In the sphere of financial regulation and anti-money laundering (AML) measures, a critical term frequently pops up – Politically Exposed Person, abbreviated as PEP. This term signifies individuals who, due to their prominent public roles, may be more susceptible to involvement in illicit activities such as corruption, bribery, or money laundering. Consequently, they are considered high-risk clients for financial institutions and businesses.
A Politically Exposed Person (PEP) is an individual who is or has been, trusted with a significant public role. This definition extends beyond local borders, encapsulating individuals performing prominent public functions domestically, in foreign countries, or in international organizations.
As these individuals generally wield considerable influence, they are perceived to pose a higher risk for potential involvement in illicit activities, such as bribery or corruption, which can lead to money laundering offenses.
However, being identified as a Politically Exposed Person does not imply criminal involvement or dubious intentions. It simply indicates that their position could potentially be abused for personal gain, thereby mandating enhanced due diligence measures to mitigate the risk.
PEPs can be categorized into several distinct types, based on their area of influence and the nature of their relationships. Let’s delve into the different categories:
These are individuals who occupy or have occupied a prominent public position or function within their own country. This could include roles such as heads of state or government, government ministers, senior civil servants, high-ranking military personnel, or top executives of state-owned enterprises.
These Politically Exposed Persons are individuals who hold or have held significant public roles in foreign countries. They may include foreign heads of state or government, senior politicians, judicial or military officials, or executives of state-owned corporations in other countries.
These individuals are or have been entrusted with a prominent function by an international organization, such as the United Nations, World Bank, or International Monetary Fund. This category typically includes members of senior management, directors, deputy directors, and board members.
This category refers to individuals who are related to a PEP or have a close personal or professional association with a Politically Exposed Person. Family members may include a spouse, children, parents, and siblings. Close associates can encompass individuals known to have joint beneficial ownership of legal entities or those with close business relations with the PEP.
The need to identify and screen Politically Exposed Persons stems from a global initiative to combat money laundering, corruption, and terrorist financing. Regulatory bodies around the world, such as the Financial Action Task Force (FATF), the European Union (EU), and several national financial intelligence units, outline specific guidelines and requirements for dealing with PEPs.
These guidelines mandate financial institutions and designated non-financial businesses and professions (DNFBPs) to apply additional AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) measures when dealing with PEPs. These measures are preventative and aim to avert the misuse of the global financial system.
National and international regulatory bodies play a crucial role in defining the criteria for identifying Politically Exposed Persons and establishing the regulations for dealing with them. One of the key organizations in this regard is the Financial Action Task Force (FATF), an intergovernmental body established to set standards and promote effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats.
FATF’s recommendations serve as a benchmark for many countries and organizations in defining who qualifies as a Politically Exposed Person and determining the necessary due diligence measures. Besides FATF, regional bodies like the European Union (EU) and country-specific financial intelligence units (FIUs) also provide guidelines for handling PEPs.
However, the lack of an internationally agreed-upon definition often leads to variations in PEP regulations across different jurisdictions. Therefore, financial institutions must stay updated with the local laws of the jurisdictions in which they operate and tailor their screening processes accordingly.
Screening for PEPs is a crucial part of the customer due diligence (CDD) process that financial institutions are required to undertake. The first step in this process is to establish an internal definition of who qualifies as a Politically Exposed Person. While many institutions opt for FATF’s definition, some may choose to draw up their criteria based on local laws and regulations.
Once the definition is set, institutions need to implement procedures to identify whether a potential or existing customer or their beneficial owner is a Politically Exposed Person or an associate of a Politically Exposed Person. These procedures should be carried out before providing any financial service to the customer, or as soon as possible thereafter.
Institutions can use commercial databases to assist in the identification and detection of PEPs. Depending on the risk assessment, they may then request further information from the individual. If an individual is established as a PEP, institutions may need to screen them for suspicious activities, such as involvement in money laundering or sanctions breaches.
There is no universally agreed-upon time frame for how long an individual should be considered a PEP after leaving their public function. The risk associated with a PEP is closely related to their country’s political situation, the inherent corruption risk, the office or function they held, and the influence associated with that position.
Although their influence may significantly reduce as soon as they leave office, a Politically Exposed Person may have been in a position to acquire their wealth illicitly, warranting a high level of scrutiny even after they have left office.
According to the Wolfsberg Group, an association of thirteen global banks that aims to develop frameworks and guidance for the management of financial crime risks, the “once a PEP, always a PEP” approach is inconsistent with a risk-based approach.
The group suggests that when considering the declassification of a Politically Exposed Person, institutions should consider factors such as the level of inherent corruption risk in their country of political exposure, the position held and its susceptibility to corruption, and the plausibility of the stated customer profile and their net worth, among others.
The identification and screening of Politically Exposed Persons are integral parts of any robust AML and CFT framework. It allows financial institutions to mitigate the risks associated with doing business with individuals who hold or have held prominent public functions and, consequently, are more susceptible to involvement in illicit activities due to their position and influence.
Despite the challenges associated with PEP identification, such as varying definitions and regulatory requirements across jurisdictions, institutions must ensure they have robust processes in place to identify and screen for PEPs effectively.
For a more comprehensive understanding of PEPs, their identification, and regulatory requirements, KYC Hub offers advanced AML solutions and due diligence for PEP sanction checks. Leveraging a risk-based approach, our solutions enable you to conduct effective PEP screening, ensuring compliance with local and international regulations while minimizing the risk of financial crimes.
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