A politically exposed person (PEP) is an individual that occupies a prominent political, high profile or public office. Occupying such a position puts them at higher risk of fraud, bribery or corruption. Politically exposed persons are commonly referred to as PEPs or senior foreign political figures, especially at international forums.
The peculiar situation of politically exposed persons makes them of high risk to financial institutions and designated non-financial businesses alike. This is why it is recommended that a more elaborate KYC be done when dealing with PEPs. Ideally, enhanced due diligence is preferred.
What is a PEP List?
This is a watch list that contains individuals who have in the past or are still classified by the European Union as politically exposed persons. The PEP list is an elaborate document that makes it easier for businesses to assess existing or potential customers to adequately classify their risk profile. Most European countries have respective PEP lists that they maintain - updating them as need be.
However, do note that a name appearing on the list does not guarantee the PEP status of the individual. It is possible that an individual on the list no longer fits the PEP classification requirements or has been recently classified as one. As a result, businesses still need to consult external data sources that maintain a real-time updated list of people defined as PEP.
What are the Types of Politically Exposed Persons?
Politically exposed persons can be categorised into the following:
1. Domestic PEPs:
This type of PEPs referred to the category of individuals who are trusted with prominent domestic public functions or offices. Examples include the head of state of a government, Military officers, senior executives, judicial officials, senior government officials, prominent political party officers, and senior executives of state-owned companies in the country.
2. Foreign PEPs:
Similarly to domestic PEPs, foreign PEPs cover the category of individuals who hold prominent functions or positions within a foreign country. Examples include the head of state of a government, Military officers, senior executives, judicial officials, senior government officials, prominent political party officers, and senior executives of state-owned companies in the country.
3. International PEPs:
The International PEPs category covers individuals who hold prominent public functions or positions in an international organisation. It includes members of the board in such an organisation as well as senior management executives.
4. Family Members:
By extension, family members of politically exposed persons can also be classified as politically exposed persons themselves. This is because they are just as susceptible to associated risks of bribery and corruption as the main PEPs themselves.
5. Close Associates:
Close associates of a PEP are also classified as PEPs themselves. This holds whether it is a professional or social relationship.
Note: An individual being classified as PEP does not guarantee their involvement in criminal activities. Instead, it only indicates that necessary precautions may need to be taken by financial institutions when doing business with them due to the higher risk they pose.
Financial Action Task Force (FATF) Recommendations on Dealing with PEPs
The Financial Action Task Force (FATF) is a global intergovernmental organisation that has the sole purpose to fight against the rise of money laundering and terrorist financing. They achieve these through Anti Money laundering laws and standards that relevant institutions are to abide by globally. Breaking such laws could incur a penalty or fine.
According to FATF recommendation, a politically exposed person should be dealt with, with caution. It is important that businesses take the detailed approach of identifying whether a customer falls within the PEP category or if they are in any way related to one. This is essential in conducting relevant risk assessments that will guide the business relationship with such individuals as long as it lasts.
How to Identify Politically Exposed Persons
Many financial institutions today, take the approach of building a list of designated PEPs globally to keep an eye out for. However, while this may be helpful, it puts a strain on who and what defines a politically exposed person as the definition varies from one country to another.
Besides each country defining its PEP criteria, the FATF also issue new global AML/ CTF laws and recommendations for countries to adopt. Incorporating all of these creates a headache for financial institutions looking to compile a definitive PEP list and implement risk management measures.
A simpler approach will be to follow the foundational FATF guide on the criteria that define a politically exposed person. They include:
- Political Party Officials
- Government Officials
- Senior Executives
- Close Associates and Relatives
a. Political Party Officials
Political party officials are individuals appointed as senior officials to roles in major political parties. The category cuts across those holding domestic as well as foreign positions.
b. Government Officials
Government officials as politically exposed persons refer to previous and currently appointed individuals in a domestic or foreign government. Examples include those working in elected or unelected roles, the executive, legislative or judicial arms of a government, or top military officials.
c. Senior Executives
This PEP category refers to top executives in internal organisations or government-owned commercial enterprises. Examples include directors and board members.
d. Close Associates and Relatives
The close associates or relatives to any of the categories listed above can also be classified as a PEP. This is because the PEP in question may have weak links around them like immediate family members, close professional associates, government contacts or senior executives.
Other notable mentions include high-ranking members of the Central Bank, ambassadors, judges and members of the court.
Implementing an Effective PEP Monitoring & Detection System for Businesses Today
To remain on the safe side of compliance, businesses are required to implement an effective PEP screening process as part of their customer AML program. This is to satisfy compliance requirements and not be used as a money laundering tool. Additionally, the business needs to be aware of the appropriate PEP regulations in the region they operate in order to implement proper AML/CFT measures against money laundering and its related crimes.
Some of the most important things to keep in mind when building an effective PEP screening process include:
- Real-time Quality Data:
The effectiveness of a PEP screening process largely depends on the quality of the database it runs through. This database should be always up to date with high response speed and accuracy.
- Additional Screening:
Good quality data is not enough, as an effective PEP screening process should be supported by extra layers of screening in case of slips through the crack. As a rule of thumb, this must include adverse media screening.
- Real-time Monitoring:
PEP regulations change globally and based on regions too, therefore, a business must monitor and update its process with the latest regulatory laws and trends. Not staying updated could cost a such business dearly.