Politically Exposed Persons (PEPs) are people holding a public position with power and influence. Due to their influential status, PEPs are considered at a higher risk of being associated with financial crimes such as corruption, bribery, or money laundering.
Sanctions and sanctions lists serve as crucial safeguards against financial crime. They have become a widely used political tool and a security measure in business. Companies use sanctions checks to prevent themselves from getting involved with sanctioned entities. This way, businesses not only avoid the risk of non-compliance fines but also safeguard their reputation in the process.
Conducting both PEP and sanction checks is crucial for businesses to minimize the chances of engaging with high-risk individuals or entities and to maintain a robust due diligence process.
Keep on reading to learn all about the ins and outs of PEPs and sanctions and how to conduct these checks to ensure compliance.
What are Sanctions Checks Meant For?
Sanctions checks are the process of screening customers against established sanction lists and watchlists to ensure they are not involved in financial crimes or other illicit activities. These checks are necessary to verify the legitimacy of businesses, individuals, and other entities that your business engages with.
💡 Sanctions checks facts to remember:
- Sanctions checks help companies meet compliance regulations. Some industries, such as financial institutions, are obliged to integrate sanctions screening policies.
- While businesses already perform watchlists and adverse media screening, sanctions checks are crucial for identity verification. These checks ensure companies comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.
Sanctions are measures applied to entire countries or, more specifically, targeted at individuals or groups. International organizations and governments design these measures to detect and protect entities from engaging in illicit activities. Governments are also responsible for publishing and updating sanctions lists.
What are Sanctions Lists?
Sanctions lists are records of businesses, states, countries, or individuals suspected of involvement in some sort of illegal activity. Sanctions lists either act as a tool to prevent criminal activity or can be used for political reasons.
The United Nations Security Council (UNSC) initially established sanctions in 1966. Since then, we have used sanctions regimes to safeguard against different threats, such as human rights abuse, global conflicts, or terrorism.
Examples of sanctions lists issued by regulatory bodies:
- European Commission
- Office of Financial Assets Control (OFAC)
- Her Majesty’s Treasury
- Government of Canada
When a person or an entity becomes part of sanctions lists, they face financial penalties, such as fines or asset freezes. Other consequences can range from reduced military aid to a complete travel ban, preventing them from leaving the country.
Challenges of Sanctions Checks
Companies and their compliance officers often face challenges with sanctions checks due to several factors. In theory, it’s possible for a company’s internal teams to manually review data and scan sanctions lists. That said, this type of sanctions check is inefficient and exposes companies to the risk of starting a business relationship with sanctioned entities.
The complexity and frequent changes in sanctions lists also make it difficult to stay up to date with the latest information, especially in the context of Russia’s war against Ukraine.
Additionally, the volume of data to be screened can be overwhelming, leading to potential errors or delays in the sanctions check process. The varying regulatory requirements across jurisdictions further complicate the task. False positives, false negatives, or duplicate results can also pose challenges, requiring ensuring accurate identity verification of sanctioned entities while minimizing unnecessary alerts.
What are Politically Exposed Persons (PEPs)?
A PEP is a person with a higher risk of corruption or money laundering, determined by their high-profile position of power and influence. According to the Financial Action Task Force, PEPs are people who currently hold or have held a significant position of authority. Their prominent roles make them susceptible to engaging in illicit activities or other offenses.
Despite that, not all PEPs are automatically involved in fraudulent activities. Companies must conduct PEPs checks and focus on the risks associated with high-risk people’s roles rather than assuming their direct involvement in any crimes.
Who Determines if an Individual is a PEP?
Definitions and standards for PEPs vary across countries, and there is no universal governing body or singular list that identifies all PEPs. When determining whether and how to engage with a PEP, consider several factors, such as your geographic location, industry specifics, or the potential actions your customers can take.
PEP databases aren’t all-inclusive because the status of PEPs is dynamic and constantly evolving, particularly when talking about the people related to PEPs. Besides, it’s possible for high-risk PEPs to evade detection and not be listed in any existing database.
How Long is a Person Considered a PEP?
The time frame of a person’s status as a PEP isn’t defined by strict rules. Established PEPs who are considered high-risk can keep their status indefinitely, while others can be declassified after a certain period.
Most countries generally agree that a waiting period of 12 to 18 months after leaving office is appropriate. It’s important to note that close associates should be considered PEPs for as long as the relationship persists.
Types of PEPs
Certain positions that can classify someone as a PEP include governmental and parliamentary roles or members of influential judicial bodies. However, people closely tied to PEPs can be considered high-risk individuals as well. This includes beneficial owners of the individual’s property, family members, or business partners.
We explain the main PEP types below:
- 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.
- Public officials. Heads of state, senior politicians, prominent party members, and other government officials are recognized as PEPs. In addition, people working in judicial bodies, such as judges or members of the Supreme Court, often fall under the PEP category.
According to the FATF’s recommendations, the mentioned PEP types can be categorized into two groups, which are domestic PEPs — individuals who currently or previously occupy significant governmental or influential roles within their country — and foreign PEPs — individuals who currently or previously hold governmental or influential positions either within a foreign state or on behalf of a foreign state. Foreign PEPs are a riskier group, which is why they often require a higher level of due diligence.
The Process of PEPs and Sanctions Checks
PEPs and sanctions checks are part of an anti-money laundering (AML) compliance procedure. In general, its goal is to identify politically exposed and sanctioned persons or entities, then screen them against sanction lists to take further action.
Here’s the full step-by-step breakdown of the PEP and sanction checks process:
- Collect customer identity data. Such as name, address, tax number, etc.
- Perform identity verification. Verify the collected information using digital ID verification software.
- Gather data regarding their business. Including their registered company name, office address, company model and activity, company’s UBOs, source of funds, etc. In this step, it’s crucial to use the checks as a way to find out who has a prominent role (see whether they are a PEP) in the business.
- Use risk scoring. Assess the customer’s risk and assign them a score based on the collected data. The score will help determine if you’ll need to conduct customer due diligence (CDD) or enhanced due diligence (EDD). PEPs, their associates, and people from high-risk third countries automatically require EDD measures.
- Conduct EDD. Based on the previous results, conduct EDD on high-risk customers. That involves asking for additional verification, analyzing their transaction history, checking adverse media, or establishing the origin of the ultimate beneficial owners’ wealth.
- Report the collected data. If you have any suspicions regarding the illicit activity or if the individual in control of the company’s interest is listed under sanctions, it’s essential to file a Suspicious Activity Report (SAR).
- Conduct ongoing monitoring. PEPs and sanctions checks don’t end here. Since both are dynamic lists, you can’t know when a specific customer might pose a risk. Ongoing monitoring helps you regularly screen existing customers and receive real-time alerts about suspicious customer activity, such as risk-profile changes.
PEPs and Sanctions Checks Recommended Approach
PEPs and sanctions checks go beyond being just a legal obligation. By conducting thorough automated PEPs and sanctions screening, businesses not only fulfill their compliance duties but also safeguard their own financial well-being and a clean image within the competitive marketplace.
When considering automated PEPs and Sanctions checks, companies should prioritize accuracy and comprehensiveness. Accuracy is essential to minimize false negatives and false positives, such as missing a potential match or flagging innocent parties. Additionally, the screening software should be up-to-date to reflect any additions or removals from the lists to maintain the highest level of accuracy.
Not to mention, efficiency and speed are vital factors for conducting efficient PEPs and sanctions checks. Automated solutions swiftly process large volumes of data, enabling businesses to detect any potential matches or red flags.
PEPs and Sanctions Screening by iDenfy
iDenfy specializes in identity verification and fraud prevention solutions designed to assist businesses in meeting regulatory requirements and maintaining complete compliance. So good news — with our custom-tailored suite of tools for various industries, you can conduct thorough PEPs and sanctions checks.
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