In 2023 the world is becoming increasingly globalized, and businesses must navigate an array of AML PEPs and sanctions regulatory requirements. One such requirement is Anti-Money Laundering (AML) compliance, in particular the 6th Anti-Money Laundering directive, which involves identifying and verifying customers to prevent money laundering, terrorist financing, and other financial crimes. A key aspect of AML compliance is conducting checks on politically exposed persons (PEPs) and sanctions lists. In this blog, we will provide a guide to AML PEPs and sanctions checks.
What are PEPs?
Politically exposed persons (PEPs) are individuals who hold or have held a prominent public position or function, either domestically or abroad. Examples include heads of state, government officials, judges, and military officers. PEPs are at a higher risk of being involved in money laundering or other financial crimes because of their access to public resources and the potential for corruption. Therefore, it is essential to conduct due diligence on PEPs to ensure that they are not involved in any illegal activities.
It is also important to verify the identity of those associated with PEPs including family members and close associates. Not only are PEPs themselves at a higher risk of being subject or involved in money laundering and other financial crimes but those close to them could also be involved.
What are sanctions?
Sanctions are measures imposed by governments, international organizations, or other bodies to restrict trade or financial transactions with certain individuals, organizations, or countries. Sanctions may be imposed for several reasons, including terrorism, human rights abuses, or weapons proliferation. Compliance with sanctions is crucial to prevent unwittingly supporting prohibited activities.
Since the conflict began between Russia and Ukraine in 2022, sanctions checking has become even more important for entities to conduct on their customers at the point of onboarding and through re-screening. Not only does sanctions checking form part of compliance requirements for regulated businesses, but it also protects the reputation of an organisation and provides a clearer view on their customer base.
One of W2’s new clients signed in 2022 screened their database of 325,000 customers and discovered they had been working with 7 newly sanctioned entities. Whilst this number might seem small compared to the amount screened, the importance of identifying and terminating the working relationship with these entities was of paramount importance.
What is a sanctions list?
Sanctions lists are often created to target entities that are believed to be involved in activities such as terrorism, human rights violations, or the development of weapons of mass destruction. The purpose of sanctions lists is to exert pressure on the targeted entities to change their behaviour or to punish them for their actions.
Within W2’s sanctions checking product, the following global lists apply:
- O.F.A.C (Office of Foreign Assets Control)
- US Treasury Department
- French Asset Freeze List
- HMT (Her Majesty’s Treasury Department – UK)
- European Union
- Government of Netherlands National Sanction List Terrorism
- United Nations
- Office of the Superintendent of Financial Institutions
- Choice to include all other global sanctions lists.
Why are PEP and sanctions checks necessary?
PEP and sanctions checks are necessary for AML compliance. Companies must ensure that they do not conduct business with individuals or entities that are on a sanctions list or are considered high-risk PEPs. Failure to conduct these checks can result in hefty fines, reputational damage, and legal consequences.
How to conduct PEP and sanctions checks?
There are several ways to conduct PEP and sanctions checks:
- Manual checks: Companies can conduct manual checks by searching publicly available databases, such as government and international organization websites. While this method is relatively inexpensive, it can be time-consuming, may not be comprehensive, and there is always the risk of human error in this method.
- Automated checks: Companies can use automated solutions to conduct PEP and sanctions checks. Automated solutions use artificial intelligence and machine learning to screen databases and flag any matches. This method is more efficient than manual checks and can be integrated into the company’s existing systems.
- Third-party providers: Companies can also engage third-party providers to conduct PEP and sanctions checks. Third-party providers offer a range of solutions, from manual checks to fully automated systems. Using a third-party provider can be more expensive than conducting checks in-house, but it provides more comprehensive coverage and can also be integrated into existing systems.
How much PEP and sanctions information do I need to obtain?
How much information a business gathers on customers really depends on their risk appetite. W2’s Anti-Money Laundering (AML) solution split these into three levels depending on how in depth the client wants to go within the check. All of these checks can be consumed through a single API call.
Level 1: Senior Political Figures (SPF) List
- Heads of state and high-ranking government figures around the world.
Level 2: PEP Select List
All the above plus:
- Regional, current, and former PEPs.
- Family members with PEPs.
- Close associates with PEPs.
- FATF (Financial Action Task Force) defined PEP categories.
Level 3: Watchlist (PEP, Sanction & Adverse Media)
All the above plus:
- A much broader spectrum of civil servants, political party officials, senior members of the police force, city mayors, National NGO officials, political pressure and labour group officials.
- Global law enforcement wanted lists.
- Regulatory enforcement actions.
- Global adverse media.
- Global sanctions lists.
What do to if a match is found?
If a match is found during a PEP or sanctions check, companies must conduct further due diligence to determine if the individual or entity is indeed on a sanctions list or is a high-risk PEP. If the match is confirmed, companies must take appropriate action, such as freezing assets or terminating the business relationship.
By using orchestration platforms such as W2’s offering, businesses can conduct even more in depth checks on their customers which range from address lookup, fraud prevention, document verification and more to confirm a match or in the instance where a more comprehensive view of the customer is required.
PEP and sanctions checks are critical components of AML compliance and the importance of them will only continue to grow. Companies must ensure that they conduct these checks to prevent being involved in financial crimes inadvertently. Conducting checks manually, using automated solutions, or engaging third-party providers are some ways to conduct these checks. If a match is found, companies must conduct further due diligence and take appropriate action. By following these guidelines, companies can ensure that they remain compliant with AML regulations and protect themselves from financial and reputational damage.
If you require more information on how to effectively conduct PEPs and Sanctions, you can contact us here to discover more on W2’s award winning platform.