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What are PEP and Sanction checks?

As a business that faces customers online and has to process financial transactions over the web, you are required to ensure Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance. To this end, you must ensure your customers are not fraudsters, criminals, and are not under sanctions. At the same time, they can be a Politically Exposed Person (PEP) if you can match the associated risks with your risk appetite. Confused yet? 

Most people are. 

Many of Covery customers and prospects ask us to define “exposed” customers, what is the PEP meaning, what is a politically exposed person, what is the sanction meaning, etc. Read on to learn what are PEPs, how PEPs and sanctions relate, and how to deal with these challenges to ensure your business is on the safe side. 

PEP in money laundering

Let’s start with definitions.

A Politically Exposed Person is somebody with public power and the ability to affect various situations using this power. This involves members of Parliament, military and police officers, judges, and other people of prominent position who might be involved in money laundering to legitimize the funds received as grafts.

The most common way of performing money laundering is by depositing money on banking accounts of various businesses and withdrawing them afterward. These might be storefront businesses run by affiliated people or legitimate online merchants like you. 

To ensure your business does not unknowingly become an accomplice in a money-laundering scheme, you should perform rigorous checks of the origin of funds deposited by your customers, whether they are PEPs and their affiliated companies and whether they are currently under sanctions. 

Sanctions and AML checks

You definitely know what sanctions are, don’t you? If an investigation is underway to determine if a PEP became a member of a criminal scheme (or when this is proven for a fact), he/she is added to a sanctions list and restricted to use their funds until trial. These lists are gathered and stored by data brokers like Dow Jones, who certified Covery to perform KYC/AML checks and PEP sanction screening against its databases.

These sanction lists are not stable, as people can be added or removed from them based on various events. Thus, you should monitor them daily for updates to ensure PEPs you work with are not currently under sanctions.

“Would it not be better to avoid working with PEPs in banking operations altogether?”, you might ask. Sure, if you are willing to sacrifice an opportunity to obtain a well-paying customer able to refer multiple leads your way. After all, there are not so many PEPs in AML investigations. Most either don’t take grafts — or never get caught.

How to ensure your customer is not paying you with illicit funds then? Perform ongoing KYC checks, real-time transaction monitoring, and daily checks of PEP/RCA/sanctions watchlists. This might seem to be quite a lot to do manually — and it is. It’s a good thing then that Covery provides KYC/AML automation as one of its features, so these checks just run in the background of your transaction monitoring routine and alert you in real-time should your PEP customers engage in some suspicious activity with your company.

Conclusions 

There are no restrictions to working with a Politically Exposed Person, but every business must evaluate possible implications based on individual risk appetite. If you want to benefit from working with a well-paying customer without suffering the risk of being listed as a money-laundering accomplice — use the Covery risk management platform to monitor the sanctions status regarding your user base!

Should you have any other questions regarding PEPs and sanctions, or should you want to learn how else Covery can provide value for your business — don’t hesitate to contact us, we are always glad to help!