PEPs, Sanctions and Adverse Media: A closer look at risk management

PEP is an acronym that is used a lot within compliance, but what exactly is a PEP and why should firms be more wary about working with them?

What are PEPs?

PEP stands for Politically Exposed Person, and this is someone who either holds, or has held a prominent public/political position, or has a close association with a high-ranking Government official.

Because of their high-profile roles, influence, and often, high levels of wealth, PEPs are more susceptible to bribery, and corruption, and therefore, present a greater risk to businesses in terms of fraud, money laundering and other financial crimes.

How are PEPs defined?

While there is no universally agreed definition of a PEP, guidance set out by the Financial Action Task Force defines PEPs as ‘individuals who are or have been entrusted domestically with prominent public functions’. In layman’s terms, ‘PEP’ essentially refers to anyone in a prominent position in public life, whether that be in the government, in law enforcement or in publicly owned corporations. There are generally three types of PEPs:

1.       International PEPs: people who hold prominent positions in foreign governments or international organisations – seen as high risk to the UK due to their foreign affiliations.

2.       Domestic PEPs: those who hold significant positions within their own country's government or public sector - require careful monitoring due to their access to national intel and financial resources.

3.       International Organization PEPs: those who hold prominent positions within international organisations, for example, the United Nations, are at high risk of bribery and corruption.

Some examples of PEPs include:

·         Leaders of political parties

·         Members of Parliament and the House of Lords

·         Ambassadors

·         Government officials

·         Senior executives in government-owned businesses, e.g. the BBC

·         Senior members of religious groups

·         High-ranking military officials

·         Close friends or relations of any of the above

How long is a PEP a PEP?

Again, there are no agreed timescales, and while generally PEP status is not permanent (usually a PEP is no longer a PEP once they have left public office) depending on their ongoing influence and vulnerability, an individual’s PEP status may extend for some time after they have left their public position.

What are sanctions?

Sanctions are legal restrictions - usually enforced by government bodies or international authorities – put in place to limit or sometimes fully prevent individuals, businesses, and even entire countries from trading if they have either committed or are associated with financial crime.

Why do firms need to be aware of PEPs and sanctions?

Any firm that forms a business relationship with a PEP needs to ensure they know everything they need to know about that individual by carrying out enhanced due diligence at onboarding, and that they closely monitor that individual and their business and financial dealings throughout their business relationship.

When it comes to Sanctions, it is different as there is no real decision to be made, as it is illegal to have dealings with an individual, business or country that is sanctioned, and the consequences can be financially and legally costly. While there are some exemptions (i.e., you can apply for a license to work with an individual or entity that is sanctioned) the risk to your business is very high so doing so is inadvisable.

What do regulated firms need to do about PEPs and sanctions?

In the context of AML and compliance, PEPs present a greater risk of involvement with bribery, corruption and other forms of financial crime, so they require monitoring more closely. Therefore, PEP screening needs to form a part of any regulated firm’s compliance procedures.

The first part of this process is to identify PEPs and sanctions in the first place, the second part is to perform enhanced due diligence i.e. gather sufficient information about that PEP so that your business can make an informed decision about whether or not to enter a business relationship with that individual. If the decision is yes, the third part of the process is to monitor PEPs closely to ensure there is no change in the risk that they pose to the business.

Identify PEPs and sanctions

There are thousands of different PEP and sanctions lists in the world, meaning any firms attempting to perform PEP and sanctions checks manually have a near-impossible task on their hands.

At SmartSearch our PEP and sanctions screening is powered by the Dow Jones Watchlist – a comprehensive combination of over 1,100 different lists sourced globally. Our automated software is incredibly thorough and can even recognise PEPs and sanctioned individuals by nicknames or aliases, enabling businesses to accurately identify PEPs and any individuals subject to sanctions at onboarding. We can even help businesses who have concerns that their PEP and sanctions checks have not always been up to scratch with our batch upload service. It can run retrospective checks to scan existing customer databases for PEPs and sanctions – a hugely useful tool following Russia’s invasion of Ukraine, which was immediately followed by extensive sanctions against Russian nationals.

Enhanced due diligence

Our innovative platform offers identification, verification and enhanced due diligence, all from one place. Therefore, once a PEP has been identified, our solution can investigate further and build up a solid profile of the individual their public role, and the risk they pose – if any – to your business.

SmartSearch performs this enhanced due diligence using a range of different techniques, including adverse media searches, which is where public records - including newspaper archives, public databases, social media, online firms etc for any mentions of the person that suggest they are high risk. This will include things like involvement in or accusations of involvement in terrorist financing, fraud, cybercrime, violent or sexual crimes, reputational damage or industry rumours.

Given there is no standardised way of doing this, SmartSearch’s automated adverse media checks can search millions of archives and real-time sources to get the most comprehensive results, filtering out any ‘fake news’ for the most accurate picture. Once these details have been gathered and presented to you, you can then make an informed decision about whether or not to enter into a business relationship with that individual.

Monitor PEPs

If, after carrying out enhanced due diligence, your firm decides to work with a PEP, you will need to keep a close eye on that individual throughout the business relationship. SmartSearch’s comprehensive PEP solution also includes ongoing monitoring, meaning every profile is checked every night against a real-time Watchlist informant so that if there is any change in a PEP’s risk level, you are the first to know. Similarly, if any existing customers become a PEP, or become subject to sanctions, you will be informed so that enhanced due diligence can be run on that individual.

PEPs, Sanctions and Adverse Media and AML

PEPs and sanctions, and adverse media checks all play a vital role in risk management and global Anti-Money Laundering (AML) efforts. As mentioned earlier, due to their prominent positions and political influence, PEPs are highly vulnerable to exploitation, therefore, for regulated firms, identifying and managing PEP-related risks is essential both in terms of protecting their own business and meeting AML requirements.

But running this level of checking manually is not only hugely time-consuming, but without the proper tools in place, is highly risky, and you cannot guarantee the accuracy of your procedures. For a robust, accurate and cost-effective way to manage risk through PEP, sanctions and adverse media checks, contact SmartSearch.

To discover more, visit SmartSearch.com