Politically Exposed Person (PEP)—All You Need to Know

Identifying a PEP isn’t an easy task, but the risk of failing to do so can  result in six-digit fines.

In 2015, Barclay’s bank was fined £72 million for arranging a transaction without conducting PEP due diligence. This is just one example underscoring the importance of PEP screening for  compliance, effective anti-money laundering measures. 

Sumsub has prepared a guide on who PEPs are, how to identify and work with them, and key strategies to minimize risks and ensure compliance.

What is a Politically Exposed Person (PEP)?

A Politically Exposed Person (PEP) is someone who holds or has held a notable public position, such as government officials or a high net-worth individual. Such clients pose a higher risk to businesses as they may potentially misuse their influence for financial gain, typically engaging in corruption or bribery. Their close relatives and close associates (RCAs)  may also obtain this status due to their potential involvement in circumventing AML controls or concealing the origins of illicitly obtained funds.

While working with PEPs requires additional scrutiny and thorough risk management, being identified as a PEP does not imply criminality.

The term ‘PEP’ first appeared in late 1990s, following the “Abacha Affair”—a scandal involving a Nigerian dictator who, together with his family and associates, embezzled vast sums from the government and transferred it to foreign bank accounts. This case raised international concern, causing global organizations, such as The Financial Action Task Force (FATF) to enact measures to prevent exploitation by politicians and high-ranking officials.

Today, identifying and tracking PEPs remains one of the main priorities—and challenges—for authorities and the private sector, However, differing legislative systems and regulatory frameworks make it difficult to give a consensus on the term and create rules that could be applied universally.

3 Types of PEPs

Most commonly, PEPs are categorized into 3 main types: Domestic PEPs, Foreign PEPs and International Organization PEPs. Let’s break it down:

PEPs: List of Personas

The list of personas that may receive a PEP status is extensive, ranging from government officials to CEOs. The positions include:

·         Heads of state:This includes presidents, prime ministers, monarchs or any other official  with the highest  leadership in a nation. 

·         Senior government officials: This includes cabinet ministers, deputy or assistant ministers, and individuals who hold key positions in government departments or agencies, responsible for shaping and implementing government policies.

·         Judiciary leaders: This includes chief justices, senior judges, and other judicial officials who have significant influence over the interpretation and application of laws.

·         High-ranking military officers: This includes senior military figures, including generals, admirals, and other top brass, who play critical roles in national defense and security decisions.

·         Senior executives of state-owned enterprises: This includes CEOs, managing directors, and board members of government-owned or controlled corporations, particularly those in critical sectors such as energy, finance, and defense, who have significant control over large sums of public funds.

The definition of a PEP extends beyond individuals directly holding prominent positions. It can also include their relatives and close associates (RCAs).

Government-issued PEP lists

For effective Anti-Money Laundering compliance, financial institutions and businesses should access a comprehensive PEP database. These databases vary depending on the country and the issuing authority. They are either publicly available or accessible through subscription services. PEP lists allow you to screen your clients and their close networks for PEP status.

Government-issued PEP lists vary in  scope and detail,  reflecting the legislative and regulatory priorities of each country. 

Here are most commonly used PEP databases:

·         United Nations (UN): The UN provides a list of individuals and entities subject to measures imposed by the Security Council, targeting those involved in terrorism, nuclear proliferation, and other threats to international peace and security.

·         Office of Foreign Assets Control (OFAC): OFAC, part of the U.S. Department of the Treasury, administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. Its lists include Specially Designated Nationals (SDNs) and Blocked Persons, among others.

·         Bureau of Industry and Security (BIS): Operating under the U.S. Department of Commerce, BIS issues lists that include entities restricted from receiving U.S. exports due to involvement in activities contrary to U.S. national security and foreign policy interests.

·         Her Majesty’s Treasury (HMT): The UK’s financial authority publishes lists of individuals and entities subject to financial sanctions, aligning with both UN and EU measures as well as UK-specific sanctions.

·         State Secretariat for Economic Affairs (SECO): SECO administers Switzerland’s economic sanctions, publishing lists of individuals and entities subject to financial restrictions.

·         European Union (EU): The EU issues its own list of persons, groups, and entities subject to financial sanctions within the EU, reflecting its foreign and security policy.

PEP fed flags: Risk levels based on FATF Guidelines

The FATF guidelines on red flags play a crucial role in defining PEP risks. 

Here, PEP risk levels are categorized based on several factors, including:

Use of third parties: Attempting to shield their identity and obscure ownership by using corporate vehicles, intermediaries, or introducing family members/associates as legal owners.

History of allegations: Any previous allegations, investigations, or sanctions related to corruption, money laundering, or other illicit activities.

Transaction patterns: Conducting suspicious transactions and financial activity.

Source of wealth: Involvement in a high-risk industry/sector like banking, finance, mining, privatization, arms trade, etc.

Geographic location: Transactions connected to countries known for high levels of corruption, lack of effective PEP regulations in AML controls, or tax havens.

Position and role: The nature of the political exposure, such as the level of seniority and the specific responsibilities of the position. 

Complex ownership structures: Use complex corporate structures, shell companies, or trusts to conceal  assets or the true beneficial ownership of funds.

Refusal to provide information: Reluctance  to disclose necessary information, such as source of funds or the purpose of transactions.

PEP risk levels Every regulated company has to meet certain guidelines for working with a PEP. After determining that a client is a PEP, companies are responsible for carrying out Enhanced Due Diligence (EDD) and ongoing monitoring. 

All of our PEP screenings are performed in compliance with FATF guidelines, which divide PEPs into four categories based on their risk level:

Tracking changes in PEP status

PEP screening has long been a critical compliance measure in banks and financial institutions. Making PEP checks a fundamental part of the customer onboarding process is essential, but setting up regular checks as a daily routine is no less important. 

Keeping up with changes is crucial in maintaining a high level of KYC and Anti-Money Laundering awareness, as PEP status is anything but static. It’s not a set-it-and-forget-it affair. Today’s mid-level official could be tomorrow’s head of state. Continuous monitoring is crucial, as PEP status and associated risks can evolve over time.

Following the FATF’s recommendations, companies are encouraged to implement a risk-based approach to PEP screening and track PEP status changes in a timely manner. This involves:

• Conducting Customer Due Diligence (CDD) on an ongoing basisTraining employees to detect such changes
• Checking adverse media sources
• Scouring commercial databases and government PEP lists

How to work with PEPs

Let’s summarize the process of Politically Exposed Person screening. According to FATF guidance on Politically Exposed Persons, proactive steps must be taken in assessing the risks factors. They include:

• Checking your client against PEP database (also known as PEP list)
• Enhanced due diligence when onboarding a customer
• Introducing PEP checks as part of your KYC and AML policy

In case a PEP is detected, companies have to:

• Get the approval of senior management before establishing a business relationship
• Verify Source of Wealth and Source of Funds
• Inform staff members about the establishment of a business relationship with a PEP
• Closely monitor such customers throughout the business relationship.

In case suspicious behavior occurs, companies should immediately report the case to a relevant governmental agency.

In today’s economic and political climate, PEP and sanctions checks are helping companies adhere to regulatory standards, avoid substantial fines, and prevent reputational damage.Therefore, for a more thorough screening process, a professional PEP screening solution is recommended to check a broader spectrum of databases, including specialized commercial databases that list PEPs, their relatives, and close associates (RCAs), and State-Owned Enterprises (SOEs).

FAQ

• What is a PEP check in AML?

  PEP checks in Anti-Money Laundering (AML) is the act of screening individuals to determine if they are considered as a PEP.

• Is PEP screening mandatory?

  While there are no specific laws and regulations mandating PEP screening, financial institutions and businesses are required to take reasonable measures to protect themselves and their customers, and PEP screening is a mandatory component of AML and counter-terrorism financing (CTF) compliance programs. Non-compliance with PEP screening requirements can lead to significant financial penalties, sanctions and suspensions of license to operate.

• What does PEPs mean in banking?

  PEP in banking refers to individuals who hold or have held a prominent public function, making them potential higher-risk customers for financial institutions due to their increased opportunity for involvement in bribery, corruption, or money laundering activities. Banks and other financial entities are required to implement Enhanced Due Diligence processes (EDD) for PEPs to mitigate these risks, in compliance with Anti-Money Laundering (AML) regulations and to protect the integrity of the financial system.

• What positions would be considered a politically exposed person?

  Positions include heads of state, senior politicians, high-ranking military officials, and top executives in state-owned corporations, among others.

• Why are PEPs high-risk?

  PEPs are considered high-risk because their position and influence can potentially be exploited for money laundering, corruption, or bribery, which can lead to financial institutions inadvertently facilitating these illegal activities.

• What is the difference between a sanction and a PEP?

  PEP checks identify and monitor individuals in significant public roles to mitigate risks of money laundering and corruption, while sanction checks screen against lists of individuals, entities, or countries subject to international or national sanctions for activities like terrorism or human rights abuses, aiming to prevent transactions with or support for these sanctioned parties. 

• Why do you need PEP checks on your new and existing clients?

  PEP screening is not about barring all transactions with politically exposed individuals; rather, it’s about understanding the risks and making informed decisions. Screening involves identifying whether individuals or entities your business deals with are PEPs or are closely related to PEPs, assessing the level of risk associated with these relationships, and applying due diligence measures appropriate to that risk level.