What Is the PEPS and Sanctions Screening Process?

On 12 July 2022, the UK’s National Crime Agency (NCA) issued a red alert to UK companies.

It warned that people on international sanctions lists and PEPs were using complex techniques to evade detection in their illicit business dealings.

Businesses are urged to conduct thorough PEPs and sanctions screening to avoid working with persons involved in illegal activities.

It’s no surprise that the NCA has issued this alert. The war in Ukraine, the resurgence of the Taliban and other international incidents means the funding of corrupt foreign regimes and terrorist groups is once again in the limelight. 

The number of new sanctions that have been imposed on individuals means that many businesses are under more pressure than ever to conduct thorough customer due diligence (CDD).

Screening for politically exposed persons (PEPs) and sanctions is a key part of this process. It helps businesses ensure that they are not breaking the law by working with companies owned by sanctioned individuals.

This article explains what you need to know about PEPs and how it fits into the customer due diligence process.

What Is a Politically Exposed Person?

A politically exposed person (PEP) is someone who has a high-profile political position, a position of power, or is close to such a person—for example, a family member.

PEPs could abuse their position to launder money, or take part in bribery or corruption. This makes it important for businesses and organizations to conduct PEPs and Sanctions screening. 

A person could be considered to be a politically exposed person (PEP) if they are:

• Heads of state or government, ministers or deputy/assistant ministers.
• Members of parliament or of similar legislative bodies (but not local government).
• Members of the governing bodies of political parties that are in power.
• Members of supreme courts, constitutional courts or any judicial body whose decisions are not subject to further appeal except in exceptional circumstances.
• Members of courts of auditors, or those on the boards of central banks.
• Ambassadors, chargés d’affaires or senior members of the armed forces.
• Members of the administrative, management or supervisory bodies of state-owned enterprises.
• Directors, deputy directors, senior management and members of the board of international organisations.
• If they have ceased to fulfil one or more of the public functions listed above within the last 12 months.
• People who are family members or close business associates of any of the above.

Businesses subject to AML regulations are expected to understand the nature of each position and whether it constitutes a financial crime risk.

For example, your company could be approached by a middle-ranking official who could be secretly acting on behalf of a PEP. 

It would be up to you to calculate the risk of this kind of relationship and then seek to identify the PEP.

What Is PEP and Sanctions Screening?

PEP and sanctions screening is an important part of the CDD process.

It involves finding out if people with a controlling interest in a customer company fulfil one of the public functions listed above to qualify as PEPs.

If they do, you’ll need to take a risk-based approach in deciding whether to work with them or not. 

Part of this involves checking if they are on international blacklists or financial sanctions lists. If they are, or if you suspect illegal activity is taking place, you should refuse to work with the company and submit a suspicious activity report (SAR) to the NCA.

Why Is Politically Exposed Persons Screening Important?

PEP screening applies to companies that are governed by anti-money laundering regulations. This means that if your company doesn’t conduct adequate PEPs and sanctions screening and report suspicious activity then you could be breaking the law.

CDD processes take place whenever a company starts a new business relationship or when managing a transaction worth £15,000 or more.

It helps spot potential money launderers, which in turn helps in detecting financial crimes like:

• Terrorist financing
• Human and drug trafficking
• Fraud

It also helps to stop the funding of corrupt regimes that might commit human rights abuses and other similar financial crimes. 

Here are some other reasons why your company should conduct sanction screening:

Large Fines

If you don’t comply with money laundering legislation you could get a large fine. This can be up to EUR 5 million or 10% of your company’s annual turnover—whichever is higher. 

Protect Your Reputation

If your company fails to prevent financial crimes, your reputation will be damaged. Your company name will become associated with organised crime, which will likely deter customers from working with you. It also shows that your business isn’t functioning correctly. If you can’t meet your regulatory requirements, what else is going wrong at your company? 

Do Only Financial Institutions Need PEP Screening?

Companies in the following industries should conduct CDD:

• Money service businesses
• Financial institutions
• Solicitors
• Tax specialists
• Accountants
• Estate agents
• Art dealers
• Lettings agents

What Is the PEPs and Sanction Screening Process?

PEP and sanction screening is one small part of an AML compliance process. It involves identifying politically exposed persons, checking them against sanction lists and then taking action. The PEPS and Sanctions Screening process is made of 7 steps these include: 

1. Gather Customer ID Data
2. Identity Verification 
3. Collect Business Information 
4. Risk Scoring 
5. Conduct EDD
6. Report 
7. Ongoing Monitoring 

Step 1: Gather Customer ID Data

Gather personal details from the customer to determine whether the individual may be classified as a politically exposed person. This includes their:

• Name
• Address
• Contact number
• Email address
• Occupation
• Tax number

Step 2: Identity Verification

You then need to verify this information, especially when dealing with PEPs. Ask them for photo ID—for example, their passport. 

An increasing number of financial institutions and other regulated businesses now use digital ID verification systems. These enable new customers to verify their own ID using their device’s built-in camera. 

The verification system is intelligent and can ‘read’ the client’s details in the picture of the ID. It can also look at the client’s photograph and confirm that it’s them using their device’s camera. This has made it easier to identify PEPs or ties to PEPs and sanctions risks.

Step 3: Collect Information on Their Business

Next, you need to collect information like:

• Registered company name
• Company trading name
• Companies House number
• Registered office address
• Business operations location
• Business model and activity
• Customer’s role at the business
• Source of funds
• Purpose of the transactions
• Names of anyone with significant control over the business
• Company’s ultimate beneficial owner

This information tells you what normal activity looks like and enables you to spot politically exposed persons or suspicious activity. 

It’s also important for PEPs and sanctions screening because you can use this information to find out who has a prominent position in the client’s business. 

You should research all of the company’s directors to see whether they are a PEPs.

Step 4: Risk Scoring

The customer is assigned a risk score based on the information collected in stages one and two. This risk score allows them to choose whether they conduct simplified, regular or enhanced due diligence (EDD).

If a person fulfils one of the following descriptions you must automatically conduct EDD:

• A person established in a high-risk third country.
• A  politically exposed person (PEP) or a family member or known associate of a PEP.
• Any other situation that presents a higher risk of money laundering or terrorist financing.

You should also automatically check them against international sanctions and blacklists.

Step 5: Conduct EDD

If the customer gets a high risk score with PEPs or sanctions, you will need to conduct EDD. This involves:

• Obtaining additional verification
• Establishing the origin of the ultimate beneficial owner’s wealth
• Analysing previous transactions
• Checking for adverse media coverage
• Visiting their business
• Creating a strategy for monitoring the client in future

Step 6: Report

If the customer or a person with a controlling interest in their company is a politically exposed person on a sanctions list you should send a SAR to the NCA.

You should also do this if you suspect any kind of criminal activity. 

Step 7: Ongoing Monitoring

You never know if and when existing customers might pose a PEPs and sanctions risk. 

You should set up ongoing monitoring to regularly check each customer’s risk profile and transactions. Conduct new CDD checks at least annually. 

It’s important to know if a customer’s risk profile changes. Our own anti-money laundering platform allows you to set up monitoring alerts that immediately inform you when this happens. 

Stay Compliant with Red Flag Alert

PEPs and sanctions screening is not just a legal requirement. It’s every company’s duty to help fight financial crime, terrorism, human rights abuses and corrupt regimes.

It also protects your business’s finances and reputation from getting involved with criminal activity.

To help businesses navigate the regulations, Red Flag Alert has developed anti-money laundering business solutions to ensure that companies are compliant.

It includes tools that allow you to conduct comprehensive screening processes for PEPs and sanctions.

These include:

• Digital ID verification
• Full access to international PEPs and sanctions lists
• Monitoring alerts
• Instant data on ultimate beneficial owners and persons with significant control down to 0.1% ownership
• Detailed information on corporate structures
• A secure audit trail