Who is a Politically
Exposed Person (PEP)?

 

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Politically Exposed Person (PEP)

A politically exposed person or PEP is an individual that holds a prominent public position or function in a government or international organisation. Their influential role makes them more susceptible to bribery, corruption, or other money laundering offences. Consequently, they are of high risk to financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs). 

Types of Politically Exposed Persons

Domestic PEPS 

Individuals that hold prominent public positions or functions domestically. This includes the Head of State or government, senior executives, and financial regulators. 

Foreign PEPs 

Individuals that hold prominent public positions or functions within a foreign country. This includes the Head of State or government, senior executives, and financial regulators of foreign countries. 

International PEPs 

Individuals that hold prominent public positions or functions in an international organisation. This can include members of the board in an organisation and senior management positions. 

Family members 

Individuals that are related to a PEP can also be classified as PEPs themselves. 

Close associates 

Individuals who have close relation with a PEP, whether it is of a social or professional nature. 

 If an individual is identified as a PEP, it does not indicate that they are involved in criminal activity, but it means that precautions may need to be taken as they are of higher risk to financial institutions and DNFBPs.

PEP Risk Levels 

It is imperative for entities to comprehend the nuanced risk levels associated with PEPs to effectively mitigate potential vulnerabilities within their operations. 

Very High (Level 1) 

PEPs at this level represent the highest tier of risk, encompassing individuals associated with corruption, illicit activities, or sanctioned regimes. Their positions of authority wield immense power, often associated with a greater probability of engaging in illegal activities. Dealing with such individuals demands rigorous scrutiny and comprehensive risk mitigation strategies. 

High (Level 2) 

PEPs designated as high risk occupy significant positions within governmental structures, such as heads of state, ministers, or senior officials. Their substantial influence and access to state assets heighten the potential for misuse, requiring vigilant monitoring and enhanced due diligence measures. 

Moderate (Level 3) 

PEPs falling within this category may hold mid-level governmental positions or positions within state-owned enterprises. Their proximity to power and resources necessitates a moderate level of scrutiny to mitigate potential risks adequately. 

Low (Level 4) 

PEPs categorised under this level typically hold low-ranking or ceremonial positions with minimal influence or access to state resources. While their affiliations warrant attention, the overall risk they pose is deemed low. 

Risk-Based PEP Screening 

In modern regulatory landscapes, risk-based politically exposed person (PEP) screening is pivotal for organisations to ensure ongoing compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. This screening revolves around the following aspects: 

Customer Due Diligence 

Customer Due Diligence forms the cornerstone of risk-based PEP screening, involving thorough verification of customer identities and assessment of associated risks. By implementing risk-based approaches, organisations can tailor due diligence measures to the specific risk profiles of customers, including PEPs. This targeted approach enables efficient allocation of resources while maintaining compliance standards. 

Ongoing Transaction Monitoring 

Continuous monitoring of customer transactions is essential for detecting suspicious activities, particularly concerning PEPs who may engage in illicit financial dealings. By employing advanced analytics and transaction monitoring tools, organisations can swiftly identify anomalies and deviations from expected patterns, thus mitigating potential risks associated with PEPs. 

 Training of Staff/Employees 

Equipping staff with comprehensive training on PEP identification and risk mitigation strategies is imperative for strengthening compliance efforts. Training programmes should cover the identification of PEPs, understanding associated risks, and protocols for conducting enhanced due diligence. By fostering a culture of compliance and awareness, organisations empower their staff to proactively address PEP-related risks. 

By leveraging these elements synergistically, organisations can fortify their compliance frameworks, enhance risk management capabilities, and safeguard against financial crime risks in the ever-evolving regulatory landscape. 

Financial Action Task Force (FATF) Recommendations 

The Financial Action Task Force (FATF)  is an inter-governmental organisation with the focus of reducing and fighting against money laundering and terrorist financing. The FATF devise a set of recommendations that are of international standard for combating such offences. 

The current FATF Recommendations (2012) ensure that financial institutions take the appropriate action to identify whether their customers or beneficial owners are PEPs, or if they are related to, or in connection with a PEP. These measures are taken to prevent the misuse of the financial system, non-financial businesses, and professions by PEPs, and to also identify potential misconduct. 

  

For more check out this blog post: Why you need PEP and Sanctions Screening for your business compliance