Sanctions Screening & PEP: Important Step Of KYC Process
Sanctions and PEP screening is an integral part of KYC process in all the organisations. To know more about pep screening & sanctions screening, click here!
What are Sanctions List?
Sanctions are regulatory limitations that government agencies or international organisations often apply to people and/or businesses violating the law. They are generally intended to limit or prohibit the trading of people, corporations, or even an entire nation conducting financial offences. Sanctions lists comprise individuals and businesses subject to broad or targeted restrictions under domestic and international sanctions frameworks.
Sanctions screening help list people and companies with ties to terrorism, terrorist funding, the spread of weapons of massive devastation, weapons smuggling, narco-trafficking, or warfare crimes. Finally, sanctions can be employed to prohibit assets and limit commerce to achieve international and national security objectives. The lists are issued by government organisations or entities, such as controllers or police, and represent official directions of monitored institutions legally required to screen against.
Instances of sanctions list impacts involve:
- Freezing of cash & financial resources
- Admittance restrictions on specific individuals
- Arms embargoes
- Restrictions on trade
- Prohibition on providing certain activities to particular nations
What is Sanctions Screening?
Sanctions screening is the way to verify that the items and parties engaged in a commercial transaction are verified against the legislation, sanctions, investigative activities, and other government watchlists. Sanctions screening must be part of every person's due investigation in various industries (gaming, financial services, EdTech and others) to avoid judicial, reputational, and financial harm induced by noncompliance and involvement with illegal trade operations, money trafficking, terrorist funding, etc.
Sanctions screening may appear straightforward, but identifying a "genuine match" is complicated and involves several variables such as different languages, customs, spelling, abbreviations, aliases, and technology constraints like varying methods, match criteria, and procedures. The kind and accessibility of data, the underlying sanctions threats to which the company and its products/services/customers might be vulnerable, and the third-party sanctions screening method adopted all impact accuracy.
What is a Politically Exposed Person (PEP)?
A politically exposed person (PEP) is someone with a prominent position. Several PEPs occupy positions that might be misused to launder illicit cash or commit other predicate crimes such as extortion or corruption. Due to the apparent dangers connected with PEPs, the Financial Action Task Force Recommendations require extra anti-money laundering (AML)/CFT controls to be applied to commercial ties with PEPs.
What Is PEP Screening?
Anti-money laundering and Know Your Customer rules require PEP screening. It comprises confirming a customer's identity to determine whether or not they are indeed a PEP. During the client authentication or transactional screening procedures, a PEP check (often referred to as a PEP sanction screening) authorised politically vulnerable person’s lists are screened to see if the potential or present customer is on that database.
Customers who have undergone PEP sanction screening are considered high-risk. The procedure of discovering PEPs and analysing their threat profile again for the financial organisation is known as PEP List Screening.
PEP requirements in India, the US & the UK
In India, firms are obligated to filter only international PEPs. As an observer member of the FATF, India strives toward total membership, which means it uses a risk-based response to AML/CFT: enterprises should employ improved due diligence steps to discover PEP-status customers. The Protection of Money Laundering Act of 2002 establishes PEP restrictions in India, which the Reserve Bank of India implements.
RBI guidelines require banks to do further due diligence on the identities of PEPs. A significant shift in the number or pattern of PEP transactions may warrant additional examination by regulatory agencies. The PEP KYC procedure is more time-consuming than the standard KYC process. Further documentation is required during the PEP's onboarding.
In the US
The comprehensive definition of PEP in the United States is somebody who possesses a senior post of public trust or those connected to them, including relatives, professional colleagues, or people who execute transactions on their account. When a company finds or thinks that a PEP is involved in money laundering, it should file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network.
In the UK
Even though the United Kingdom has left the European Union, its PEP screening standards generally remain identical due to its earlier adoption of the European Anti-Money Laundering Guidelines. The Financial Conduct Authority establishes rules for vetting politically exposed individuals in the United Kingdom (FCA).
Importance of Screening of PEPs and Sanctions List
- Regular sanctions lists & PEP data scans are needed for regulated firms, which may grow cumbersome and costly. Choosing the correct vendor & solution for business screening requirements is crucial as it significantly influences an organisation.
- Since it assists financial institutions in assessing a customer's risk potential, a PEP sanctions screening seems an essential aspect of the Know Your Customer & name screening procedure. As PEPs hold public power and authority over govt contracts, it is vital to monitor their financial activities to avoid financial crimes.
- Businesses may avoid human labour and reduce administrative burdens by implementing an automated sanction screening system. Screening tests can also be tailored to your company's requirements and threats. When gathering evidence for a compliance audit, paperwork is also streamlined and easily obtainable.
Best Practices For PEP & Sanction Screening
Here are some effective practices for improving your PEP and sanction screening process:
Concentrate on High-Quality Data
When performing PEP and punishment screens, it is critical to concentrate on high-quality data. Misspelt titles and spelling variances caused by linguistic difficulties can make this work considerably more difficult, not to include the need to investigate any other identities the client may have.
Employ a Risk-Based Strategy
Companies should use risk-based methods during the PEP and sanction screening procedure to decide whether people deserve more due diligence. This allows compliance officials to make the most of their time while assessing the danger of doing commerce with a particular individual.
Perform further due diligence tests
Whenever it relates to PEP and sanction screening, as well as their close connections, there is underlying uncertainty that may necessitate further due diligence confirmation. Additional due diligence processes, such as monitoring negative press or unwanted news, may help businesses better appreciate all risks connected with a PEP & Sanction.
Automating continual surveillance of persons and businesses versus up-to-date PEPs & sanctions lists to check your clients daily and quickly can tell you any modifications to a customer's situation or position, ensuring continuing AML compliance.
Every company should have a sanction screening plan that is maintained and evaluated regularly. The integrity and internal information are critical to an efficient sanction screening procedure. In contrast, technology is crucial in timely and adequately detecting financial fraud threats.
Policies and processes must be in place to establish what data should be screened & how often, how they must address alarms, & which information assets must be checked for depending on a comprehensive risk analysis.