What is a Politically Exposed Person (PEP)?

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 may be more susceptible to involvement in illicit activities such as corruption, bribery, or money laundering due to their prominent public roles. Consequently, they are considered high-risk clients for financial institutions and businesses.

Politically Exposed Person

• A politically exposed person or PEP is an individual with a high authority position in a country or an international organization.
• PEPs can be involved in politics, the judiciary, or the military, among other professions.
• Verification of a Politically Exposed Person (PEP) is required under Know Your Customer (KYC) and Anti-Money Laundering (AML) rules.
• A politically exposed person falls easily into crime given the nature of his or her position or status.

Who is a Politically Exposed Person (PEP)?

PEP or Politically Exposed Person 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.

Who is Considered a PEP According to the FATF?

This is true since implementing guidelines set by FATF becomes cumbersome as these change with time and thus pose a great challenge for financial institutions. Such institutions have to scrutinize in cases in which the client or the beneficiary owner is PEP or associated with PEP.

Politically exposed persons (PEPs) are people who hold or have held a political position, their immediate family members and close associates, as defined by FATF. According to this definition, it is similar to one adopted by the United Nations Convention Against Corruption (UNCAC).

The FATF identifies six types of PEPs: 

• Foreign PEPs: Present or former high-ranking officials or those who served in any capacity of an official nature for a foreign state or its agencies or departments.
• Domestic PEPs: Persons, who at the present moment or in the past, occupy or have occupied some important posts in their own country.
• International Organizations: They are people who have had or now exercise important functions in an IO.
• Family Members: PEPs are those who are associated with PEPs as spouses or partners of the patient, his or her children or siblings, parents, or other members of the family including in-laws.
• Close Associates: Persons having or having had direct business relationships or being related parties due to beneficial ownership of companies, funds, or other structures together with a PEP.
• National PEPs: Individuals who are or have been entrusted with prominent functions by a national government.

Types of PEP (Politically Exposed Persons)

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:

1: Domestic PEPs

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.

2: Foreign PEPs

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.

3: International Organization PEPs

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.

4: Family Members and Close Associates

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.

Categories of PEPs

The FATF categorizes PEPs into several distinct groups:

• Close Associates: This group includes relatives of politicians, individuals with beneficial ownership of legal entities, and those involved in government-majority companies.
• Government Officials: Public officials include the judiciary, legislative, and executive branch bureaucracies’ senior staff as well as diplomats and parliamentarians.
• High-Positioned Individuals: At the political party level, those individuals involved in its administration, at central banks, ranking military officers, and executives in government-owned business organizations are regarded as PEPs.
• International Organizations: Individuals associated with international bodies, such as certain committee members influencing major global events, are also recognized as PEPs.

Examples of PEP (Politically Exposed Persons) 

Knowledge of the different types of PEPs is essential for financial institutions to easily know the laws that govern them and also manage these risks in cases of money laundering.

• Central Financial Institutions: Since they exercise important functions in the national financial and auditing systems, members of the central banks and officials of the Court of Auditors are classified as PEPs. Because the two positions convey significant influence over economizing policies and fiscal management, such people are considered FFHI risks in financial transactions.
• Armed Forces: High-ranking military officers are classified as PEPs. Their senior roles in national defense and security organizations place them in positions of considerable power, which can impact national stability and financial systems.
• International Sports Committees: Key figures in major sports organizations, such as committee members who influence decisions on global sporting events, are also deemed PEPs. Their influence over international sports can have significant financial implications and attract scrutiny under AML regulations.
• Legislative Bodies: Members of Parliament are categorized as PEPs because of their legislative power and decision-making capabilities. Their roles in shaping laws and policies make them prominent figures in the context of financial oversight.
• Executive Bodies: Heads of state and senior ministers hold significant political power and are classified as PEPs. Their positions involve high-level decision-making that can affect national and international financial environments.
• Diplomatic Roles: Ambassadors and chargé d’affaires are recognized as PEPs due to their roles in representing their countries and managing international relations. Their influence extends into economic and diplomatic spheres.
• Judiciary Bodies: Key figures in supreme or constitutional courts are PEPs due to their roles in interpreting laws and judicial decisions that impact legal and financial systems.
• State-Owned Enterprises: Senior executives and former board members of state-owned enterprises are classified as PEPs because of their influence over government-controlled economic activities and resources.

Politically Exposed Person Red Flags

• Identity Concealment: PEPs may try to hide their true identity by using shell companies or intermediaries, transferring legal ownership to others, or creating confusion about who really owns and controls the assets.
• Suspicious Behavior: Watch for signs like the inability to provide valid information, being secretive about the source of funds, offering false or incomplete details, frequent wire transfers or cash withdrawals, unexplained business relationships, or repeated cross-border transactions.
• Position of Authority: PEPs might hold significant positions in financial institutions, have control over business licenses or funds, or influence anti-money laundering policies and procedures.
• Industry Involvement: Pay attention to industries like banking, finance, defense, arms trade, mining, public goods, and businesses closely linked to the government or state agencies.
• Transaction Patterns: Be alert for large transfers into and out of accounts, frequent cash transactions, sudden account activity after periods of inactivity, wire transfers without clear explanations, and the use of multiple bank accounts without justifiable reasons.
• Service and Product Usage: PEPs may be involved with high-value sectors such as real estate, luxury goods, or services from foreign clients and high-value transport dealers.
• Local Risks: Consider if the customer comes from a country with high corruption risks, a mono-economy, or a country that is not a signatory to the United Nations Convention Against Corruption (UNCAC).

Understanding the Need to Identify and Screen Politically Exposed Persons

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.

The Role of International and National Bodies in Defining and Regulating PEPs

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.

Delving into the Process of PEP Screening

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.

The Duration of PEP Status: How Long is a Person Considered a PEP?

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.

PEP Risk Levels Based on FATF Guidelines of Red Flags

Politically Exposed Persons (PEPs) are categorized into different risk levels based on their positions and influence.

Here’s a simplified breakdown of these risk levels:

Low-Level Risk

• International Business Officials: Senior figures working in international business.
• Local Leaders: Mayors, and members of local or state assemblies.

Medium/Low-Level Risk

• Government Boards: High-ranking officials in state-owned organizations or businesses.
• Judiciary and Law Enforcement: Senior members of the judiciary, banks, military, and law enforcement.
• State Agencies: Senior members of various state agencies.
• Religious Organizations: High-ranking figures in religious groups.
• Commissioners and Consuls: Officials who manage specific duties and international relations.
• Ambassadors: Representatives of their countries in foreign nations.

High-Level Risk

• Top Government Officials: Heads of state and other high-ranking government members.
• Parliament Members: Key legislators in the government.
• Judiciary and Military Heads: Leading figures in the judiciary, banks, law enforcement, and military.
• Political Party Leaders: Prominent members of major political parties.

KYC Hub’s AML Solutions to Help with Screening PEPs

KYC Hub is one of the leading providers of PEP list services that include state-of-the-art technology, easy integration, and professional access to accurate and up-to-date lists to ensure better risk profiling and management. All their PEP and Sanction Lists are dynamically updated within 15 minutes, hence the high accuracy.

Thus, by cooperating with KYC Hub, companies can enhance their compliance and guarantee the purity and safety of the institution in the fight against financial crime. To solve this, KYC Hub’s solutions embrace the risk-based approach where PEP screening is effectively done, hence conforming to the law of the land and international standards of anti-financial crimes.

Conclusion

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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