What is Transaction Screening?
Transaction screening is an essential process when it comes to Anti Money Laundering procedures. It involves tracking and dissecting customer transactions as they are made or going through previous transactions to verify that there is no suspicious activity taking place.
Transaction screening isn’t as simple as only observing customers exchange money- it involves building a picture of the customer through screening their transaction history and frequent contacts against international sanctions lists and encrypted rules.
This vital part of AML regulations is compulsory in many jurisdictions and was even made compulsory in Europe under the 2015 4th Money Laundering Directive.
Many companies use transaction screening programs that work according to a set of rules that they put in place. If the system detects that any transaction is violating any of the rules, it automatically flags it as a threat and shuts it down after alerting the authorities. The transaction details are then passed over to the relevant compliance officer, which reviews the case thoroughly to check whether the alert was justified.
If the compliance department finds that the transaction indeed points towards suspicious activity, it is forwarded to the supervisory, regulatory body as a Suspicious Activity Report (SAR). Companies can forward any cases to the compliance department on the grounds of suspicion; they do not need to have concrete proof of illicit behavior to do so.
Transaction screening can help companies to prevent money laundering, which in turn can help stop potentially detrimental activities like drug trafficking, corruption, human trafficking, and terrorist financing from taking place.
What red flags should a company look out for when screening transactions?
Here are a few red flags that every company should be aware of when screening their client’s transactions-
- Suspiciously large amounts of money coming from sanctioned countries or neighboring territories or being sent by or to people with disproportionate economic backgrounds.
- If the source of the money or destination is hidden or the client is evasive about the nature of the transaction.
- If not much information is found about the client, they may be making the transaction under a fake name to avoid detection.
- The client is discovered to have multiple off-shore or foreign bank accounts.
- Large recurring payments are made to the same source periodically.
- A newly-established company keeps making large transactions without any valid reason; it could be a shell company incorporated for money laddering of funds.
Who counts as a Politically Exposed Person (PEP)?
A Politically Exposed Person (PEP) refers to an individual who is known to be either involved in or have strong relations with the world of politics, which grants them more opportunities to partake in illicit financial activities than an ordinary person. People involved with politics are more likely to have criminal connections that can help them make under-the-table transactions through bribes and move money without detection by the law.
Due to the high risk of such people committing illegal and potentially dangerous financial activities, it is essential for businesses to refrain from doing business with them, as they may be unintentionally aiding them in committing fraud or money laundering. In many cases, money laundering can lead to the funding of serious anti-social or criminal activities like terrorism, human trafficking, and drug peddling that are dangerous to society. Aiding and abetting such people and groups, even if it may be involuntary, can land businesses and financial institutions in deep trouble with regulatory authorities for not following adequate due diligence and screening methods. Hence, it is vital that companies conduct PEP screening, both for their own good and the collective health of society.
Some examples of politically exposed persons are government officials, members of political parties, judges holding high ranks in the judicial system, and top executives of public companies or state-owned entities.
How often should a company conduct PEP screening?
Companies are advised to screen their clients periodically after they take them on, not just upon the first meeting. The client’s allegations may change, or they may become involved with a political party or politician during their period of business with the company. The risk level of people may change according to the circumstances; there is no guarantee that a client with an initially clean slate will remain risk-free; hence it is essential to conduct PEP screening tests from time to time and allocate clients to appropriate risk categories.
Is PEP screening compulsory?
PEP screening, among other AML requirements, is compulsory under the European Union’s Anti-Money Laundering Directive. Even if PEP screening is not mandatory in a country, it is recommended that all organizations still do so as a preventive measure. According to the Financial Action Task Force (FATF), if organizations come across any high-risk PEPs, it is recommended not to refuse to do business with them but rather continue the agreement with enhanced monitoring and due diligence levels, which will help keep an eye on their activities.
How to determine a customers risk level
A client’s risk level must be determined by screening their details through various sanctions lists. Important details that can pull up red flags include the customer’s full name, registered address of their business, the type of business the client company deals in, geographical reach, the businesses or people they transact with the most, and most importantly, in this scenario, any relation of company higher-ups with political entities or activities. This information can be checked from various sanctions lists or other official sources from the client’s country of residence and operation.
Financial institutions are the most important entities in the screening chain and must take their due diligence activities very seriously. It is up to banks to determine if any clients they are dealing with pose the risk of being PEPs. Hence, all bank employees and management must be aware of the appropriate screening processes and AML procedures to determine the customers’ risk level that they can pass on to relevant entities or even law enforcement if needed.
Upon determining the client’s risk level, the company can take appropriate measures to monitor its activities and transactions and ensure that no suspicious financial activities are occurring under its watch. The customer must be observed proportionately to their risk level; the higher the risk, the more attention should be given to their dealings.
If the company is using an automatic sanction-scanning program or AI, it is still important to verify all hits manually, as there may be some false positives that may lead to the incorrect designation of risk levels for some clients.
Conclusion
Screening to determine if a client is a Politically Exposed Person (PEP) is a part of transaction screening. Transaction screening involves monitoring transactions made by a client or company to determine whether they are legitimate and not part of any money laundering or criminal activity scheme. A PEP refers to any person affiliated with a political party or having strong relations with politicians, which makes them more likely to be involved with illicit financial activities due to their connections.
Companies and financial institutions must perform due diligence on their clients before engaging in business with them to monitor their transactions appropriately and detect any suspicious transactions or going-ons. Transaction screening is a vital tool in fighting money laundering and an important step under AML regulations.
