversight functions, require special attention.

PEP Requirements in the Isle of Man & the UK

In both The Isle of Man and the UK, identifying PEP accounts and assessing associated risks is a mandatory practice. The decision to accept such accounts should involve senior management.

In the UK, the term PEP specifically pertains to individuals in high public office. However, family members or close associates of PEPs are deemed high-risk, necessitating Enhanced Due Diligence procedures.

The Isle of Man considers a ‘PEP’ as someone appointed to a ‘prominent public function,’ which includes not only politicians but also judges, senior military officials, diplomats, and high-ranking civil servants. Family members and close associates of Isle of Man PEPs are also categorised as PEPs.

Why PEPs Matter in the Isle of Man and the United Kingdom

Businesses within the regulated sector, referred to as ‘Relevant Persons’ – such as financial services firms, accountants, and lawyers – closely monitor PEPs due to their susceptibility to bribery and corruption. Consequently, they pose a higher risk of money laundering. The Isle of Man’s Anti-Money Laundering laws recognise this and mandate regulated businesses to adopt specific measures to address the enhanced risks associated with PEPs.

The Importance of PEP Screening

PEP screening is a crucial component of a robust Anti-Money Laundering and Know Your Customer (AML/KYC) programme. Conducting PEP screening during account opening helps assess the applicant’s PEP status and the potential risk associated with doing business with them. 

While account opening is still possible in certain jurisdictions and risk profiles, it often necessitates careful analysis and enhanced due diligence. Like sanctions screening, ongoing monitoring of PEP status is essential to maintain the effectiveness of AML/KYC programmes.

The Importance of Screening Against PEPs and Sanctions Lists

Engaging with customers found on PEP and sanctions lists exposes organisations to significant risks. Non-compliance with watchlist screening may result in substantial regulatory fines, and failing to identify sanctions evasion, bad actors, or PEPs involved in organised crime can harm an organisation’s reputation.

Typical compliance procedures rarely address “high-risk individuals and entities.” Therefore, conducting watchlist checks, which scrutinise occurrences on PEP or other sanction lists, plays a vital role in safeguarding an organisation.

Best Practices for PEP and Sanction Screening

It’s imperative to integrate with a wide range of high-quality trusted data sources, in order to ensure comprehensive and up-to-date customer screening is conducted against dynamic lists from all relevant bodies. With this in mind, automated ongoing monitoring of client status in relation to PEP and Sanctions data, such as that provided by SQR, is crucial to ensure ongoing AML compliance.

By utilising advanced technology, including artificial intelligence and machine learning, organisations can further enhance the efficiency of the screening process, reduce false positives and improve the overall effectiveness of AML/KYC procedures. 

Incorporating automatic watchlist screening and ongoing monitoring, alongside a seamless and secure global identity verification platform, proves to be a smart and cost-effective strategy to deter corrupt individuals from laundering illicit funds, thereby safeguarding an organisation’s reputation and integrity.

To find out more about SQR’s identity verification and ongoing monitoring services, please contact us to arrange a demo. 

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