PEP & Sanctions Q&A

illion recently hosted an insightful PEP & Sanctions webinar for clients.

Richard Atkinson, illion’s GM Consumer risk and AML, was joined by Nick Parfitt, Head of Market Planning at Acuris, and Neil Marshal, Partner Manager at FinScan – both UK-based organisations.

Here are some of the key questions that were discussed during the presentation

There are really three key areas that we have noticed in the Australian and New Zealand markets:

1. Concerns around the checks that were performed in the past at onboarding, and how compliant these checks were.
2. Issues around how up-to-date an organisation’s PEP and Sanctions status is if there has been no updating of the checks performed at onboarding.
3. Challenges for our customers in dealing effectively with false positives in PEP and Sanctions checks.

We are seeing much more demand for the Adverse news service.  This is primarily driven by reputational concerns.

Regulators in both Australia and New Zealand have become a lot more ‘energised’ over the past few years!

In Australia, AUSTRAC imposed one of the highest fines on CBA (8% of revenue) – and then charged Westpac $1.4B for multiple breaches.

In New Zealand, DIA has shown a strong trend towards targeting individual actors, including CEOs and Executive Officers.  This is in addition to imposing big financial penalties against the corporate entities. In 2020 multimillion penalties were meted out against two money remitters (NZ$3.1m against OTT, and $4.485m against MSI Group) following the NZ$2.55 million fine against Jiaxin Finance and 3 individuals.

It’s especially important to monitor your customers regularly because circumstances change over time. Regulators expect reporting entities to be reviewing their customer’s details, account activity and transaction behaviour. Timing should be defined on a risk-based approach, but when it comes to politically exposed persons (PEP), sanctions and regulatory lists, as well as adverse media, it’s important to keep in mind that these details can literally change overnight.  Out moto is ‘know your customer and keep knowing your customer’.

Questions for Neil Marshall, Partner Manager at FinScan (UK-based).

Bad data is a massive issue everywhere.  FinScan recently asked 1200 compliance officers around the world what their biggest compliance challenge was in terms of reducing false positives and identifying true risk.

The results were very interesting. 44% said bad internal data. 36% said matching algorithms that were not optimised, and 29% said they had screening technology that was not good enough.

A lack of leading-edge technologies and inadequate watchlist databases were also noted as problematic (25% and 15% respectively).

A huge trend we are seeing with regulators is that you need to be able to demonstrate that you understand your monitoring system.

The best way you can do this is by recognising and managing your data and watch lists so you can demonstrate an understanding of your controls.

Oftentimes though, data that Compliance receives is not fit for compliance screening – so addressing the data quality issues up front is fundamental to reducing false positives and managing risk.

Questions for Nick Parfitt, Head of Market Planning at Acuris (UK-based).

Not any more. Acuris’ PEP approach has significantly evolved from a ‘one-size fits all’ to a global standard with local variations as per country-specific regulatory requirements.  Importantly, this approach now provides the ‘right number of PEPs’ versus simply having the most PEPs.

Our PEP Methodology 2 now includes further analysis based on the prevalent practice for PEP definition, adopted by national legislators and AML/CFT regulators in the transposition of the international requirements.

It also defines as a PEP only those categories of PEPs that are explicitly mentioned in the national definition. PEP status now expires after 1 year from the PEPs departure from office or as prescribed by the national definition (for example, 5 years for Brazilian PEPs, 18 months for Swiss PEPs).

Profile of Interest (PoI) is a category designed to capture legacy data – profiles of legacy (Methodology 1.0) PEPs such as middle and low-ranking officials, who are out of scope per PEP Methodology 2.0 for your country, legacy Adverse Media profiles such as profiles of murderers, kidnappers, petty criminals and other criminals who do not fit the RRE methodology.

This allows you to avoid flagging as PEP persons who are not in fact PEPs and never were, e.g. persons who don’t currently hold or have never held a Methodology 2.0 position. Flagging “everyone” as PEP is not helpful for our clients, because it assigns an unnecessarily high risk to persons who are not high-risk, which leads to increased time and monetary investment for additional checks. You are also able to avoid flagging as former PEPs persons who have not been in office in the past year in the general case.