All of us have watched a movie or two about how government officials are corrupt, coerced, or threatened at some point by anti-social elements and make decisions that are detrimental to the country’s prospects and its citizens. Then comes our hero, who saves the day, and all is well in the end. In real life, these possibly corrupt people are called PEPs, and the hero is PEP sanctions screening. However, it is not as straightforward as it seems and is extremely complicated to implement.
To understand PEPs and PEP sanctions screening in detail, let’s begin with the basics.
What are PEPs?
PEP stands for Politically Exposed Persons such as high-ranking politicians, politicians holding positions in the ruling government, heads of armed forces, and decision-makers of government-owned institutions. People who have power and hold influential positions are called PEPs and are required to undergo PEP screening by the government owing to being at a higher risk of being associated directly or indirectly with financial fraud and money laundering. Close associates and direct family members are sometimes on the PEP sanctions list.
The definition of PEPs, however, can change from one country to another. It may even extend beyond their tenure.
There are sub-groups of PEP:
Domestic PEP: A politically exposed person in the country.
International or non-domestic PEP: A person who holds an influential position globally or in a foreign country.
PEP because of the position: When a person is warranted PEP status because of the job they have.
What are sanctions, and why is PEP sanctions screening needed?
Sanctions are the restrictions imposed by a government to curb financial fraud and crimes a PEP may be exposed to. These are indispensable safeguards and are widely used to safeguard the interests of a country and its economy. The sanctions are determined to curb the commercial and monetary interactions with a person associated with a country that has violated the laws internationally or regarding the country he is visiting.
To identify such PEPs and assess their risk profiles, PEP sanctions screening is used by banks, neobanks, fintechs, and financial institutions. It is a part of AML compliance and a need of the hour more than ever.
As banking transactions go cashless and do away with physical visits unless, of course, absolutely necessary, money is changing hands more swiftly than ever. From a local politician to a highly decorated military official can be a source of corruption and may give way to terrorist funding, illegal permits, and policy-making that can adversely affect the economy in the years to come.
Also read: A step-by-step guide to AML Sanctions Screening and why your business needs it!
What happens if a business fails to comply with PEP check and screening?
Companies failing to adhere to PEP protocols are penalized by the regulatory authorities. If a business of repute is found lacking on this front, it can lead to reputational damage and negative media coverage. However, unfortunately, this doesn’t deter companies from taking the PEP sanctions list lightly. A survey by the UK-based RegTech firm SmartSearch reveals that businesses, in fact, are getting complacent and more risk-prone as only 25 percent of regulated 500 participant firms screen new customers against the PEP sanctions list. This is shocking, considering ‘dirty money’ results in over £100 billion losses to the UK economy.
To revive compliance and prompt businesses to join this collective fight against money laundering, regulatory authorities are sending a strong message by levying hefty fines. The London branch of Commerzbank AG had to pay a whopping 37.8 million fine for failing to comply with the PEP sanctions screening. BNP Paribas was fined $140 million by FINRA (Financial Industry Regulatory Authority) for not establishing procedures to detect suspicious penny stock activity and wire transfers. Barclays was asked to pay a £72 million fine for not conducting the appropriate PEP check and doing its due diligence.
These are just a few stark reminders of what non-compliance to PEP sanctions screening could result in.
To understand why government and regulatory authorities are serious about effectively implementing PEP sanctions screening, let’s understand why PEPs are flagged as high-risk and why their financial transactions should be closely monitored.
Why are PEPs seen as high-risk individuals?
PEPs are people with prominent positions in society and politics. They are usually the decision-makers and are considered to be prone to bribery and corruption. For instance, the former governor of Nigeria, Diepreye Solomon Peter Alamieyeseigha, was termed a domestic PEP risk and later pled guilty to six charges of corruption.
Teodoro Nguema Obiang Mangue, Vice President of Equatorial Guinea, who also happens to be the son of the world’s largest-serving ruler, has been accused of exploiting the land of an oil-rich country to fill his coffers. His assets include a Malibu mansion, a fleet of luxury cars, a super yacht, Michael Jackson memorabilia, and a crystal black glove worth $275,000, worn by the singer at the expense of the welfare of the citizens.
Former president of Ukraine and international fugitive Pavel Lazarenko used his position to hand out unethical favours to businesses in exchange for money. Pavel even threatened businesses with consequences if they refused to pay him 50% of the profits.
India’s regulatory body, RBI (The Reserve Bank of India), has found Paytm, a popular money transfer platform, to be lacking in PEP due diligence and failing to file STRs or Suspicious Transaction Reports and is under the scanner.
And these aren’t isolated events. Bribes of $1 trillion are paid globally, and an estimated US$2.6 trillion slips through corruption yearly. A PEP participating in financial fraud can alter the course of a country’s growth or make a country susceptible to illicit terrorist activity for money. They are targets of entities seeking favors or contracts. They would want to hide the source of funds obtained illegally and, hence, would resort to money laundering. The regulatory authorities want to stop this vicious cycle in its nascent stage, hence the need for rigorous PEP checks and screening procedures.
What if a PEP is identified?
It is misconstrued that a PEP always means high-risk, and a business shouldn’t partner or enter into a deal with them. A PEP should continuously be assessed for their association with financial crimes such as scams, money laundering, bribery, and corruption. If they are clean, there is nothing to worry about. When it comes to PEP sanctions screening, it is the risk associated with them a business should be concerned with and not their names or jobs.
Which businesses should follow the PEP sanctions list and screening process?
Ideally, the government and authorities mandated banks and financial institutes to follow the PEP screening process. However, with the advent of e-banking and cryptocurrency and considering how banking has eased across borders and globalization has accelerated international trade, money laundering has become a concern that needs immediate attention. To increase AML compliance among politically exposed individuals, businesses bringing in large amounts of money must comply with PEP sanctions lists.
Since AML and PEP sanctions screening laws differ from one country to another, it is recommended to check with local authorities to be sure. Some of the businesses globally on the watchlist are:
- Real-estate firms
- Companies dealing in antique art collectibles
- Finance firms managing personal portfolios
- Gambling and casino companies
- Cryptocurrency firms
How is PEP sanctions screening done?
The key elements of a PEP screening vary from country to country and depend on how rigorously the process is implemented. Following are the few mandatory steps of a PEP screening process that are followed by businesses globally:
Screening of new customers:
A vital aspect of the customer due diligence process is screening new customers against the PEP sanctions list. Customers’ records with key information such as proof of domicile, social security number, passport, and employment verification are asked and matched for verification. Customers are also asked to disclose their employment details and tenure if they were exposed to such roles or entrusted with prominent roles at any time.
Various checkpoints:
Special approvals from senior management are required to onboard a PEP, even to open a bank account.
Regular screening:
Since the PEP sanctions list is updated regularly with new names and entities, banks and other financial institutions must run regular checks and screening procedures to eliminate risks.
Training:
Regular training is imparted to the employees so that they remain updated with the dynamic and constantly evolving PEP sanctions list.
However, following the checklist and maintaining such a tight grasp on the PEP sanctions list is easier said than done. For several reasons, organizations and businesses struggle to identify customers and clients projecting a financial crime risk.
PEP sanctions screening challenges faced by businesses
Here are a few challenges that businesses and organizations face while implementing effective PEP sanctions screening:
Defining PEPs:
As mentioned, the PEP sanctions list and AML laws are comprehensive and constantly evolving. The definition of PEP can’t be set in stone. A PEP is a person entrusted with power, money, and position, but how far should the sanction extend? A PEP sanction could be politically motivated in today’s charged atmosphere, but governments find it easier to be risk-averse rather than manage it well. Sometimes, even a lower-level position in a government office can be included in the PEP list, which may not be necessary. Neither are all PEPs high-risk nor should they be examined solely based on their position in an office.
Not enough workforce and training:
The scope of the PEP sanctions list is broad and dynamic, with new names and new sanctions being added to it regularly. It is almost impossible to cover them, especially when your in-house team has other priorities. Borderless banking and paperless money have also made it manually impossible to keep a close check on what changes have been made since your team last referred to it. The Harvard Law School has raised a demand for a global PEP database as the current PEP sanctions list is deemed ineffective and inaccurate in curbing financial crimes. However, the World Bank cautions against it as it may quickly become outdated, or there will be a political tussle over the sanctions list’s control.
Non-automated processes:
It is crucial to have the right tool and software, such as the PEP sanctions scanner, to automate the screening process. Most businesses don’t have tools to extensively cover and screen their old and new customers regularly, so they lag in auditing their data.
How can the Sanctions Database help your business in PEP screening?
The not-so-good news is that conducting due diligence on PEPs and monitoring their financial activities are governed by several factors. The good news is that the compliance risk is manageable. By automating the process, you can stay one step ahead of regulatory compliance and ensure seamless navigation of the sanctions screening.
The Sanctions Database team can help your business cut down on overall PEP compliance costs. The team deploys and utilizes the cutting-edge PEP sanctions scanner equipped with AI to assess and verify PEP compliance vis-à-vis risk spectrum and does periodic screening. Sanctions Database’s tech-enabled compliance ensures seamless compliance via various methods such as background screening, adverse media reporting, and document screening against a comprehensive PEP database in real-time. The entire process is automated; hence, your in-house team can focus on the tasks and be more productive.
Enhance your business’ PEP compliance. Contact the Sanctions Database team for a demo call now.