How PEPs & Sanctions Checks Prevent Money Laundering

Fraudulent activity is on the rise globally and criminals are continually developing new ways to attack businesses and customers. Millions of people are affected by fraud every year and it is estimated that in 2019, criminals made $4.2 trillion from fraudulent activity worldwide. 

In this shifting landscape, organisations need to keep on top of their exposure to the risk of financial crimes such as fraud, money laundering and terrorist financing, ensuring they’re up to the job of protecting their customers, and deal with breaches accordingly.

In order to remain compliant, companies are required to perform verification checks on their customers, one of them involves making sure customers are not at risk of political exposure or under any sanctions.

Below is a list of all the topics we will cover in this article. Go ahead and click on any of these links, and you’ll be taken to that specific section.

• Peps & Sanctions Checks
• What is Money Laundering?
• How PEPs & Sanctions Checks Prevent Money Laundering
• How We Can Help

Peps & Sanctions Checks

PEPs & Sanctions checks are necessary when onboarding new customers, as well as during the ongoing review of clients, to search and monitor individuals that may be considered high-risk or pose a reputational risk to businesses. They check whether potential customers are considered politically exposed or on any global law enforcement and sanctions lists.

According to the FATF, a politically exposed person (PEP) is an individual who is or has been entrusted with a prominent function. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or other predicate offences such as corruption or bribery. 

Because of the risks associated with PEPs, the FATF Recommendations require the application of additional AML/CFT measures to business relationships with PEPs. 

We recently explored exactly what is considered a PEP and the four tiers associated with them, but the FATF categorises PEPs as:

• Government Officials
• Political Party Officials 
• Senior Executives
• Relatives and Close Associates
• Government Officials

Sanctions lists are established to help reduce financial crime by flagging people, businesses and countries that have committed illegal acts (or are suspected of committing them). 

These sanctions lists are a compilation of various regulatory and enhanced due diligence lists from major sanctioning bodies around the globe, such as the Office of Foreign Assets Control (OFAC), UN sanctions, EU sanctions, Her Majesty’s Treasury and thousands of other regulatory and law enforcement lists like Interpol.

If a prospective customer is deemed politically exposed or is found to be on a sanctions list, it is likely that entering into a business relationship with that individual may be financially and reputationally detrimental to that organisation.

What is Money Laundering?

Most regulated markets and countries in the world have strict anti-money laundering laws and regulations with severe penalties.

According to the Oxford English Dictionary, ‘Money laundering is the illegal process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions. The overall scheme of this process returns the “clean” money to the launderer in an obscure and indirect way.’

Money laundering is essential for criminal organisations who wish to use illegally obtained money effectively. Dealing in large amounts of illegal cash is inefficient and dangerous; criminals need a way to deposit the money in legitimate financial institutions, yet they can only do so if it appears to come from legitimate sources.

We investigated exactly how money is laundered in a recent blog post, but the process of laundering money typically involves three steps: placement, layering, and integration.

• Placement puts the ‘dirty money’ into the legitimate financial system.
• Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
• In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used for whatever purposes the criminals have in mind for it.

Today, money laundering has permeated almost every regulated market; the scale of the pandemic is difficult to assess, but the United Nations Office on Drugs and Crime (UNODC) estimates that the amount of money laundered globally is “between 2–5% of global GDP, or $800billion – $2trillion per year.”

How PEPs & Sanctions Checks Prevent Money Laundering

The global anti-money laundering landscape is diverse and financial institutions must keep pace with developing rules in order to remain compliant. Most regulated markets and countries in the world have strict AML laws and regulations with severe penalties.

Anti-Money Laundering regulations are in place to mitigate the risk of money laundering and terrorism financing. Financial institutions are required to monitor their clients to prevent money laundering and report any financial crime they detect to relevant regulators; where a business is functioning determines the local and international regulations they need to comply with in order to continue operating.

In order to remain safe and compliant, companies worldwide must perform verification checks on their customers. One of the necessary checks involves making sure customers are not at risk of political exposure or under any sanctions. Transacting with customers who appear on PEPs and sanctions lists puts organisations at greater risk:

• Non-compliance with watch list screening may expose businesses to steep regulatory fines.
• Failure to identify sanctions evasion, bad actors or a PEP involved in organised crime may lead to reputational damage.

Standard compliance procedures don’t generally involve high-risk individuals and entities. As such, running continual watchlist checks that examine PEPs or occurrences on sanctions lists help to protect organisations.

Here are some of the regulated markets which are required to perform AML checks:

• Finance & Banking
• Payments & Digital Money
• Gambling & Social Gaming
• Cryptocurrency
• Retail Finance

How We Can Help

Wherever your business is operating you need to comply with local and international regulations, but keeping on top of jurisdiction while retaining efficient business practice is no mean feat. Acuant’s PEPs & Sanctions API allows businesses to both search and monitor individuals that may be considered high-risk or pose a reputational risk to a business.

Our global suite of AML solutions leverage thousands of data sources to identify and monitor high-risk individuals and prevent fraud around the world within seconds. They satisfy and comply with all regulatory bodies while helping safely onboard your customers faster and more efficiently with more accurate results. 

Using our single universal API, Sodium you can onboard up to 68% more customers compared with traditional identity verification methods. One simple integration; a flexible 360° solution which is scalable and secure.

Book a demo today and see for yourself how powerful our suite of solutions are.