Politically Exposed Persons (PEPs)

Financial businesses have the responsibility to ensure proper AML/CFT standards within the organization. Although politically exposed persons, better known as PEPs, are not exactly criminals, there exists a certain possibility because of the high status they possess. While establishing business relations with a PEP, financial institutions need to take relevant measures to track their risk profile. This is done through comprehensive AML compliance regulations.

Who is a Potentially Exposed Person (PEP)?

The Financial Action Task Force defines a PEP as someone entitled with a prominent public role. PEPs are seen as high-risk individuals because of their influence and position in the public. This means that they could misuse the authority to conduct potential money laundering, and related financial crimes including, corruption, bribery and terrorist financing.

The potential risks tied with PEPs require businesses to take additional preventative measures when establishing relations with them. These requirements are “non-criminal” in nature and are not intended to label politicians as someone with a bad reputation, but to prevent potential money laundering.

What makes someone a PEP?

The criteria to determine a PEP is different in each country and is subject to the laws and regulations there. The FATF regularly issues recommendations on PEP compliance which make it increasingly difficult to make a definitive list. According to the guidelines and definitions provided by the FATF, the following individuals are categorized as PEPs:

State Officials: In-service or former officials appointed at a domestic or foreign government position. These include figures and heads of states working in administrative, judicial, military or legislative departments.

Members of Political Organizations: Officials representing a political party either in their country or in foreign are recognized as potentially exposed persons. 

International Figures: Another category of PEPs are those with a prominent function entrusted by an international organization. These could be directors, deputies and members of the board or equivalent roles.

Family Members and Associates: An individual linked with a politically exposed person through a blood relation or associated partnership is also a PEP. Since those are close associates related to the PEP, they present the same level of risk.

Sources of PEP Lists

Identifying whether a customer or a business partner is a PEP could be a challenge for financial businesses. When it comes to foreign PEPs, the process becomes more difficult since their information is not readily available. Customer Due Diligence, as per FATF’s Recommendation 10 and 12, plays a crucial role in obtaining information necessary to conduct PEP and AML screening. Here are some sources apart from CDD which could help to acquire information for PEP screening:

• Commercially available databases
• PEP lists issued by the government
• In-house data repositories
• Inter-country information sharing
• Asset disclosure systems
• Self-declaration by the customer
• Internet and Media
• Employees

PEP Types by Risk

Level 1 (High-risk PEPs)

• State and government executives
• Leading roles in military, judicial, and law enforcement departments
• Parliament officials including senators and house representatives
• Prominent figures in a political party

Level 2 (Medium-high Risk PEPs)

• Officials of the state, military, and law enforcement at a senior position
• High-rank civil service officers, leaders of religious groups and state agencies
• State ambassadors, diplomats, and commissioners

Level 3 (Medium-risk PEPs)

• Senior management at businesses owned by the government
• Board of directors of a state organization

Level 4 (Low Risk PEPs)

• Senior officials and employees working for international bodies
• State and district assembly members

How can Online Businesses Cope?

Businesses operating in the digital space need to keep an eye on their customers and beneficial owners. Global regulators such as the FATF require financial institutions to include PEP screening as an integral part of their AML compliance program. Ongoing monitoring will help organizations to properly keep track of the client’s risk status based on the frequency and volume of their transactions.

PEP screening can be used to assess the level of risk involved in the business relation as well. It allows financial institutions and Designated Non-Financial Businesses (DNFBs) to take down potential instances of money laundering.