In today’s increasingly regulated landscape, businesses must be vigilant when onboarding new clients or customers. To comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, organizations are required to conduct Politically Exposed Persons (PEPs) and sanctions checks as part of their due diligence process. The latest article by Onfido explores the significance of PEPs and sanctions checks, the definitions and sources of sanctions lists, and best practices for conducting these crucial screenings.
Sanctions: A Global Measure
Sanctions serve as a powerful tool used by governments and international organizations to restrict the activities of individuals, entities, or even entire countries. Think of sanctions lists as a comprehensive global record of restrictions. These lists are maintained and published by various authorities and are essential for identifying and safeguarding against individuals engaged in illegal activities, often referred to as personal sanctions. By incorporating sanctions checks into their Customer Due Diligence (CDD) processes, businesses add a robust layer of defense against potential lawbreakers and ensure compliance with KYC and AML regulations.
Understanding Sanctions Lists
Sanctions lists originated with the United Nations Security Council (UNSC) in 1966 and have since expanded to cover various areas, including:
- Global conflicts and escalation
- Nuclear proliferation
- Terrorism and human rights violations
- Money laundering and drug trafficking
Individuals, organizations, or governments can be added to these lists for engaging in illegal activities, and the consequences range from financial penalties to travel bans or asset freezes.
Who Qualifies as a Politically Exposed Person (PEP)?
PEPs are individuals at a higher risk of being involved in money laundering or corruption due to their high-profile positions or close ties to political figures. The Financial Action Task Force (FATF), a global authority on combating money laundering and terrorism financing, defines PEPs as individuals who have been entrusted with prominent functions. This category includes government officials, high-ranking military members, and senior judicial figures. Additionally, individuals closely associated with these at-risk positions, such as family members and business associates, may also be considered PEPs.
The Necessity of PEPs and Sanctions Screening
Certain industries, particularly financial services, are legally mandated to conduct PEPs and sanctions screenings during customer onboarding. Based on the results of these checks, businesses may need to perform additional screenings before deciding whether to onboard a customer. These screenings are a vital part of the broader KYC process, which aims to verify the identity of customers.
Countries and international bodies, including the US, UK, EU, and United Nations, impose sanctions to prohibit dealings with specific countries, businesses, or individuals. The primary purpose of sanctions is to influence the behavior of targeted entities for the betterment of the situation in a particular country.
Who Decides Who’s on the Lists?
Numerous sanctions lists exist, each maintained by different authorities. For instance, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) manages the Correspondent Account or Payable-Through Account (CAPTA) list. The EU and UK have their own lists as well. Businesses with a global presence must monitor multiple lists to ensure compliance across various geographies.
How Sanctions Checks Work
Sanctions lists extend beyond borders and continents, creating a complex web of political and diplomatic matters. To meet global regulatory and CDD requirements, organizations rely on solutions that provide accurate and up-to-date sanctions checks. While it’s theoretically possible to manually scan these lists, this process is time-consuming, inefficient, and exposes organizations to risks. Automation streamlines the process, ensuring compliance and accuracy. Automated solutions continuously reference multiple data sources, keeping the information current and reliable.
Best Practices for PEPs and Sanctions Checks
Financial services businesses often adopt a risk-based approach, tailoring their screenings to each applicant’s level of risk. Automated watchlist providers offer real-time screening and track list changes. These providers not only assist during customer onboarding but also provide ongoing monitoring to inform businesses of any changes in an individual’s sanctions status.
Regular, automated checks are crucial, particularly when sanctions lists are updated or when there is a change in customer details. It’s also recommended to include directors, beneficial owners, and third-party payees in the screening process to ensure comprehensive coverage.
The Risks of Inaccurate Sanctions Checks
Engaging with sanctioned individuals or entities can lead to severe legal and financial penalties, as well as damage to an organization’s reputation. In some cases, businesses may need to implement Enhanced Due Diligence (EDD) for high-risk customers.
PEP and Sanctions Screening Solutions from Onfido
Onfido offers a watchlist monitoring solution that screens user data at onboarding and provides ongoing re-screening against chosen sources. Powered by AI and regularly updated data, Onfido’s solution ensures timely, accurate responses, enabling organizations to make quick decisions while maintaining compliance. Curious to know more? Then read the full story here!
