"Name screening for PEPs and sanctions form a critical component to any banks’ Anti-Money Laundering and Know Your Customer programs. Indeed, without scrutinizing the risks…large fines should be expected."

We have previously discussed in a previous series how financial firms can effectively use Adverse Media Screening while avoiding inefficiencies and mitigating risk. Now let’s explore a more established, but nevertheless complex form of screening: Politically Exposed Persons status (PEPs) and Sanctions Screening.   

Let’s first understand what this screening involves and why it’s complex. In a future post we will explore how the landscape is changing around this form of screening.  

Sanctions are regulatory, government or quasi-governmental orders that prohibit a firm from carrying out transactions with a sanctioned person or organization, and in some cases prohibit a firm from providing any financial services at all.1 A PEP is an individual who is or has been entrusted with prominent public functions either domestically or abroad such as, for example, a head of state or senior politician. Financial institutions have an obligation to check their customers against sanctions and PEP lists for potential matches.2  

Sanctions and PEP lists are periodically updated to identify;  

  • Individuals or entities that are sanctioned for either known or suspected criminal activity, or; 
  • PEPs that are considered to be at an elevated risk of corruption.  

Approaches to PEPs and sanctions screening vary across financial institutions, with different operating models in place depending on factors like the scale and nature of business. To simplify this landscape, PEP and sanctions screening can be split into 2 parts;  

  • Name screening of customers names at onboarding and every day thereafter 
  • Transaction screening of parties making or receiving payments through the financial institution (for sanctions only) 

Name screening for PEPs and sanctions form a critical component to any banks’ Anti-Money Laundering (AML) and Know Your Customer (KYC) programs. Indeed, without scrutinizing the risks posed by potential PEPs and sanctions exposure, large fines should be expected. One estimate says global financial institutions have been fined a staggering $26 billion for AML, sanctions and KYC non-compliance in the last decade alone.3

Matching names seems straightforward, so what’s the challenge?

The complexity in effective PEPs and sanctions screening lies in knowing when a true match has been found. A true match is when a bank is confident their customer is the party listed as a PEP or sanctioned party on a watchlist. In the swathes of data existing today, how do we find the useful data required to correctly identify individuals around the world without creating reams of false positives? There are dozens of PEPs and sanctions list providers claiming to have comprehensive databases, but these sources often lack unique identifiers, such as date of birth or address, which financial institutions can use to be confident in a true match.  

A key challenge for financial institutions is reducing and investigating false positive alerts. These alerts are often generated from a mismatch between internal or watchlist data and external media flagged by current monitoring solutions. As more false positives are created and investigated, operational costs increase, particularly within large retail financial institutions. 

Historically, it has been challenging for institutions to keep up4 with the volume of false positives.  These are caused by crude rules (based on very simple matching criteria), mapped against uncleansed client data, incomplete list databases, frequent changes to sanctions lists, poorly formatted data, misspellings, aliases and exponential growth in third-party reference lists. Indeed, some banks seem to be intentionally de-risking their customer portfolio by terminating accounts of PEPs due to the increased resource and compliance costs associated with reviewing and maintaining these relationships.5 

Frequent changes in sanctions requirements and the regulatory framework are causing many financial institutions to re-evaluate their approach to sanctions compliance, raising the need for a deep review of the target operating model and landscape. 

Is there a solution at hand? Our next post will talk about the PEPs and sanctions landscape and new trends on the horizon.  

References:

  1. “Financial sanctions,” Financial Conduct Authority, May 17, 2016. Access: https://www.fca.org.uk/firms/financial-crime/financial-sanctions
  2. Ibid
  3. Global Financial Institutions Fined $26 Billion for AML, Sanctions & KYC Non-Compliance,” Fenergo, September 26, 2018. Access at: https://www.fenergo.com/press-releases/global-financial-institutions-fined-$26-billion-for-aml-kyc.html 
  4. “The evolution of sanctions and PEPs,” ACAMS Today, September-November 2015. Access at: http://files.acams.org/pdfs/2015/The-Evolution-of-Sanctions-and-PEPs.pdf 
  5. “How to Audit Controls to Manage Financial Crime Compliance (FCC) Risks Associated with Politically Exposed Persons,” ACAMS. Access at: http://www.acams.org/wp-content/uploads/2015/08/How-to-Audit-Controls-to-Manage-FCC-Risks-Associated-with-PEPs-A-Rosi.pdf

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