PEP, sanctions and adverse media screening guide

If you work in compliance, risk, or financial services, screening isn’t something you can afford to treat lightly. Sanctions lists shift, politically exposed persons bring added scrutiny, and adverse media can flag risks long before they show up anywhere official. Keeping on top of all three can feel like spinning plates, especially as expectations from regulators continue to rise.

Sanctions, politically exposed persons, and adverse media checks tend to come up together in Anti-Money Laundering (AML) compliance, but they’re often treated as separate boxes to tick. In reality, they each point to a different kind of risk, and it’s how they work alongside each other that gives them real value.

Sanctions screening is tied to legal restrictions, flagging individuals and entities you’re not allowed to do business with. PEP screening focuses on people in positions of influence, where there’s a higher expectation of scrutiny around their finances and connections. Adverse media adds another layer, picking up on negative news and public reporting that might indicate risk before it shows up anywhere official. This guide sets out what each of these checks involves and what they mean in practice for AML compliance.

What is a Politically Exposed Person (PEP)?

A politically exposed person (or PEP) is someone who holds, or has held, a prominent public role. Think senior politicians, government officials, or executives in state-owned organisations. The definition also extends to their close family members and known associates.

PEPs aren’t automatically high risk, but they do carry a higher chance of involvement in bribery or corruption due to their position and influence. From an AML point of view, this means applying enhanced due diligence. Firms need a clearer understanding of the source of funds, ongoing activity, and any changes in risk over time. It’s about context rather than assumption, but that context needs to be properly documented.

Why is PEP screening important?

There are several key reasons why PEP screening is important for AML compliance:

• Higher risk of corruption and bribery: PEPs often have access to significant public funds and resources, which makes them susceptible to corruption and bribery. They may use their positions to facilitate money laundering activities or accept illicit funds in exchange for political favours.
• Money laundering risk: It is possible that individuals use their influence to engage in money laundering activities, whereby illicit funds are integrated into the financial system to appear legitimate. This can involve complex transactions and shell companies to hide the source and ownership of the funds. Working with such people is dangerous to your own business legally, financially and reputationally.
• Influence peddling and embezzlement: PEPs may misuse their political influence to embezzle funds from government coffers or state-owned enterprises. Using AML compliance can help identify suspicious financial transactions that could be related to such activities.
• Terrorism financing risk: PEPs may unknowingly or knowingly facilitate terrorism financing through their networks or connections. Compliance measures help detect and prevent such activities, protecting the integrity of the financial system.
• Reputation and regulatory risks: Financial institutions and businesses dealing with PEPs face reputational risks if they are associated with individuals involved in financial crimes. Non-compliance with AML regulations can also lead to severe regulatory penalties and legal consequences.
• International sanctions: PEPs from certain countries or regions may be subject to international sanctions. AML compliance works to ensure financial institutions stay ahead of these measures and do not engage in prohibited transactions with sanctioned PEPs.
• Enhanced due diligence requirements: AML regulations require financial institutions to apply enhanced due diligence measures when dealing with PEPs. This includes gathering additional information about the individual and the source of their wealth and monitoring their financial activities more closely.

What are sanctions?

Sanctions are legal restrictions imposed by governments or international bodies on specific individuals, organisations, or countries. They are typically introduced to address issues like financial crime, terrorism, or geopolitical conflict.

In practice, sanctions can prohibit doing business with certain parties, restrict access to financial systems, or require assets to be frozen. AML teams screen customers against official sanctions lists, such as those issued by the Office of Financial Sanctions Implementation or the Office of Foreign Assets Control. A confirmed match usually triggers immediate action, making sanctions screening one of the most clear-cut areas of compliance.

The primary objective of sanctions is to limit the targeted entities’ ability to access the international financial system, which includes freezing their assets, denying them access to credit, and restricting their ability to engage in international trade. This process aims to disrupt and weaken the targeted entities’ ability to fund their operations, acquire weapons or technology, and finance their illicit activities. In essence, sanctions are a form of financial pressure aimed at forcing the targeted entities to change their behaviour or face consequences.

AML compliance plays a critical role in the implementation of economic sanctions by financial institutions. The financial industry’s compliance obligations are governed by various regulations, such as the UK’s Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act), the USA’s Patriot Act, and the Bank Secrecy Act, among others. These regulations require financial institutions to establish policies and procedures that enable them to detect and report suspicious transactions and to ensure that they do not inadvertently facilitate transactions that violate economic sanctions.

Conducting a sanctions check

AML compliance programmes must be designed to identify, monitor, and report transactions that involve individuals or entities subject to sanctions. This means that financial institutions must conduct robust due diligence on their customers, including screening them against sanction lists, such as the Office of Financial Sanctions Implementation list issued by His Majesty’s Treasury in the United Kingdom or the Office of Foreign Assets Control (OFAC) list in the United States. Financial institutions must also monitor clients throughout the duration of their relationship and report any suspicious activity that may indicate an attempt to circumvent economic sanctions.

To comply with economic sanctions, financial institutions must establish strong internal controls that enable them to detect and prevent potential violations. These controls include monitoring, customer due diligence, sanctions screening, and employee training.

Financial institutions must also maintain comprehensive records of their compliance efforts, including documentation of due diligence, sanctions screening, and suspicious activity reporting.

Failure to comply with sanctions can result in severe financial and reputational damage, as well as legal and regulatory consequences. Therefore, it is critical that financial institutions prioritise their AML compliance efforts to mitigate these risks.

What is adverse media?

Adverse media refers to negative information about a person or business that appears in publicly available sources. This might include news reports, regulatory announcements, court records, or other credible publications linking someone to financial crime, fraud, or unethical behaviour. It’s less structured than sanctions or PEP data, and often requires judgement. Not every negative mention carries the same weight, but it can highlight early warning signs.

The global Financial Action Task Force (FATF) includes adverse media screening in its anti-money laundering guidelines, forming part of its recommendations that organisations implement a ‘risk-based approach’ to compliance in order to “target their resources more effectively and apply preventive measures that are commensurate to the nature of risks, in order to focus their efforts in the most effective way.”

Similarly, the UK’s Financial Conduct Authority (FCA) mirrors the guidance set out by the FATF, stipulating that media screening should be conducted when onboarding new customers and during periodic reviews of existing relationships.

In an open letter to financial institutions in May 2021, the FCA stressed the significance of comprehensive adverse media screening – and to reiterate the importance of following up on any, and all, allegations of financial crime against customers.

How and where to conduct adverse media screening

Adverse media screening involves monitoring global media sources for evidence of a customer’s involvement or alleged involvement in suspicious activity.

In today’s world, anyone online can become a publisher of ‘news’. The likes of X.com, online blogging and forums such as Reddit can, pretty much, allow any of us to publish ‘news’. Though hearsay, gossip and rumours can soon become rampant, muddying the waters of legitimate, accurate news.

A critical step in screening for adverse media is to use reputable, credible and current news sources – whether official news outlets, government websites, judiciary databases, regulatory body updates or credible online media sources.

• Adverse media screening tools: There are various technology platforms designed specifically for adverse media screening. They use advanced technology to scour the web and media sources for any negative reports related to a given subject.
• News aggregators: Platforms like Google News or Bing News can provide a vast range of news articles and reports from various sources. Regular searches using these tools can be effective, especially for smaller firms without access to specialised screening tools.
• Public and private databases: Compliance professionals can check individuals and companies against law enforcement databases, regulatory authority publications, or international blacklists such as the UK Sanctions list, FATF’s grey and black lists, or the Office of Foreign Assets Control (OFAC) list.
• Subscription-based news services: These are professional news services that provide deeper insights and coverage than standard news outlets. Reuters, Bloomberg, and The Financial Times are some examples.
• Manual monitoring: Designate a team or individual to regularly monitor leading newspapers, magazines, and broadcast news for relevant information. This method, while time-intensive, provides a human touch that can be essential for more complex situations.

5 challenges of screening clients

Data quality and accuracy: One of the main challenges in screening clients for PEP, sanctions and adverse media exposure is ensuring the quality and accuracy of the data used for screening purposes. All three areas are changing and growing, with updates and additions made frequently by regulatory bodies and authorities. This dynamic nature makes it difficult for businesses to maintain accurate data and keep their screening databases up to date.

Solution: Implementing robust data management processes, making use of advanced technology such as ID-Pal for data validation, screening and compliance with regulations, and using reliable data providers can help improve the quality and accuracy of sanctions screening data.

False positives: False positives occur when legitimate transactions are incorrectly flagged as potential matches to sanctioned entities or individuals. The high volume of transactions processed by financial institutions and businesses increases the likelihood of false positives, leading to operational inefficiencies, increased workload for compliance teams, and potential delays in transaction processing.

Solution: Employing advanced screening algorithms capable of reducing false positives through intelligent matching criteria, refining screening parameters based on historical data and client risk patterns, and implementing effective review processes to quickly resolve potential matches can mitigate the impact of false positives.

Screening coverage and jurisdictional variations: Sanctions regimes differ across jurisdictions, PEP definitions vary, and adverse media coverage can be spotty. What’s more, each country will often maintain its own set of sanctions lists, PEP databases and regulations. Ensuring comprehensive coverage of all relevant risk factors and staying ahead of changes in regulations across multiple jurisdictions pose significant challenges for organisations operating globally.

Solution: Adopting a risk-based approach to sanctions screening by prioritising high-risk jurisdictions and entities, establishing strong partnerships with local compliance experts or third-party vendors for insights into regional sanctions regimes, and leveraging technology solutions that support multi-jurisdictional screening capabilities can help companies address this challenge effectively.

Resource constraints and cost: Implementing and maintaining an effective screening program requires substantial resources in terms of technology, employees, and ongoing monitoring efforts. Many organisations, particularly smaller firms with limited budgets, struggle to allocate sufficient resources to screening, resulting in gaps in compliance and increased exposure to regulatory risks.

Solution: Investing in automation and technology solutions to streamline screening processes and reduce manual effort, outsourcing non-core screening functions to specialised service providers, and conducting regular cost-benefit analyses to optimise resource allocation can help businesses achieve cost-effective sanctions screening operations.

Emerging threats and evolving sanctions landscape: The nature of geopolitical events and international conflicts means that new sanctions rules may be imposed suddenly, targeting entities that may previously have been unaffected. Staying ahead of emerging threats and understanding the implications of evolving sanctions regulations require continuous monitoring and proactive risk assessment capabilities.

Solution: Establishing robust monitoring strategies to track developments and regulatory changes, conducting regular risk assessments to identify potential exposure to emerging threats, and fostering a culture of compliance that emphasises agility and adaptability can enable organisations to effectively navigate the dynamic sanctions landscape.

How to ensure effective client screening

To enhance screening effectiveness and minimise compliance risks, businesses can adopt the following best practices:

• Comprehensive data coverage: Utilise reputable sources from authoritative places, such as government agencies and international bodies, to ensure comprehensive coverage of sanctioned entities and jurisdictions, PEPs and adverse media
• Real-time screening: Implement automated screening solutions capable of conducting real-time checks on customers, transactions, and counterparties. Real-time screening enables timely identification and resolution of compliance issues, minimising potential exposure to risk.
• Risk-based approach: Tailor screening procedures to align with the organisation’s risk profile and business objectives. Prioritise screening efforts based on factors such as customer risk rating, transaction value, and geographic location to focus resources effectively.
• Regular updates and monitoring: Stay ahead of regulatory developments and updates to screening requirements lists to ensure ongoing compliance. Establish processes for regularly updating screening databases and conducting periodic reviews of customer profiles to detect any changes in risk status.
• Integration with compliance framework: Integrate screening capabilities into broader compliance frameworks, such as anti-money laundering (AML) and Know Your Customer (KYC) programs, to create an inclusive approach to risk management and regulatory compliance.

Effective screening is essential for businesses to mitigate compliance risks, uphold legal obligations, and safeguard their reputation and operations. By implementing robust screening processes, leveraging technology solutions, and adopting a risk-based approach, businesses can enhance compliance effectiveness and demonstrate a commitment to ethical business conduct.

The challenges in identifying UBOs

For many organisations, getting into the details of Ultimate Beneficial Ownership is not straightforward. Bad actors are skilled at exploiting gaps in the system. Complex corporate structures are deliberately designed to make UBOs as hard to trace as possible. Multi-layered ownership chains, offshore jurisdictions, and nominee directors create opacity that even seasoned compliance professionals struggle to penetrate.

Offshore tax havens with minimal UBO disclosure requirements are particularly attractive. Jurisdictions like the British Virgin Islands and the Cayman Islands provide the perfect cover for hiding ownership, allowing criminals to bypass more stringent oversight in places like the UK.

And yet, even within the UK, criminals use inconsistent registry standards and trusts to their advantage. Trusts, for example, allow a trustee to hold legal ownership while the true beneficiary stays hidden, creating another layer of complexity.

Corporate webs can often be confusing to navigate and can take hours or days to manually unravel and identify attributes (confirming self-certified information such as company name, address, and registration details) and verify those attributes (such as ownership levels and financial reports), and understand where if necessary, to conduct enhanced due diligence.

Ultimate beneficial ownership verification can be further complicated as a result of the different ways a company can be constituted. Let’s look at some specific examples of what we mean by this.

There might be more than one class of shares issued by the company, which carry different voting rights. For example, there might be 100 shares issued in total, 70 “A” shares which carry one vote each and 30 “B” shares which carry 20 votes each. You could easily have a situation where 2 people own all the “A” shares, and 3 people own the “B” shares.

What would this mean in practice?

Each of the “A” shareholders owns 35 shares and, therefore, owns 35% of the company, so they are UBOs by virtue of ownership. Each of the “B” shareholders controls 10 “B” shares and therefore 200 votes each. Given that the total number of votes available is 670 (70 “A” share votes plus 20 x 30 = 600 “B” share votes”), each “B” shareholder is a UBO by virtue of control (200 votes equates to approx. 30% of the voting rights).

Not quite so straightforward.

What if there doesn’t appear to be a direct owner of a company?

To take this a stage further, what happens if there is no direct ownership of the company you are onboarding? Let’s say there are three shareholders, all corporate entities themselves, and they all have a variety of shareholders, some of whom are common to more than one company.

And what if some of those intermediate companies also have different shares with different voting rights? All of those shareholdings need to be worked out (along with voting right calculations if necessary) in order to establish who, if anyone, is a UBO.

Getting all that information is not always easy, which further complicates matters.

At this point, it would be nice to think that we’ve now covered all the requirements relating to legal entities, but there is still more.

One of the things that regulated entities are obliged to do is to consider the rationale for any particularly complex ownership structures. Previous fact sheets emanating from the Financial Action Task Force (FATF) have indicated that more than three layers of ownership should be considered as a possible starting point for complexity.

 

PEP, sanctions and adverse media screening FAQs

Why is sanctions screening important?

Sanctions screening helps businesses avoid dealing with individuals, organisations, or countries subject to legal restrictions. Failing to identify a sanctioned party can lead to serious penalties, including fines and enforced business restrictions. It also plays a key role in preventing financial systems from being used to support criminal or prohibited activities.

Why do businesses need to screen for PEPs?

Screening for politically exposed persons helps identify individuals who may present a higher risk due to their position and influence. It allows businesses to apply enhanced due diligence, understand the source of funds more clearly, and monitor relationships more closely over time. This supports better risk management and aligns with regulatory expectations.

What is the importance of adverse media screening?

Adverse media screening helps identify potential risks that may not yet appear on official watchlists. By reviewing credible news sources and public information, businesses can spot early warning signs of financial crime, fraud, or misconduct. This allows for quicker decisions and a more informed view of customer risk.

How do sanctions, PEP, and adverse media screening work together?

These checks complement each other by covering different areas of risk. Sanctions screening highlights legal restrictions, PEP screening flags individuals who require closer review, and adverse media adds context from real-world reporting. Together, they provide a more complete picture and support stronger AML decision-making.

What happens if these screenings are not carried out properly?

Poor screening processes can lead to missed risks, regulatory breaches, and reputational damage. Businesses may unknowingly engage with high-risk or prohibited parties, which can result in fines and increased scrutiny from regulators. Consistent and accurate screening helps reduce these risks and supports ongoing compliance.