PEPs and Sanctions checks and how they fit into your AML compliance management

Carrying out PEP and Sanctions checks is an important part of your client due diligence (CDD). The results could help identify any clients that might pose a higher risk of money laundering due to their status as either a politically exposed person or their inclusion on a sanctions list.

PEP and sanctions check when combined with your other KYC and due diligence data can be critical in helping you identify if you’re required to carry out any additional checks and follow enhanced due diligence (EDD) measures.

In addition to both PEP and sanctions checks, adverse media checks can also provide additional insights into the person(s) you’re dealing with, offering an extra layer of security and risk assessment for any clients that have been identified as higher risk. However, despite their value it’s worth noting that adverse media checks aren’t ‘essential’ or a legal requirement by the Financial Conducts Authority (FCA) they’re just an extra buffer to provide an additional layer of scrutiny when conducting your due diligence. It ultimately depends on how comfortable you are that you've got enough information to determine a client's risk profile.

In this article, we will discuss the role and importance of these different types of checks for accountants and bookkeepers in the UK, and provide insights on how to effectively implement them into your AML compliance program. We’ll cover what each check entails, the consequences of non-compliance, and practical steps for conducting them efficiently.

What is a PEP check?

First things first, let’s start at the beginning.

A politically exposed person (PEP) is an individual who holds a prominent public position or has held one in the past. This can include government officials, politicians, and high-ranking members of international organisations. Due to their influence, PEPs are in positions that potentially could be abused for money laundering or other financial crimes.

A recent example is that which has emerged from the recent South African elections – whilst there is no known link between money laundering or the proceeds of financial crimes being distributed, it does show how people in these positions can be exposed to bribes (which could come from illicit funds). This is why PEP screening is important and it’s a good idea to know if anyone you’re dealing with is, or has historically been a politically exposed person.

Whilst most accountants are likely dealing with ‘normal’ clients in 99% of cases, this is a prime example of why all financial institutions (not just accountants) are required to conduct PEP checks on their clients to identify any potential risks. It's essential to understand that family members and close associates of PEPs also pose a risk and should be screened accordingly too.

The actual PEP check itself involves screening against global and domestic PEP lists to determine if a client is a PEP or has close connections to one. If a client is identified as a PEP, enhanced due diligence measures must be taken and therefore it’s important to check their source of funds/wealth to ensure they are not obtained through illicit means. This could be as straightforward as obtaining some bank statements. From an ongoing perspective keeping a closer eye on the client's transactions and monitoring them more regularly could be how you mitigate this risk.

Conducting a politically exposed person check

There are essentially two ways to conduct a PEP checks:

• You can carry them out manually by searching through public records. It could even be as simple as searching for your client's name. 

• Or you can use AML software which has PEP checks built into its offering (Firmcheck is just one example, but there are many types of AML software out there).

We recommend accountants and bookkeepers use AML software that includes PEP checks, mainly due to the streamlined nature – we all know that doing anything manually typically takes more time and is more prone to human error, so why not let the robots take care of this one? And when they’re free as they are if you are a Firmcheck customer it’s a no-brainer.

Manual searches, while possible, are less reliable and much more time-intensive. When conducting a check manually, accountants should review a variety of sources including government databases, international PEP lists, and reputable news sources. It is crucial to document each step of the process to demonstrate compliance with regulatory requirements.

If you are doing manual PEP checks, a simple hack you can do alongside also checking government databases etc., is run a simple name search on Google, and then jump to the ‘news’ tab – take Brighton’s newly elected Mayor as an example, it might take a bit of trawling but almost anyone politically exposed will have had some news at some point written about them, and this ‘kind of’ doubles as a quick adverse media check too.

An example of how a quick Google search could be helpful in identifying if a client might be politically exposed or has been mentioned in any adverse media

‍Sanction checks

Sanctions are restrictions imposed by governments or international organisations to prevent the financing of illegal activities, such as terrorism or money laundering. Sanctions can include freezing assets, travel restrictions, and trade restrictions. They are a tool used by the international community to address threats to international peace and security.

Sanction checks involve screening clients against global and domestic sanctions lists to ensure that they are not involved in any sanctioned activities. If a client is identified as a sanctioned individual or entity, it is illegal to conduct any business with them. These checks are essential to prevent accountants and their firms from inadvertently facilitating prohibited activities.

It might feel like a distant memory now, yet the crackdown on Russia and the sanctions imposed in the wake of the Ukraine war is a modern-day example of sanctions being applied to try to reduce the impact of war, and a country's ability to operate globally.

How to Conduct a Sanctions Check?

Similar to PEP checks, sanction checks can be done manually or through an automated AML compliance tool. However, given the constantly changing nature of sanctions lists, it is more efficient and effective to use a tool that updates the lists for you, so when you run future checks you know you’re working with the most up-to-date information. This saves you time, creates efficiency as part of your ongoing AML monitoring and ensures that you’re always working with the most current information.

When conducting sanctions checks manually in the UK, accountants should consult the lists provided by the UK Office of Financial Sanctions Implementation (OFSI), you might also choose to check international lists as well like those from the United Nations, however, you should expect that checking the UK sanctions list is comprehensive enough and should include details about individuals and businesses facing sanctions in the UK context. It's essential to screen not just against the names on the lists, but also against ownership structures and control relationships, as sanctioned individuals may attempt to hide their involvement through complex corporate structures.

Why PEP and Sanctions checks are important

Fighting financial crime is one benefit of a robust and well-implemented AML compliance program, but as we know most accountants don’t see it as their role to play the role of the financial crimes unit of the Police, and AML is just downright painful. However, turning a blind eye to the requirements of your AML obligations as an accountant could be detrimental to business, so ensuring you’re carrying out the required checks as part of your client due diligence is imperative. PEP and sanction media checks form a key part of that.

Compliance with AML regulations

In the UK, accountants are required to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017). This includes conducting PEP and sanction checks on all clients. These checks are part of the broader risk-based approach mandated by the regulations, where the extent of due diligence is proportionate to the level of risk.

The core reason for running PEP and sanctions checks is to understand if an enhanced level of due diligence is required.

Failure to comply with the MLR 2017 does have its consequences, and when it comes around to audit time your supervisory body is likely going to pull you up for not having a record, or showing that you’ve run these checks as part of your client due diligence. So making sure you’re running PEPs and sanctions checks not only reduces your risk, but it’s also a critical part of maintaining AML compliance. 

Protection against reputational damage and avoiding fines

If a client of yours is involved in illegal activities, it can have severe consequences for your reputation as an accountant. Conducting PEP and sanction checks can help protect your reputation by identifying any potential risks before they become a problem. A strong reputation is essential for attracting and retaining clients, and demonstrating a commitment to due diligence can enhance your firm's credibility.

It can also help you avoid potential legal and financial risks. No one wants to be caught unwittingly conducting business with a sanctioned individual or entity, whilst we don’t mean to sound all doom and gloom, the ramifications of such oversight could result in a loss of your practicing certificates, personal liability and also damage to your firm's reputation (or finances in the way of fines).

Making PEPs and sanctions part of your AML program

Folding PEP and sanctions checks into your AML compliance program is easy. If you’re using AML software already, beyond just a tool that helps you check and verify clients' IDs then you probably have access to PEP and sanctions checks.

In Firmcheck we include them for free as part of your AML subscription, whereas other tools might charge you per check – either way leveraging the ability to perform PEP and sanction checks automatically without having to trawl the internet yourself is an easy way to effectively bring them into your due diligence process.

Whilst leveraging the technology is the best way to do the check, making sure you’ve outlined the role these checks play as part of your due diligence process in your policies, controls and procedures document is equally important. This includes outlining how you deal with any PEPs, or sanctioned individuals and what that means for the enhanced due diligence measures you will be required to carry out.

Ensuring your staff are well trained and informed in what to do when these checks throw up any red flags is equally as critical as running the checks themselves, and documenting the process.

And whilst we wish AML compliance was as simple as being a one-time thing, it’s not. And so when you come around to review your client's AML status and risk assessments, it’s always a good idea to make sure you’re running a refreshed check to make sure you’ve got the most up-to-date information available to you and if anything has changed you can take action accordingly.

What to do if you discover a PEP or sanctioned individual/business

From our experience, it’s quite rare, but that doesn’t mean it doesn’t happen, and when it does it’s not unusual for alarm bells to start ringing.

The first thing we often get in the support inbox when screening for PEPs or sanctions and one is identified is “What should we do next?”

First of all, you need to assess if the alert is aligned to that person – false positives are a thing in PEP and sanctions checks, and whilst software providers try their best to reduce the amount of these it can still pay dividends to check some indicators on your PEP or sanctions report.

If it isn’t a false positive, then this is where your documented due diligence process comes into play – depending on what's been identified there probably is a need to conduct some form of enhanced due diligence – this could mean asking for the source of wealth or source of funds as an example.

Or sometimes a fairly simple thing might get flagged, which you're able to ask the client about. We had a recent example where a potential client was flagged as they had been banned from the USA – turns out it was a visa/travel issue that had caused a problem, and the client was able to explain what the issue was. In this case, you might still decide to take on that client as you're satisfied with their response or you might just want to reduce the risk as much as possible in your firm, in which case you might choose to not work with this client.

If you choose to disengage the client, you might be unsure how to approach the client, so we've created a quick email template below that you could use with a few unique tweaks to help explain your decision. Just remember this is a template, which our friend AI helped write, so it's by no means a copy-and-paste job. It does however give you some structure to help inform a potential client if you're unsure where to start.

Dear [Client’s Name],

I am writing to discuss an important matter regarding our firm’s anti-money laundering (AML) policy.

During our initial assessment, we conducted a thorough review of your background, including checks against various regulatory lists. Unfortunately, we discovered that your name appears on [both the Politically Exposed Persons (PEP) list and a Sanctions list].

As a firm committed to upholding the highest standards of integrity and compliance, we are obligated to adhere strictly to anti-money laundering (AML) and know-your-customer (KYC) regulations. [Our firm policy is that anyone identified on these lists is deemed higher risk, and we choose not to engage with clients who are on these lists.]

I understand that this news may come as a disappointment, and I sincerely apologise for any inconvenience it may cause. Please know that this decision is based solely on our compliance requirements and is in no way a reflection of your character or business.

If you have any questions or require further clarification, please do not hesitate to reach out.

Thank you for your understanding and cooperation.

Best regards,

[Your Name]

[Your Title]

[Your Contact Information]‍

To wrap up, PEP, and sanction checks are crucial for UK accountants in fulfilling their AML compliance responsibilities. These checks help identify potential risks associated with clients and protect against reputational, legal, and financial damage. Implementing these checks effectively as part of your onboarding and ongoing AML management through the use of AML software can ensure that you are complying with regulations and safeguarding your business at the same time.

Whilst PEP and Sanctions checks are a small slice of your AML compliance, they are included in the Firmcheck platform. If you want to see how Firmcheck can help you consolidate key parts of your AML compliance and due diligence into one place we'd love to show you a demo.‍

(NB: This article doesn't constitute legal advice and is only intended for general informational purposes. Always consult with a legal expert or compliance consultant for guidance specific to your firm.)