What to know about PEP and Sanctions

Every year, record-breaking corporate penalties are issued to Reporting Entities for failure to comply with Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) obligations. Aside from the legal implications and reputational damage, non-compliance can result in hefty fines and lengthy prison terms.

Screen for PEPs to help identify potential money laundering or bribery

According to AUSTRAC, Politically Exposed Persons (PEPs) are individuals who occupy a prominent public position or function in a government body or international organisation, both within and outside Australia. This definition also extends to their immediate family members and close associates.

An individual is still deemed to be ‘politically exposed’ even if they have left a political position or severed a relationship with another PEP. It is up to each organisation to take a risk-based approach to determine their definition of persons who are politically exposed, including those that no longer hold political positions or are related to persons with political status.

While there is no law against conducting business with PEPs, it’s essential to manage the risk they represent. The premise behind identifying PEPs, and their relatives and associates, is to understand how their position and influence may increase their susceptibility to bribery or corruption, as well as activity related to terrorism financing. From here, your organisation can determine their level of risk, and hence apply the appropriate level of due diligence.

Identify sanctioned entities

Sanctions are measures imposed by the Australian Government and the United Nations Security Council (UNSC) in situations of international concern. They restrict activities relating to particular countries, goods and services, persons and entities.[i]

Australian businesses must ensure that they do not breach Australia’s sanctions programs and sanctions law by screening their customers and partner entities to determine whether they have been sanctioned. Once identified, the business must cease to provide the sanctioned good or service to the person or entity, then report their findings to the governing body, Department of Foreign Affairs and Trade (DFAT). Failure to do so is a serious criminal offence which may result in substantial fines and/or even imprisonment for up to 10 years.[ii]

In rare circumstances, sanctions permits may be granted to authorise activity that would otherwise violate the sanction law.

Effective screening beyond onboarding

Many Reporting Entities understand their customer due diligence requirements at the point of onboarding but lack sufficient processes and procedures for ongoing customer due diligence (OCDD). In the absence of effective OCDD procedures, Reporting Entities may be unaware if an existing customer becomes a PEP or becomes sanctioned during the relationship and will expose themselves to significant risk.

Regulators expect businesses, particularly Reporting Entities to take reasonable measures to verify the identity of their customers and identify whether they are politically exposed or sanctioned continuously. It is an AML/CTF requirement that “a Reporting Entity must have procedures to identify whether any individual customer or beneficial owner is a PEP or an associate of a PEP.”

Similarly, OCDD is considered central to an adequate AML/CTF regime. The AUSTRAC compliance guide states that regular and ongoing screening of all customers is expected, particularly those that are politically exposed:

“A Reporting Entity's ongoing customer due diligence procedures should consider whether any of its existing customers have become PEPs since they originally became a customer.”

“Effective due diligence and risk assessment procedures put in place by Reporting Entities not only identify persons who are PEPs, but will also assist Reporting Entities to detect any suspicious transactions or customer behaviour related to money laundering and related predicate offences.”

To manage these customer monitoring obligations, access to accurate, reliable and up-to-date data is crucial. As the PEP and sanction lists are updated continuously, it’s necessary to use the latest regulatory list versions and PEP information to ensure your business is protected.

Managing PEPs and sanctioned entities

As soon as you identify a PEP or sanction, take immediate action.

If your customer or partner is on a sanctions list, cease any provision of good or services to them and report your findings to DFAT. Trading directly or indirectly with an individual or entity on a sanctions list is illegal and of considerable risk for businesses of all sizes.

When dealing with PEPs, the Financial Action Task Force recommends you take a risk-based approach to each phase of the process. An internal risk assessment, for example, will help you define what does and doesn’t constitute ‘politically exposed’ according to your company policies and risk appetite.

From there, determining the level of risk posed by a PEP will help to ascertain the level of enhanced due diligence to be undertaken. Possible factors that may influence the proposed risk level include the seniority of the position held as a PEP, the country in which they reside and have associations with or their relationship to a PEP.

Developing an internal AML policy and processes to identify and assess risk will ensure that the appropriate controls for ongoing customer due diligence can be applied to manage risk exposures.

Get the assistance you need to manage your customer monitoring obligations with effective PEP and sanction screening. GlobalScreening by Equifax is an industry recognised solution designed to reduce your risk exposure, ensure compliance and improve operational efficiency. Powered by Accuity and locally hosted in Australia, GlobalScreening identifies entities in over 50 different risk categories worldwide to ensure you don’t just meet your compliance obligations; you exceed them. Find out more at https://www.equifax.com.au/globalscreening/ or email us.

[i] http://www.austrac.gov.au/businesses/important-information-industry/sanctions

[ii] https://dfat.gov.au/international-relations/security/sanctions/pages/sanctions-offences.aspx