Sanctions and PEP screening processes for an efficient KYC

Know Your Customer (KYC) process is an indispensable financial procedure used to maintain the cleanliness of country’s legitimate financial system and keep public funds separate from the tainted funds of corrupt political systems and various organizational networks. The process of onboarding of new customers and that of reviewing existing clients involves a detailed politically exposed person(s) PEP check to ensure and maintain organization’s reputation, revenue and protection of capital.

Any neglect to identify PEPs may lead to respective financial institutions incurring significant fines by a breach of sanctions. Almost 27 billion dollars were levied as fines by global regulators on financial screening between 2008 and 2018, which included BNP Paribas ($9 billion), Societe Generale ($1.3 billion) and Standard Chartered ($1.1 billion) as major offenders within this period.

Types of screening

The following two types of checks constitute the screening program

- Sanctions search is performed to ensure that individuals on global law enforcement and sanctions list are strictly not allowed to make financial transactions.

- PEP check  is done to identify and conduct CDD on any PEPs or other high-risk customers.

The watchlists are constantly updated with new names, and both sanction search and PEP check is advised to be performed in real-time in adherence to KYC requirements, the goal being creating a seamless customer onboarding process.

Sanction lists

The main objective of creation of sanction lists is reduction of financial crime through flagging people, businesses and countries that have committed (or are accused of committing) illegal acts. Sanction lists are used to screen customers so that organizations stop doing business with those entities and thus be able to lower substantial financial risks.

Sanction lists are compiled using various regulatory and diligence database obtained through major sanctioning bodies worldwide. Some prominent examples of such organizations keeping regulatory lists are the Office of Foreign Assets Control (OFAC), UN Sanctions, EU Sanctions, Her Majesty’s Treasury and many other regulatory and law enforcements organizations such as Interpol.

Politically Exposed Person (PEP)

A politically exposed person, or a PEP is defined as an individual who has been entrust with positions or functions of great public prominence in either domestic or international capacity, e.g. a head of state or a senior politician. Close business associates and immediate family members also form a part of the PEP list of the said person. Due to the special influence that these persons have the capacity to exert over various business functions and government contracts, careful attention is required to focus on and bring to light their abilities to enable corrupt practices.

Requirements of PEP (for US/UK)

Identification of PEP accounts through all necessary and appropriate means is a compulsory requirement in the US and the UK. This assignment is generally handled by an organization’s senior management.

In the US, a politically exposed person (PEP) is defined as a person in charge of a senior position of public trust, or any person(s) close to such a person, like family members, associates, professional partners and any of those who conduct transactions for that person.

In the UK, however, the term politically active person (PEP) is only associated with people holding high public office. Enhanced Due Diligence (EDD) procedures apply as any of the family members or personal associates of those PEPs are considered higher risks.

Screening against sanctions and PEP lists

Organizations who are engaged in transactions with customers who appear on any of the sanction and PEP lists put themselves in financial jeopardy:

- A financial institution is at a risk of incurring steep regulatory fines due to non-compliance with watchlist screening.

- Potential reputational damage can happen due to failures in identifying evasions of sanctions or a PEP involved in criminal activities.

There are no high-risk individuals and entities involved in standard compliance procedures, in general. Protection of an organization is largely dependant upon periodic running of watchlist checks that examine highlights, addendums and other occurrences on sanction or other PEP lists

Best practices

- Integration using high quality data and a wide range of trusted data sources

Application of clean, comprehensive and an up-to-date data bank to screen customers is reliable and undisputed in order to identify sanctions from various regulatory bodies. It is also important that all data must be consolidated in one place and with all other watchlist databases.

- Performing a risk-based approach

A risk-based approach to PEPs is recommended by the FATF. Definition of various parameters such as what does and doesn’t constitute politically exposed may be defined using an internal assessment, in accordance with the policies of a financial institution.

- Monitoring

It is highly recommended that the monitoring of individuals and against updated sanctions and PEP lists must be automated in order to ease the process of daily monitoring of customers. Automation can also alert you immediately in case of changes made to customer’s status and stay in pace with AML regulations.

- Dependence on the best technology platforms

Implementation of AML/KYC solutions can improve the effectiveness of sanction search and PEP check processes, as well as automate workloads. These API-driven solutions can mitigate AML risks by screening customers from various sources against sanctions and PEP list. Technologies such as artificial intelligence and machine learning can assist financial institutions to reduce false positives and screen lists using ever-increasing efficiencies.

Automatic watchlist screening is a smart and efficient way to prevent laundering of illicit funds in financial institutions and thus protect the latter’s reputation and integrity.