Politically Exposed Persons (PEPs) and sanctioned individuals, entities or nations are two critical areas of compliance for regulated firms.
As part of their obligations in the prevention of money laundering, terrorist financing and other forms of financial crime, firms must complete PEPs and sanctions checks as part of their due diligence processes.
Read on as we take a look at what PEPs and sanctions are, which checks are mandatory for UK regulated firms and how to ensure compliance.
What is a PEP?
In financial services regulation, a Politically Exposed Person (PEP) is a public official appointed to a prominent position. These individuals may have been entrusted with a public, high-profile position by a community institution, an international body or state.
PEPs are often considered, through their prominent position or influence, to be more susceptible to being involved in bribery or corruption. They also have a higher risk of being involved in money laundering and/or terrorist financing due to their position.
A full list of the roles considered to be high-profile under The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 can be found on legislation.gov.uk.
What are sanctions?
International communities often use sanctions to impact the behaviour or actions of a country or regime, in cases where human rights are being violated, war is being waged, or international peace and security is being endangered. Sanctions are imposed to change behaviour, limit opportunities for undesirable behaviour and to deter other countries from acting in a similarly unwanted manner.
The purpose of sanctions, according to the UK government, is to: “change the behaviour of the target country’s regimes, individuals or groups in a direction which will improve the situation in that country.”
These sanctions can be administered by the UN Security Council, the European Union (EU) and individual states where deemed necessary.
Sanctions can include financial restrictions such as trade barriers and tariffs, bans on import and export of certain goods or technology, freezing of assets and travel bans or visa restrictions for certain individuals.
Russia’s war on Ukraine is a key example of significant packages of economic and individual sanctions imposed against the nation. In late December 2022, the EU imposed its 9th package of sanctions on Russia since the war on Ukraine began in early 2022, responding with another iteration of hard-hitting sanctions targeting the Russian economy and those individuals playing an instrumental role in the war.
From restrictions on exports and freezing assets, to the suspension of Russian broadcasting outlets spreading propaganda and disinformation, and the prohibition of EU nationals from holding posts on governing bodies of Russian state-owned entities of bodies in Russia.
Sanctions are designed to adversely impact states perceived as a threat to international peace or where human rights are being violated. They are often used as an alternative weapon instead of going to war to achieve desired outcomes.
What PEP and sanction checks are mandatory in the UK?
All businesses and individuals (with some specific, defined exceptions) must comply with sanctions imposed by the government. Additionally, all businesses, organisations and individuals now have an obligation to report information about sanctions breaches through Suspicious Activity Reports (SARs).
Sanctions may prohibit carrying out transactions or trading with a sanctioned person or organisation, impose controls on imports and exports, cease shipping and transport between sanctioned nations, or ban the provision of business or professional services to sanctioned parties.
The Sanctions and Anti-Money Laundering Act 2018 (‘the Sanctions Act’) dictates that contravening sanctions, and enabling or facilitating a contravention of, or circumventing any of the prohibitions in sanctions regulations, is a criminal offence. Punishments range from prison terms of up to 10 years and severe financial penalties, to the irrecoverable reputational damage that failing to adhere to sanctions can cause.
Similarly, the significant risk that a PEP can pose means that a higher level of scrutiny is required as part of your due diligence processes.
Regulated firms are expected to “take appropriate but proportionate measures in meeting their financial crime obligations. The money laundering regulations set out that all firms must apply a risk sensitive approach to identifying PEPs and then applying enhanced due diligence measures.” (FCA Guidance documentation: The treatment of politically exposed persons for anti-money laundering purposes)
The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 states that when entering into, or continuing, a business relationship with a PEP, firms must:
- Have approval from senior management for establishing or continuing the business relationship with that person
- Establish the source of wealth and source of funds of the person with whom the proposed business relationship or transaction will take place
- Conduct enhanced ongoing monitoring of the business relationship with that person
Where PEPs are identified, firms must assess:
- the level of risk associated with that customer, and
- the extent of enhanced customer due diligence measures to be applied to that customer
How can firms ensure compliance with PEP and sanction check requirements?
In addition to their overall risk assessment, businesses must consider PEP and sanction checks as part of their customer due diligence, tailored to the sector, type and size of their operations. Customer risk profiles, the goods and services offered (including manufacturing and production if applicable), and the geographic markets in which the firm operates might all be taken into account.
The HM Treasury website provides details of all the current financial sanctions regimes in force and of the requirements relating to these sanctions – staying abreast of sanctions and any amendments to these is critical for ongoing compliance.
When identifying PEPs, the FCA expects firms to use information that is reasonably available to help identify any politically exposed individuals including public domain information such as parliament and government websites, reliable registers such as Companies House and commercial databases that contain lists of PEPs and their close associates.
AML screening software can be used to help businesses identify the politically exposed as well as flagging individuals or companies which are subject to sanctions without the need for manual interrogation of registries, documents and official websites.
What’s more, ongoing monitoring software for AML will help in identifying PEPs and staying abreast of sanctions throughout the course of business relationships.