A PEP (Politically Exposed Person) is a person who holds a certain form of political and institutional power by virtue of a high-ranking government position or other type of political position. Because of their power, PEPs are considered to be at high risk in relation to money laundering, extortion, bribery and other forms of corruption. Spouses, family and close business partners are also considered PEPs, as their relationship may be exploited – voluntarily or involuntarily. The Anti-Money Laundering Directive requires all businesses to exercise particular caution when doing business with clients or customers who are PEPs, as they pose an increased risk. A Politically Exposed Person (PEP) is someone who has been appointed to a high-level position by a Community institution, an international body or a country in the last 12 months. The main objective of applying additional scrutiny to work involving PEPs is to mitigate the risk that the proceeds of bribery and corruption may be laundered or assets otherwise taken from the country of origin.

Definition of Politically Exposed Persons

A Politically Exposed Person (PEP), as defined by the Financial Action Task Force (FATF), is someone who is currently or has been entrusted with a prominent function. The United Nations Convention against Corruption (UNCAC) extends this definition to include relatives and close associates (RCA) of persons holding prominent public functions. PEPs are at greater risk of corruption, money laundering, terrorist financing and bribery in relation to the nature of the influence they wield by virtue of their position.

Identifying PEPs

PEPs may include:

• Heads of State, Heads of Government, Ministers and Deputy or Assistant Ministers;
• Members of Parliament (MPs);
• Members of Courts of Auditors or Boards of Central Banks;
• Ambassadors, Chargés d’Affaires and senior officers in the armed forces;
• Members of the administrative, management or supervisory bodies of state-owned enterprises;
• Members of supreme courts, constitutional courts or other high-level judicial bodies whose decisions are generally not subject to further appeal, except in exceptional circumstances;

PEPs also include:

• Family members of a politically exposed person;
• Close business associates;
• Beneficial owners of a person’s assets (someone who enjoys the benefits of ownership even though the ownership of the assets is in the name of another person);

You should take a risk-based and proportionate approach to determining whether you have a PEP as a client.

Situations that might suggest that you have a PEP client include:

• receiving funds from a government account;
• receiving a communication on official letterhead from a client or a connected person;
• having a general conversation with a client or a person connected to the recipient that links the person to a PEP;
• news reports that suggest that your client is or is associated with a PEP;

AML/CFT regulators expect firms to use information reasonably available to them to help identify PEPs, including:

• information in the public domain, such as parliamentary and government websites;
• reliable public registers, such as the Business Register of Companies and Persons with Significant Control Registers;
• commercial databases containing lists of PEPs, family members and known close associates;

You do not need to actively investigate whether the beneficial owners of a client are PEPs. However, if you know that the beneficial owner is a PEP, you should consider what additional measures, if any, you need to take when dealing with that client.

Online sources can often provide information about individuals and their:

• source of wealth outside of political office
• remuneration for their current role

They can also indicate whether there are any credible allegations or investigations of criminal activity that you should consider when assessing risk.

Is PEP screening required by law?

While there are no specific universal sets of regulations for PEP screening, AML and KYC compliance regulations require a risk-based approach to screening potential clients. Organizations are required to take “reasonable steps” to determine the level of risk a client may pose. This should be defined by internal policies within the organization to avoid potential fines for non-compliance.

These efforts to reduce the risk associated with PEPs should be preventative in nature. This does not necessarily mean refusing to do business with these individuals, but rather using a risk-based approach, including enhanced customer due diligence (CDD) to better understand and mitigate potential risk.

Who needs PEP screening?

All financial institutions, individuals or businesses subject to anti-money laundering regulations, including banks and credit unions, will be required to screen for PEPs.

PEP screening should be conducted as part of the client onboarding process as part of the KYC protocol. Politically exposed persons should be assigned a risk rating once they have been identified, using a risk-based approach.

Dealing with PEP clients

If your client is a PEP, you should apply enhanced due diligence measures. You should also treat dealings with PEPs on a case-by-case basis. If your client is a PEP, you must:

• obtain senior management approval for the business relationship;
• take appropriate steps to identify the source of wealth and sources of funds;
• closely monitor the business relationship;

It is also recommended that you tell those responsible for monitoring risk assessments in your company that a business relationship with a PEP has been entered into.

Once you have identified that you have a PEP client, you can look at the basis on which they are categorised (lower or higher risk) and the nature of the undertaking they are asking you to undertake.

This will help you to ensure that your enhanced due diligence is proportionate and effective.

Key elements of a quality PEP screening process

There are many different types of controls and elements that can be used in a PEP screening. Some of the key elements of PEP screening should include the following:

• Identification of new customers: During onboarding or the first interaction between a potential customer and the organization, reasonable methods should be used to determine whether an individual is a PEP. Customer records will need to be sufficiently complete to provide unique identification factors. The minimum information required for PEP screening should include the following:
  • Full name
  • Date of birth,
  • Gender,
  • Country of political exposure,
  • Politically exposed roles, date of appointment and years of service,
  • Current status or date of termination if no longer in office;
• Customer due diligence and risk assessment: Once a PEP has been identified, standard due diligence (CDD) should be applied. This can help the organization determine the level of risk associated with the individual. The product, type of business, geography and potential for financial crime should be taken into account;
• Approval required: Senior management approval is required to enter into a business relationship with a known PEP or high-risk customer;
• Continued screening of existing users: Enhanced monitoring of PEP users is required, including regular review to verify PEP status and additional potential risk factors;
• Employee training: A regular anti-money laundering training program is necessary to ensure that all employees understand the importance of PEP screening and how to maintain compliance;

How often to check PEPs

Just as there is no universal rule for checking PEPs, there is no timeframe for the frequency of checks. However, PEP checks should be carried out periodically, and not just when a new potential client is brought on board. A person’s status as a PEP may change, for example, and it is important to monitor this information.

Just because a PEP leaves office does not negate their influence or the opportunity for corruption. It will be important to continue to assess the risk level of a PEP even if they are no longer in the same position. PEP checks should check the current level of influence of the individual and whether there is any connection between their previous and current positions.

PEP checks should be an ongoing practice that is reviewed periodically based on the risk category in which a particular PEP has been placed. Those with higher levels of risk should be checked more frequently.

Lower-risk PEPs

Asking basic questions and documenting the answers can adequately mitigate the increased risk of money laundering if:

• there is no unusual funding;
• the transaction is regularly conducted by non-PEPs;

Higher-risk PEPs

You may need to ask additional questions and gather more documented evidence if:

• the jurisdiction that appointed the PEP is a higher-risk jurisdiction;
• the funding for the transaction is significant or from an unusual source;
• the type of transaction is higher risk;

Higher-risk PEPs may continue to pose some risk after they leave office. As a result, you may decide to conduct enhanced due diligence for a longer period of time.

A risk-based approach is only about how many questions you ask. You should ask as many as you need to be sure that the retention is consistent with the legitimate means available to the PEP and that you do not suspect money laundering.

PEP Verification Best Practices

PEP verification can help reduce risk and ensure that you remain compliant with AML and KYC regulations. PEP verification best practices may include the following:

• conduct a PEP verification. You can use automated PEP screening software or perform a manual PEP screening. This includes checking PEP lists;
• most governments issue PEP lists, but they are not always complete. Commercial databases often offer more comprehensive PEP lists that are updated more frequently. An extension of sanctions screening software, automated PEP screening tools can provide up-to-date and comprehensive information on domestic and foreign PEPs;
• Conduct a risk assessment and PEP Due Diligence. You will need to use a risk-based model to drive enhanced due diligence methods. Independent and reliable sources from the country of political exposure should be used during the PEP risk assessment;

The following information should be included in this risk assessment and due diligence process:

• verify the accuracy of personal documents and confirm the actual identity of the PEP, including their country of origin and date of birth;
• verify the source of the individual’s funds to ensure they are coming from legal channels;
• conduct a thorough background check on the individual for any potential misconduct;
• where necessary, verify that the person has not committed illegal activities at other financial institutions;
• continuously monitor PEP status. Conduct PEP reviews at regular intervals based on the client’s risk level, as PEP status may change. Continue to compare them with PEP lists and monitor their relationships and activities to ensure that there is no illegal dealing;
• immediately file a SAR (Suspicious Activity Report) if you suspect any illegal activities. Close family members and known associates of PEPs should also be closely monitored;