Demystifying Politically Exposed Persons (PEPs)

PEPs are individuals who currently hold or have held significant public roles, which naturally makes them attractive targets for money laundering activities due to their status. This group isn’t limited to but includes government officials, heads of state, members of parliament, judges, and high-ranking executives in state-owned companies.

A Closer Look at PEP Categories

PEPs are generally sorted into three main categories:

1. Foreign PEPs (FPEPs): Individuals in this category hold influential public positions in foreign nations, making them high-risk as they might misuse their power for corrupt activities overseas.
2. Domestic PEPs (DPEPs): DPEPs are influential figures within their home country’s government or public administration, subject to AML scrutiny in their respective jurisdictions.
3. International Organization PEPs (IOPEPs): This category encompasses individuals with significant roles in international organizations, necessitating careful screening due to their influence and access to international funds.

PEPs Through the Lens of FATF Categories

The FATF provides valuable guidance on identifying and categorizing PEPs, offering a framework that helps in understanding their roles and relationships. Examples of PEPs across various FATF categories include:

• Category 1 – Foreign PEPs: This includes heads of state, senior politicians, and high-ranking military officers from foreign countries.
• Category 2 – Domestic PEPs: This category comprises senior judges, high-ranking government officials, and top executives in state-owned enterprises within the domestic sphere.
• Category 3 – International Organization PEPs: Leaders and key officials of international organizations fall under this category.

Why PEP Screening is Crucial in AML Compliance

PEP screening is indispensable in AML compliance for several reasons:

1. Risk Mitigation: PEPs inherently carry a higher risk of involvement in corruption or money laundering, making screening essential for risk identification and assessment.
2. Regulatory Adherence: Regulatory bodies, including the FATF, necessitate the incorporation of PEP screening into AML compliance programs.
3. Promoting Transparency: Screening fosters transparency and accountability within financial systems, thereby diminishing corruption risks.
4. Reputation Management: Overlooking PEP screening can tarnish an institution’s reputation and result in regulatory fines.
5. Legal Compliance: Many jurisdictions legally require PEP screening to thwart illegal financial activities. 

The Cost of Non-Compliance

Neglecting proper PEP screening can lead to severe consequences, including hefty fines and reputational damage. Regulatory bodies are stringent about PEP screening enforcement, and non-compliance can attract legal penalties. The fines can vary, ranging from thousands to millions of dollars, depending on the jurisdiction and the severity of the violation.

KYC2020’s Screening Technology: A Game-Changer

At KYC2020, we understand the importance of PEP screening in the AML compliance landscape. Our Screening Technology is crafted with precision to effectively identify, monitor, and mitigate risks associated with PEPs. It employs cutting-edge algorithms and regularly updated databases for PEP identification, provides ongoing monitoring, offers extensive data coverage, and triggers enhanced due diligence measures for comprehensive risk assessment.

If you wish to experience the efficiency and accuracy of our Screening Technology firsthand, we are delighted to offer a 7-day free trial. Simply click here to try it now, and a member of our dedicated sales team will promptly reach out to arrange a demo for you.

Conclusion

Understanding and adeptly managing PEPs is non-negotiable in AML compliance. With their influential positions, PEPs present unique risks that require vigilant screening. By grasping the nuances of different PEP types, adhering to FATF guidelines, acknowledging the importance of PEP screening, and utilizing advanced technology like that of KYC2020, businesses and financial institutions can fortify their AML compliance efforts, fostering a transparent and accountable global financial ecosystem.

Sanctions screening thoroughly examines customer data against various national and international sanctions lists. While PEP screening identifies individuals who hold prominent public positions or have close affiliations with politically exposed roles.

Financial institutions can proactively detect and prevent financial crimes, uphold regulatory standards, and protect their reputation by incorporating rigorous PEP and sanctions screening processes into their KYC protocols. Effective screening measures ensure compliance and contribute to the overall security and stability of the global financial ecosystem.

This blog will delve deeper into the significance of sanctions and PEP screening in the KYC process. We will get the introduction to Sanction and PEP screening provided by KYC2020 and know the importance of these screening technologies in the KYC process.

Introduction to Sanctions by KYC2020

Sanctions screening plays a crucial role in the Know Your Customer (KYC) process, particularly in the realm of financial compliance and risk management. With the ever-increasing complexity of global financial transactions and the rise in financial crimes, institutions are under immense pressure to adhere to stringent regulatory requirements. KYC2020, a leading provider of KYC solutions, recognizes the importance of sanctions screening in mitigating risk and maintaining regulatory compliance.

In collaboration with regulatory bodies and financial institutions, KYC2020 offers comprehensive sanctions screening solutions to identify individuals, entities, and countries subject to financial restrictions. Leveraging advanced technology and robust data sources, KYC2020 enables financial institutions to conduct thorough and efficient screenings, enhancing their ability to prevent illicit activities such as money laundering and terrorism financing.

By integrating KYC2020’s sanctions screening capabilities into their existing KYC processes, institutions can bolster their risk management strategies, safeguard their reputation, and contribute to a more secure global financial system.

Introduction to PEP Screening by KYC2020

Politically exposed persons (PEPs) pose unique risks to financial institutions due to their influential positions and potential involvement in corruption, money laundering, and other illicit activities. Recognizing the importance of effectively identifying and managing PEP-related risks, KYC2020, a leading provider of Know Your Customer (KYC) solutions, offers robust PEP screening services.

KYC2020’s PEP screening solutions are designed to enable financial institutions to conduct thorough due diligence on customers and identify any association with PEPs. By leveraging comprehensive data sources and advanced technology, KYC2020 empowers institutions to identify and assess the risk posed by individuals with political connections, strengthening their compliance efforts and mitigating the potential for financial crimes.

Integrating KYC2020’s PEP screening capabilities into their KYC processes allows institutions to apply enhanced due diligence measures and fulfill regulatory requirements. By proactively identifying and managing PEP-related risks, financial institutions can protect their reputation, reduce exposure to illicit funds, and contribute to a more secure and transparent financial ecosystem.

What is the Importance of Sanction and PEP Screening in the KYC Process?

Below are some factors showing the importance of Sanction and PEP Screening in KYC:

Staying Ahead of Illicit Activities and Fraudulent Transactions

Sanctions screening involves cross-referencing customer data against government-issued sanction lists. These lists encompass individuals, entities, or countries subject to financial restrictions due to involvement in illegal activities, terrorism financing, or violations of international laws. Financial institutions can proactively identify and flag high-risk customers by conducting thorough sanctions screening, preventing illicit activities and potential financial crimes.

Unveiling the PEP Phenomenon and Its Impact on KYC

Politically exposed persons, or PEPs, are individuals entrusted with prominent public positions or their close associates. PEPs, due to their influential roles, pose an elevated risk for corruption, money laundering, and bribery. PEP screening involves scrutinizing customer profiles to identify any association with PEPs. This process allows financial institutions to apply enhanced due diligence measures to prevent undue influence, reputational damage, and exposure to illicit funds.

Strengthening Compliance with Regulatory Frameworks

Sanctions and PEP screening are vital compliance measures, helping financial institutions align with national and international regulatory frameworks. Regulatory bodies such as the Financial Action Task Force (FATF) and local authorities enforce stringent guidelines to combat money laundering, terrorist financing, and other financial crimes. Financial institutions implementing comprehensive screening processes meet regulatory requirements and demonstrate their commitment to upholding global standards.

Mitigating Reputational Risks and Building Trust

Maintaining a sterling reputation is essential for financial institutions to attract customers, investors, and partners. Failure to effectively screen customers for sanctions or PEPs can lead to severe reputational damage. The association with individuals involved in illicit activities or unethical practices can erode trust and result in significant financial losses. By conducting thorough screening, institutions protect their brand reputation and demonstrate their commitment to transparency and integrity.

Leveraging Technology for Efficient and Accurate Screening

Advancements in technology have revolutionized the KYC landscape, making sanctions and PEP screening more efficient and accurate. Innovative solutions powered by artificial intelligence (AI) and machine learning (ML) enable automated screening processes, reducing manual effort and increasing the speed of customer onboarding. These technologies enhance risk assessment capabilities, improve detection rates, and ensure compliance with evolving regulations.

Integrated KYC Solutions: A Comprehensive Approach

Financial institutions can adopt integrated KYC solutions to streamline the KYC process and achieve optimal compliance. These solutions encompass robust customer due diligence, automated screening processes, and ongoing monitoring of customer activities. By integrating sanctions and PEP screening into a comprehensive KYC framework, institutions can effectively identify and manage risk, enhancing their ability to detect and prevent financial crimes.

Collaboration and Knowledge Sharing for Effective Risk Mitigation

The fight against financial crimes requires collaboration between financial institutions, regulatory bodies, and law enforcement agencies. Sharing information and best practices regarding sanctions and PEP screening helps to establish a robust network that can identify emerging risks, stay updated on new sanction lists, and combat evolving threats collectively. Such collaboration ensures a collective front against illicit activities and bolsters the resilience of the global financial system.

Final Words!

Sanctions and PEP screening constitute vital components of the KYC process, empowering financial institutions to maintain and safeguard the financial system’s integrity. By implementing robust screening procedures with sanction monitoring, leveraging technology, and fostering collaboration, institutions can stay ahead of evolving risks, protect their reputation, and contribute to a more secure and transparent financial ecosystem.

The initial part of implementing risk management strategies is customer onboarding which must involve screening for Sanctioned Individuals and Entities (SIEs), Politically Exposed Persons (PEPs), and adverse media. In this comprehensive guide, we mention the importance of screening, explore the world of Adverse Media, Sanctions, and PEP screening, and offer insights into implementing effective screening techniques for enhanced risk mitigation.

Understanding the Importance of Screening in Customer Onboarding

Why is Screening Essential?

In an era where financial crimes and reputational risks are rampant, screening customers for PEPs and Sanctions checks is vital. By conducting thorough due diligence, businesses can mitigate financial crime risk, protect their reputation, and ensure compliance with regulatory obligations. Effective screening allows for identifying high-risk customers, assessing their potential involvement in illicit activities, and making informed decisions during customer onboarding.

Compliance and Regulatory Requirements

Stringent regulations, such as Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) laws, mandate the screening of customers against SIEs and PEPs. Financial institutions and businesses must comply with these regulations to avoid hefty penalties, legal consequences, and damage to their reputation. Additionally, regulatory bodies often issue sanctions and embargo lists highlighting individuals, entities, and countries involved in prohibited activities. By screening against these lists, organizations can ensure compliance and mitigate risks associated with these sanctioned entities.

Unraveling the World of Sanction, PEP, and Adverse Media

1. Sanction Screening: Identifying High-Risk Entities
Sanction screening involves comparing customer data against official sanction lists, which include individuals, entities, and countries subject to financial and trade restrictions. Governmental bodies, international organizations, and regulatory agencies issue these lists. By implementing an effective sanction screening process, businesses can identify and flag high-risk entities, preventing potentially illegal transactions and safeguarding themselves from legal and reputational damage.

2. PEP Screening: Mitigating the Risk of Corruption
Politically Exposed Persons are individuals who hold prominent public positions or have close associations with such individuals. Due to their elevated positions, PEPs are at a higher risk of being involved in corrupt practices, money laundering, and bribery. Screening customers for PEP checks is crucial in assessing the risk associated with their involvement in illicit activities. Implementing robust PEP screening measures allows organizations to make informed decisions, exercise enhanced due diligence, and safeguard against financial and reputational risks.

3. Adverse Media Screening: Protecting Reputation
Adverse media screening involves monitoring various sources, such as news articles, public records, and social media, to identify any negative or potentially damaging customer information. This screening technique helps protect an organization’s reputation by identifying customers with connections to criminal activities, fraud, or controversial business practices. By conducting comprehensive adverse media screening, businesses can proactively manage their reputation, make informed decisions during onboarding, and safeguard against potential risks.

Implementing Effective Screening Techniques for Enhanced Risk Mitigation

1. Leveraging Technology for Screening
Advancements in technology have significantly improved the efficiency and effectiveness of screening processes. Automated screening solutions powered by artificial intelligence and machine learning algorithms can quickly scan vast databases, identify potential matches, and reduce false positives. Leveraging such technology allows organizations to streamline their onboarding processes, minimize manual errors, and enhance risk mitigation efforts.

2. Conducting Ongoing Monitoring and Periodic Reviews
Screening should not be limited to the initial onboarding process alone. Ongoing monitoring and periodic reviews are essential to ensure existing customers remain compliant and free from new risks. By continuously monitoring customer activities and conducting regular reviews, businesses can detect any changes in risk profiles, identify emerging threats, and take appropriate actions in a timely manner.

Introducing KYC2020 to Streamline Customer Onboarding with Sanction Screening and PEP

KYC2020 is a leading company offering comprehensive Global Watchlist Data, Screening, and Decisioning solutions that can significantly streamline customer onboarding by integrating PEPs and Sanctions checks. With our expertise, we can assist businesses in ensuring compliance with regulatory requirements while efficiently vetting potential customers.

Sanction Screening, a crucial component of KYC2020, allows organizations to identify individuals or entities on global watchlists or sanction lists. Organizations can quickly and accurately screen customers during onboarding by leveraging a vast database of sanctioned individuals. It prevents businesses from engaging in transactions with individuals involved in illegal activities, mitigating financial and reputational risks.

Moreover, KYC2020 includes PEP screening, identifying individuals with prominent public positions or close associations with politically exposed individuals. This screening process helps organizations assess potential risks associated with such customers. By incorporating PEP checks into the customer onboarding workflow, businesses can ensure transparency and integrity, preventing potential involvement in corruption or illicit activities.

By partnering with KYC2020, organizations can automate the customer onboarding process, minimizing manual effort and improving operational efficiency. The solution seamlessly integrates with existing systems, enabling real-time screening and reducing the risk of onboarding high-risk individuals. It saves time and enhances customer experience by expediting the onboarding process.

Conclusion

Effective screening for Sanctioned Individuals and Entities (SIEs), Politically Exposed Persons (PEPs), and adverse media is critical to customer onboarding. Organizations can ensure compliance, mitigate risks, and maintain high due diligence while welcoming new customers by incorporating PEPs and Sanctions checks. KYC2020 provides businesses with a powerful toolset to streamline customer onboarding with Sanctions and PEP screening. By partnering with us, organizations can enhance risk mitigation efforts, comply with regulatory requirements, and protect their reputation in an increasingly complex and challenging business environment. Contact our experts for further details.

But what happens when the results of the screening return false positives? Let’s explore why false positives happen, and how you can reduce them.

What Causes False Positives?

False positives occur when an individual or entity appears on a list of sanctioned entities, but should not be considered as such. This could be because the name does not match exactly, or because the person has been incorrectly identified as someone who is sanctioned.

False positives are more likely when the information used for sanction screening is incomplete, inaccurate, outdated, or contains typos.

The Impact of False Positives

False positives can have costly consequences for organizations. Not only do they create unnecessary delays in processing payments and customer onboarding, but they can also lead to significant reputational damage if the mistake isn’t caught before it reaches regulators.

Furthermore, repeatedly having suspicious transactions flagged by regulators for further review can lead to fines and sanctions from authorities down the line. 

Reducing False Positives

Fortunately, there are steps you can take to reduce false positives. First and foremost is investing in a comprehensive data set that includes all relevant information about individuals and companies on sanctioned lists—including aliases, family members, former addresses, etc.—so that all possible matches are captured accurately and immediately.

Additionally, utilizing AI-driven solutions helps to improve accuracy of information by cross-referencing multiple sources and performing real-time checks against global watchlists so that false positives are minimized. 

Conclusion:

Reducing false positives in sanction screening is very important for any business that needs to comply with governmental regulations and other laws. False positives can cause delays in processing payments and customer onboarding processes as well as lead to significant reputational damage or financial penalties from authorities down the line.

Fortunately, there are steps you can take to reduce false positives including investing in a comprehensive data set and utilizing AI-driven solutions for improved accuracy of information checks against global watchlists. With these measures in place your company will be ready to meet compliance requirements while avoiding costly mistakes due to false positive results from sanction screening checks!

The Anti-Money Laundering (AML) and Know Your Customer (KYC) laws require screening for PEP. This involves confirming a customer’s identification to determine whether they’re a Politically Exposed Person (PEP).

While banks and financial institutions can legally work with those on the PEP lists, they must take additional due diligence steps during onboarding customers to avoid AML penalties.

PEP screening for sanction is the highest risk for customers. A PEP Screening process is the process of identification of Politically Exposed Persons and assessing their risk profile for the financial institution. It is a must-screen to ensure the most efficient implementation of Anti-Money laundering (AML) compliance procedures, especially in fintech, banks, and other financial institutions.

What is the reason why PEPs should be Verified?

Crimes of corruption and bribery are major issues worldwide, and the consequences of these crimes can be quite negative. About $ 1 trillion of bribes are paid each year. At the same time, the total number of corrupt individuals is close to 2.6 trillion. These figures are serious and financial institutions must be able to prevent these kinds of crimes. 

PEP screening is a process to stop crimes like corruption and bribery

PEP Screening allows PEPs to be identified. The primary reason for screening PEPs is that they are classified as people at risk due to their increased opportunities to earn illicit income, which includes money laundering, financing terrorism, corruption, bribery, and corruption.

So, companies must identify PEPs and regulate their transactions in line with laws. Companies that fail to spot PEPs and monitor their transactions face penalties for not complying with local or global rules.

PEP Screening Process

There aren’t generally accepted guidelines for defining people who fall into the PEPs group. In conducting a PEP screening, it is essential to determine politically exposed people and their family members and close friends (RCA). Furthermore, it cannot be claimed that each PEP is at risk since PEPs are distinct by their own risk.

The risk posed by the foreign PEP, domestic PEP as well as foreign PEP, and international organizations PEPs, as well as foreign PEP, is greater than the risk posed by the domestic PEP. Financial institutions must establish and improve PEP screening processes, regardless of how difficult they determine PEPs.

The PEP Screening and Sanction should be carried out according to the understanding of risk for an FI using a risk-based approach. PEP Screening should be conducted during the customer’s first engagement phase, while periodic reviews of customers when triggers require the need for a due diligence review.

In most cases, PEP Screening isn’t the only method of determining PEPs. The responsibility for defining PEP is with the business lines in direct contact with customers and must be included in CDD procedures.

Quality standards for data are needed to screen PEP

Financial institutions must be able to access accurate and complete electronic customer records to ensure that the databases used for PEP Screening provide enough unique identification information.

The PEP Screening process would be ineffective and produce consistent and consistent results with the RCA with this data. The minimum information that financial institutions must have for a reliable PEP Screening are:

• Full name
• Birth date or year
• Country of exposure to political pressure
• Gender
• Roles that are politically exposed appointments, dates of appointment, and even years
• The date PEP quit its post.

Screening existing customers against PEP Lists Frequently

The steps and precautions that are used for customer purchases to determine if a buyer is PEP is the very first step. PEP Screening on its own does not suffice. Following the initial screening, the scans must be conducted at specific times.

However, there is no specific timeframe for this, and the durations differ based on the company. PEP Screening is conducted regularly because the risk for the client may change. For example, it could not be PEP the moment a customer can open accounts for the first time; however, ongoing procedures might exist.

These scenarios can be replicated; however, as a result, PEP Screening needs to be performed regularly to alter the risk level and put these individuals in the suitable risk classifications.

PEP Risk Management Framework

Many kinds of controls establish and manage PEP relationships. Financial institutions must also implement these controls. Here are a few control measures:

Customer Identification for Existing Customers: 

Financial institutions should adopt risk-based due diligence and controls when they learn of the possibility of their existing customers who are now PEP.

Risk Assessment of Customers:

Once a new or existing customer is classified as a PEP, financial institutions should assess risk to determine the degree of risk of financial crime associated with that customer and the appropriate level for due diligence, monitoring and. Financial institutions should consider the risk factors like the type of business, geography, and product and conduct risk assessments in line with them. 

Instruction: Financial institutions are the primary line of defense for stopping and detecting financial sector criminals, including money laundering. Additionally, financial institutions play a significant role in identifying potential PEPs and customers. So, the risks, policies, procedures, and processes associated with PEPs should be made clear to relevant employees and their managers as an integral part of the AML training program.

KYC2020 Screening PEP

AI support

KYC2020 is an AI-powered AML compliance software. It can collect

and set up PEP data globally because of this AI support. Businesses can thus access PEP data from all over the world and request information from their customers using their surname, name identity, passport, or numbers.

Additionally, with the KYC2020, you will be able to get outcomes of customer screening within a matter of seconds. Therefore, you can implement an approach based on risk by screening for high-risk customers.

Conformity to Regulations

Every institution must adhere to AML regulations to adhere to. Institutions that fail to comply with these rules and don’t conform to the AML standards are subject to numerous criminal sanctions. Secure your company from penalties and speed up clients’ PEP controls with our robust API.

Eliminate False Positives

False positives can prevent businesses from focusing on the correct alarms, which can increase the workload. Thus, organizations must develop the best situation and set of rules. KYC2020 aims to minimize false positives. DecisionIQ Automatically clears false positives and delivers real-time actionable screening decisions along with aggregating and structuring its own global watchlist data

Easy API Integration

KYC2020’S DecisionIQ has an API-first approach alongside all the features that provide an enterprise-class service. There is built-in rapid review and case

Management system to expedite manual workflows,multiple ways to interfacevia Web, Batch, or API and built-in Persistent Monitoring to

keep up with watchlist data changes. Businesses can use these features to conduct risk assessments of their customers in just a few minutes.

Getting sanctions screening right is a growing priority for financial services institutions in their AML/CFT compliance program. The constant drumbeat of increasing regulatory requirements, the mix of customer profiles that grows more complex by the day, and an ever-expanding menu of financial products and services have only made such due diligence all the more critical.

However, current AML/CFT detection systems and procedures that lean heavily on rules-based screening engines and manual inputs can not keep up with today’s reality. The issue of false positives is arguably one of the most consequential areas this plays out. On one hand, financial institutions need a new set of tools to accurately detect true matches and reduce the occurrence of false positives. On the other hand, too few false positives in an indication that an institution’s AML systems are not appropriately calibrated to catch the wily evaders.

What are False Positives and Why Do They Happen?

In its most basic form, an AML compliance program includes three fundamental functions:

1. Assess the risk of new and current customers
2. Implement screening measures to weed out clients who present a high risk for financial crimes
3. Conduct ongoing monitoring of customer activity

There are really two goals to an organization’s AML program. The first is to create an alert system that can efficiently identify and actively prevent the emergence of money laundering and other financial crimes within the organization. The second is to avoid regulatory sanctions and their fallout like the plague.

These two goals are often at odds with each other. Moving from financial crime identification to financial crime prevention can be a resource-intensive high-wire act.

In order to comply with the strict regulatory requirements and stiff fines for non-compliance, financial institutions will often operate on the side of caution in their screening and monitoring efforts.  That is, they will lean towards “Over-Screening“. In practice, this means the definition of suspicious activity, for example, would include a very broad range of actions and behaviors– each of which will generate an alert.

An AML alert does not necessarily mean that criminal activity of any kind is in fact happening. It is quite common for a subsequent manual review to result in a cleared warning. When this happens, it is called a false positive.

Such manual reviews are simply “baked” into the AML compliance system of many traditional and established financial institutions. The time and resources required to conduct this oversight is then written off as the cost of doing business.

The added piece of mind comes with a big price tag, however. The industry average rate of false positives currently hovers around 42%. But for larger institutions it can reach a whopping 95%. This translates into millions and even billions of dollars of lost revenue each year.

Another indirect cost of a high false positive rate is the negative impact it has on the customer experience. In recent years, the financial services industry has been required to pour more resources into the experience users have as they move through the buyer’s journey. According to the 2020 Digital Banking Report, customer experience is a key element in maintaining a competitive edge. Customers increasingly want financial institutions to provide personalized services. This is putting increasing pressure on financial institutions to perform to rapid, frictionless transactions and offer personalized customer communications.

A large number of false positives can slow down the on-boarding process as well as customer transaction times. They are thus an obvious stumbling block. However, compliance teams must find a way to reduce their rate of false positives without compromising the accuracy and effectiveness of AML transaction monitoring and screening.

What are Your False Positives Telling You?

The solution to the false positives conundrum is to fundamentally change the way your organization perceives false positives in the first place. False positives are a necessary and unavoidable occurrence. When your rate of false positives stays within a healthy range appropriate for your user base and risk profile, then it is a sign that your institution is on the right track.

When the number of false positives steps outside of that range, then you’ll want to pay attention. You are getting valuable information about your AML compliance efforts. Usually, it means that something within your system has to be tweaked or reworked.

Let’s consider a few examples…

Scanning sanctions watchlists and associated data, such as adverse media and PEP lists, coupled with ongoing transaction monitoring require firms to process and analyze a vast amount of information from a variety of sources which are themselves evolving. With sanctions screening in particular, these sources often vary wildly in quality and completeness, and they are bloated with redundant or useless information. On top of this, they generally come in an unstructured format.

A high rate of false positives could simply be the result of relying on poor data pools full of outdated or irrelevant information that has been ineffectively culled, organized and structured. Of course, the more confusing the data, the more challenging it becomes to discern false positives from true positive matches.

For this reason if your institution is experiencing an unusually high rate of false positives, you may want to reevaluate your data capture. You need to ensure it truly fits the needs of your organization along with the reality of the market base you are servicing.

For example, we developed VisionIQ, a comprehensive watchlist database with access to over 1000 watchlists and automatically updated news sources from more than 200 countries. VisionIQ is powered by advanced technologies, such as artificial intelligence (AI) and natural language processing (NLP). This smart data system is structured and organized to make it easy to selectively group watchlists for different risk profiles and screening criteria. Data is de-duplicated and cross-linked across watchlists to better resolve the data into personas.

Smart data by itself may help reduce the rate of false positives, however, it may not be enough. Part of the challenge is being able to manage the sheer volume and velocity of data creation today, as well as the constantly growing number of data sources. Even the best compilation of data and news is useless without an intelligent search and scoring engine built on AI algorithms and machine learning. Such an automated screening solution can significantly reduce labor-intensive manual interventions. In the process it will significantly minimize False Positives, while helping to ensure that True Positives are discovered.

Utilizing an automated screening solution solves yet another factor in a high false positives rate: the need for real-time data updates. It’s common for those involved in financial crimes to change their names or move to another region in order to avoid prosecution. It’s also common for innocent individuals to make such life changes.

Your organization should thus ensure that the customer data you are relying on is both relevant and up-to-date. A false positive might be created, for example, if a firm neglects to update a user’s change of name or list their new home address– particularly if the new region presents less of a risk than that of the previous residence.

When Even a Little Becomes A Lot

When it comes to false positives, some organizations, for example, a financial services business, may discover that their ability to conduct manual reviews on even a moderate rate of false positives is a struggle. Despite all the advances in technology, sanction screening still requires a significant amount of manual intervention that can dramatically slow down and disrupt the customer verification and on-boarding processes. Many sanction screening solutions on the market are designed to filter a set of watchlists. The search results must then be manually exported for review.

For nimble organizations with limited human resources, there are stand-alone decisioning systems that yield screening decisions in real-time without requiring manual review. This of course includes the automatic clearing of false positives using AI.

A smart, AI and NLP based sanction and PEP screening decision system, like our very own DecisionIQ, can render 95% of all verification decisions automatically within a 60-second response time and a low decision error rate. For records that still require manual screening, they can be sent within minutes to compliance officers, who should have all the info they need to take immediate action.  The screening decisions are then setup for ongoing monitoring based on your risk-based approach.

Slow customer on-boarding and the constant drumbeat of false positives will quickly eat up your profitability and your competitive advantage. On the other hand, failing to identify criminal financial activity can lead to unwanted regulatory attention and action.

The use of smart automated technologies can help to alleviate the challenge of false positives in sanction screening more effectively, more rapidly, and more affordably than ever before.

In the previous article of the KYC 2020 Guide to PEP Screening, we learned that engaging with PEPs and RCAs who are involved in financial crime can be damaging to your financial institution’s reputation. Although you may already recognize the risk and have tried to address it with legacy screening systems, your current program may not provide enough protection and oversight.

AML/CFT systems and procedures need to protect your financial institution against corrupt PEPs and RCAs. However, these days they must do so while accurately verifying legitimate transactional activity and creating a positive customer experience.

Slow customer onboarding and the constant drumbeat of false positives will eat up your profitability and your competitive advantage. On the other hand, failing to identify corrupt PEPs or RCAs can lead to unwanted regulatory attention and action.

Thanks to AI and advancements in regulation technology (RegTech), screening for PEPs in global watchlists, government sources, and in adverse media is more effective, fast, and affordable than ever before.

Over the next four years, the global RegTech industry is expected to reach $16 billion. Much of this growth is driven by a wave of up-and-coming fintech innovators. These companies are harnessing advanced technologies to make AML compliance more doable and budget-friendly for smaller organizations and FinTech. In the process, they are leveling the playing field for financial innovators against their bigger, more established competitors.

Considerations Before Choosing PEP Data and Screening Solutions

One of the most important things to understand in your search for PEP data and screening solutions is that not all solutions (or vendors) are created equal. Not all solutions will be a perfect fit for your organization, either.

To give your institution a good chance of finding the most suitable tools for the identification and prevention of PEP financial corruption, keep in mind the following three considerations:

1. What are your needs?

Which kinds of PEPs or RCAs do you work with? What types of products or services does your organization offer that would be of interest to them? What is your workflow, and what AML/CFT compliance tools or technologies do you already employ?

Another important point to consider is how much direction and assistance you need to set up and run these tools. At KYC2020, for example, our CAMS and Vskills certified specialists help clients define a risk-based approach to compliance that fits their risk profile. We can also tailor our products to fit established workflows and assist with the integration.

2. What are the specifics of the PEP data and screening solution?

What is the scope of the solution? What methodologies does the vendor use? Does the AML/CFT compliance database go beyond sanction lists and other standard databases? Does the vendor also include other sources of data for PEP identification, such as negative news databases? How much of this data is truly necessary and how well is the data structured and de-duplicated? Does the vendor use advanced technologies such as AI and NLP for identity recognition and resolution? What search technologies does the software use to filter matches? How often is the data updated?

3. What kind of relationship does the vendor offer?

Who is the vendor and how do they work with their clients? Do they have experience working with your type of financial institution, credit union, Fintech company or MSB? Do they offer direct assistance and support to get started or integrate, as mentioned above?

Elements of a Good PEP and RCA Screening Tools

The most reliable, efficient, and modern data screening systems for PEPs and RCAs will include the following three core functions:

Smart Screening and Verification

Your institution is required by law to conduct reasonable procedures to identify PEPs either before a relationship is established or as part of the onboarding process. The quality of such screening, however, depends on the quality of the data you use. PEP and RCA sanctions screening always starts with traditional sanctions lists and Regulatory Authority databases. However, these watchlists are aggregated from thousands of independent sources, are highly unstructured, and are constantly changing. Simultaneously, sanctions are becoming more complex, while the number of regulatory bodies are growing.

In short, maintaining quality data is a resource-intensive challenge.

Given the nature of watchlist data, you must start with a smart watchlist database that is well structured, normalized, and regularly updated to catch true positives while minimizing false positives. This data should be coupled with an intelligent screening engine to help filter, sort and analyze search results.

In the event a firm wants to eliminate the manual effort of clearing false positives and speed up onboarding, they must move from screening to decisioning systems. These smart systems use AI to automatically clear false positives and deliver pass/fail decisions so your organization can speed up its customer onboarding.

The Ability to Conduct Enhanced Due Diligence

Once you have successfully identified a PEP or RCA and have defined the level of risk the individual brings, additional research and analysis may be appropriate. You may want to validate, for example, the individual’s source of funds and/or wealth. The bulk of this added investigation will often include non-watchlist data, such as adverse media screening.

Accounts with a PEP relationship are also subject to enhanced monitoring and periodic review. This helps to ensure that due diligence information remains current and the risk assessment and associated controls remain appropriate.

Automated Processes

Sanction screening still requires a significant amount of manual intervention that can dramatically slow down and disrupt the PEP verification and onboarding processes. False positives in particular will hold your workflow hostage. Most sanction screening systems still yield 5-7% false positives that must be cleared manually by a compliance officer.

Advanced sanction screening solutions leverage latest technologies, such as AI, machine learning, and NLP to significantly reduce such manual intervention. They also go beyond the matching, sorting, and analysis of watchlist data results. Smart solutions, like our DecisionIQ^TM, can render 95% of all verification decisions automatically in under a minute with a low decision error rate.

Each screening decision is accompanied with a transparent ‘Proof of Decision’ that is electronically stored. The Proof of Decision can be electronically reviewed and annotated by a compliance officer. When a PEP or RCA is identified, they can be assigned to different customer lists based on the risk level. These customer lists can then be set up for scheduled or active ongoing monitoring and alerts. All this can be done via an easy to access online user interface, or via an easy to integrate API library.

Just imagine what your institution could do with all the time, money and other resources that would be freed up under such a system! Decision-making would be a lot more accurate, too.

The point is PEP data and screening solutions are evolving, just as the regulatory environment and even the world itself shifts and transforms. When you are in search of AML compliance tools of any kind, you need to partner with an AML compliance vendor that understands the winds of change. This knowledge should be worked into their collection of solutions. In the financial services sector, such partnerships are what it takes to stay in the game.

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