PEP and Sanctions Screening

Why must an exchange office screen for PEPs and sanctions?

A bureau-de-change operator is an obliged entity under the AML Act. Customer identification and due diligence include the duty to establish whether the customer (or its beneficial owner) is a politically exposed person (PEP) and whether international sanctions apply to them under Act No. 69/2006 Coll., on the Implementation of International Sanctions, and directly applicable EU regulations.

This duty is no formality: a transaction must not be executed if doing so would breach a binding restrictive measure. You first have to verify whether the match is genuine and establish the content of the applicable measure – the correct course depends on the particular sanctions regime and may involve a transfer ban, an asset freeze or a reporting duty. A missing screening process is also a typical finding in CNB and FAÚ inspections.

Who is a politically exposed person (PEP)?

Under Section 4(5) of the AML Act, a PEP is a natural person who holds or has held a prominent public function (e.g. head of state, minister, member of parliament, judge of a supreme court, ambassador, high-ranking officer, member of a state enterprise body), as well as close relatives and known business associates of such a person. PEPs are subject to an enhanced regime – among other things, the origin of the assets and funds used in the transaction must be established.

What are international sanctions and which lists must be checked?

International sanctions are restrictive measures adopted in particular by the UN and the European Union (and implemented in Czech law), typically asset freezes and the prohibition of making funds available to designated persons. In practice, customers must be screened at least against the EU consolidated sanctions list, the UN lists and the Czech national sanctions list; many exchange offices voluntarily also screen the OFAC (US) and UK lists. These are not automatically binding in the Czech Republic – they act rather as a risk or contractual factor, particularly in relation to banks and cross-border payments, and their legal effects have to be assessed case by case.

When and how often should screening take place?

Screening must be performed before executing a transaction for which you identify the customer, and on an ongoing basis for continuing business relationships (sanctions lists change practically daily). Manual look-ups in public lists are laborious and error-prone – we therefore recommend an automated solution that checks the customer's name against current lists in an instant and stores the result for inspection purposes.

How can we help?

• we will design the PEP and sanctions screening process in your internal AML policy so that it reflects your actual operations and reduces risk in a CNB or FAÚ inspection;
• we will provide an automated screening tool for the daily operation of your exchange office, including records of performed checks;
• we will prepare procedures for a match (refusing the transaction, freezing, reporting to the FAÚ);
• we will train your staff in working with the lists and the tool.

Where to next?

• AML obligations of an exchange office
• Preparing for a CNB inspection
• Legal audit of an exchange office
• Turnkey exchange office setup