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Sanctions and PEP Screening: Ensuring Compliance with KYB Regulations

04 October, 2023

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Politically Exposed Persons (PEPs) are a more significant threat to financial institutions than traditional customers and businesses. Therefore, sanctions and PEP screening are more critical than ever to meet the Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) regulations. Recent research showed that criminals launder between $800M and $2T every year, and that’s a massive number.

Screening for PEPs and sanctioned individuals allows your business to ensure that you are dealing with low-risk entities that don’t pose any significant threat to your organization’s reputation. This article discusses the importance of these checks in the KYB process to prevent crimes like money laundering and ensure corporate due diligence.

Politically Exposed Persons: A Quick Glance

As described by the Financial Action Task Force (FATF), a Politically Exposed Person (PEP) is a person who presently is, or has been, authorized with an essential role at the state level. The United Nations Convention Against Corruption (UNCAC) further extends this description to include these prominent figures’ close associates and relatives with public roles. PEPs are at a greater risk for financial crimes like terrorist financing, money laundering, bribery, and corruption because of the nature of their work based on their role.

The following are the primary examples (but not limited to) of PEPs:

  • Present or former state officials
  • Judges and high-level judiciary positions
  • High-ranked military officers
  • Senior members of foreign political entities
  • Executives and board members of commercial enterprises owned by the government

Types of Identity Screening

A comprehensive screening process includes two main types of verifications:

  • PEP Screening to recognize and perform client due diligence on Politically Exposed Persons (PEPs) or customers with high-risk
  • Sanctions screening process to ensure that the individuals on global sanction lists are not authorized to make any financial transaction

What is PEP Screening?

Have you ever wondered about the consequences of doing business with individuals on PEP lists? Non-compliance with standard PEP regulations can put your businesses at the risk of heavy fines and, most importantly, reputational damage. That doesn’t mean you withdraw your dealings with the customers in this category. However, taking precautions with such clients is essential to save your business reputation and prevent monetary crimes.

PEP screening allows businesses to avoid precarious clients to ensure adequate corporate due diligence. These screening processes are an integral component of AML and CFT compliance. 

Here’s an example to further understand PEP Screening. When banks receive a loan application from a high-end associate who is a parliamentary member of their state, the banks will conduct a PEP screening. It helps them ensure that the respective individual is not engaged in any illicit activity and doesn’t have secret ties with criminal associations.

Identifying any possible concerns requires cross-referencing people with sanction lists and PEP databases. Financial organizations can preemptively detect and manage risks while maintaining regulatory compliance by conducting extensive PEP screening.

Sanctions & their Lists: A Brief Overview

Sanctions are the regulatory measures to limit certain activities of individuals, organizations, or countries. Government organizations and international authorities can issue sanctions lists of those involved in illicit financial crimes. The businesses use these published checklists to recognize and safeguard themselves from collaboration with sanctioned individuals and entities.

As a part of Customer or Corporate Due Diligence (CDD), sanctions lists assist businesses in making a robust layer of defence mechanism against the entities violating laws. These sanction lists comprise a collection of several different regulatory lists from substantial regulating bodies around the world, including the Office of Foreign Assets Control (OFAC), United Nations sanctions, European Union sanctions, and numerous other legislative and enforcement lists, including Interpol.

What is Sanctions Screening?

Sanctions screening is a process where members and organizations are screened against the lists issued by international regulatory authorities, as discussed above. These checklists allow businesses to verify the officials and enterprises involved in illicit activities, including money laundering, drug trafficking, corruption, etc.

However, failure to meet the regulations regarding sanctions can even lead to the revocation of business licenses or criminal charges.

Importance of Sanctions & PEP List Screening

By implementing sanctions lists and PEP list screening procedures, you may meet your country’s compliance standards and avoid penalties for failing to meet compliance. When conducting screenings, there are many lists to pick from, and it can be challenging to correctly identify someone if criminals use alternative name spellings or aliases. Regulations that apply to domestic clients may differ significantly from those that apply to foreign clients. 

Businesses can save administrative effort and remove manual work by utilizing an automated screening system. Additionally, sanctions and PEP screening can be tailored to the business’s individual requirements and risks.

Furthermore, businesses can perform ongoing due diligence checks on firms and clients with PEP designations. These checks significantly assist in protecting your company’s interests. 

Best Practices to Ensure Compliance

Integration with High-Quality Data Sources

Businesses must integrate with high-quality and up-to-date databases to ensure accurate and precise screening. It helps companies make informed decisions regarding their professional relations with customers and entities.

Implementing a Risk-Based Approach

The Financial Action Task Force (FATF) recommends utilizing a risk-based approach when it comes to PEP screening. For instance, a comprehensive and internal risk assessment helps businesses define what lies under the Politically Exposed Person (PEP) category as per foreign policies.

Performing Ongoing Monitoring

Businesses must practice automated ongoing monitoring of organizations and individuals against updated sanctions and PEP screening lists. It allows companies to check on the daily activities of individuals, officials, and organizations, meeting compliance with AML and CFT regulations.

Reliance on Trusted Platform

To ensure efficient sanctions and PEP screening processes, businesses must rely on high-technology and automated systems that immediately extract customer information. Such platforms reduce the possibility of false positives and accelerate the screening process.

Ensure Compliance with The KYB

Companies can use The KYB to simplify their sanctions and PEP screening processes while swiftly meeting AML and KYB compliance. With these automated procedures, businesses can effortlessly onboard new customers, whether a high-profile individual, organization, or foreign enterprise. Our upgraded screening systems allow corporations to avoid heavy penalties and significant losses while mitigating regulatory or reputational risk. Furthermore, The KYB’s specialized team ensures your business gets Know Your Business (KYB) services that flawlessly incorporate into the business verification systems, allowing you to make knowledgeable decisions.

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