Money laundering is on the rise. Recent intelligence and investigations have exposed the extent of large-scale and systemic money laundering throughout Australia. It is believed billions of dollars are being laundered in Australia every year.
The challenge for organisations is to limit their exposure to the risk of financial crimes, such as money laundering and terrorist financing, and protect their business and customers from the impact.
That’s where PEP and sanctions checks come in.
PEP (Politically Exposed Person) and sanctions checks are critical to anti-money laundering (AML) regulations with which certain companies must comply in Australia.
In this article, we’ll explain what PEP and sanctions checks are and how they can help protect organisations from money laundering crimes.
PEP and sanctions checks are critical to anti-money laundering (AML) and Know Your Customer (KYC) compliance programs and the fight against financial crime.
They are part of the KYC identity verification process to ensure customers are not at risk of political exposure or on any global law enforcement and sanctions lists.
To comply with KYC and AML requirements, regulated businesses must perform PEP and sanctions checks when onboarding and reviewing customers. This means companies must verify customers against sanctions, watchlists, PEPs and adverse media lists to see if they are individuals who may be considered high-risk or pose a reputational risk to businesses.
Non-compliance with PEP and sanctions screening may expose a company to steep regulatory fines from AUSTRAC, Australia’s financial intelligence agency and AML/CTF regulator, as well as a high risk of exposure to money laundering crimes and fraud.
A politically exposed person (PEP) is seen to be at an above-average risk of money laundering due to bribery or corruption, typically because they hold a high-profile position or have proximity to someone in a political position.
The global watchdog for money laundering and terrorist financing, the Financial Action Task Force (FATF), defines a PEP as “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.”
PEPs may include:
In Australia, the AML/CTF Act identifies three types of PEPs:
PEP screening is a process designed to identify and conduct customer due diligence on any PEP as part of AML/KYC compliance.
Regulated companies should perform PEP screening during customer onboarding to help determine if an applicant is a PEP and the potential risk level of doing business with that person.
Depending on the risk profile, the individual may become a customer but with ongoing monitoring and enhanced due diligence, including transaction monitoring.
This will help you establish normal, legitimate financial behaviour for that customer so you can identify any unusual or suspicious behaviour.
Due to the ever-evolving nature of politics and power, PEP lists are constantly evolving, so companies must continue monitoring customers' status and risk levels.
Governments or bodies, such as the United Nations, can impose sanctions on countries, businesses, or individuals to prohibit organisations from doing business with them.
For example, in 2022, the Australian Government imposed sanctions on specific individuals, companies, organisations and officials supporting Russia’s invasion of Ukraine.
Sanction screening checks people or organisations against global sanctions lists to determine the risk of doing business with them.
As part of anti-money laundering programs, companies should have a process to check customers continuously. This is especially important because there are many sanctions lists, which are constantly changing.
It is critical that the data you screen your customers against is comprehensive, up to date and consolidated in one place. This is where an automated fraud and AML compliance system can help.
GBG’s PEP and sanctions screening uses a wide range of high-quality, trusted data sources, including more than 350 lists, so you can identify up-to-date watchlists and sanctions from all relevant bodies and safeguard your business.
You can also use graph intelligence to see matches based on the individual’s associations with sanctioned or risky entities and the strength of those associations.
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