What is a Politically Exposed Person (PEP)?
A politically exposed person (PEP) refers to an individual – whether foreign or domestic – with a prominent public function, as well as his or her family members and close personal or business associates. Because of their position and potential influence, PEPs often present a greater risk for involvement in such crimes as corruption and bribery.
It is important to note, however, that just because someone is a PEP, it doesn’t necessarily mean they are engaged in criminal activity.
Types of Politically Exposed Persons (PEPs)
It is important to understand what type of politically exposed person you are screening, as this will help you better understand the risk that they may pose, whether your organisation operates in the UK or internationally.
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) identifies three types of PEPs:
- Domestic politically exposed person - entrusted with a prominent public role in a national government.
- Foreign politically exposed person - a high ranking political figure in a foreign country.
- International organisation politically exposed person - prominent public members of an international organisation, such as the UN, WTO or NATO.
Examples of PEPs
Examples of politically exposed persons include:
- Heads of government or heads of state
- Senior politicians and government officials
- Top military or judicial officials
- Senior executives of government owned organisations
- High ranking political party members
- Close associates such as immediate family members and support staff are also considered PEPs.
Why are PEPs Considered High-Risk?
Politically Exposed Persons (PEPs) are often considered high-risk due to the nature of their role and influence in society. Given their access to public resources and influence over decisions involving significant amounts of money, they are frequently scrutinised to ensure they aren't participating in illicit activities such as corruption, bribery, money laundering, or other forms of financial misconduct.
A key reason why PEPs pose a higher risk is their potential susceptibility to corruption. They are frequently targets for entities seeking favourable legislation, contracts or regulatory outcomes, which can lead to instances of bribery or embezzlement. In other cases, PEPs themselves may exploit their positions to acquire wealth illegally, using complex mechanisms to disguise the source of these funds.
Another significant risk associated with PEPs is the potential for money laundering. The high-level positions that PEPs hold, combined with their ability to influence monetary flows, make them well-positioned to facilitate significant transactions that could be used to launder money.
Consider the high-profile example of Teodoro Nguema Obiang Mangue, the Vice President of Equatorial Guinea and son of the country's leader. In 2014, the US Department of Justice seized assets worth around $30 million that were traced back to Mangue. The assets, which included a Malibu mansion and a collection of luxury cars, were found to be funded by corrupt activities, including the embezzlement of public funds and money laundering. In February of 2023, additional assets were seized, including a superyacht and two palatial homes.
Another case study involves former Ukrainian Prime Minister, Pavlo Lazarenko. He was convicted in 2004 for money laundering, wire fraud, and extortion, reflecting significant financial crimes facilitated by his political influence.
These examples underline why PEPs are seen as high-risk clients. Their social position and the potential for their manipulation, either through external influences or their own motivations, make them a significant risk for financial institutions. It is crucial that institutions perform stringent due diligence processes when dealing with PEPs to mitigate these potential risks.
Why Dig Deeper?
Whether they’re in government or another organisation, politically exposed persons pose a higher risk of exposure to money laundering and other economic offences. It’s important to identify and investigate any potential PEPs, as a partnership could expose your business to potential risks. If a potential customer or business partner is identified as a PEP, you must ensure effective risk management with an enhanced due diligence procedure.
Money Laundering
Money laundering is the ‘cleaning’ of large amounts of illegally obtained funds to conceal its original origins, by passing ‘dirty’ money through bank transfers and various entry points in the financial system. PEPs have a high risk of being involved in such activities, and should be investigated as such.
Corruption
Corruption is the misuse of power and position by an individual for personal gain. It can involve such acts as abusing their function, position or influence; extorting money or other articles of value; embezzling funds; self-dealing; and bribery. Corruption impacts political stability, economic development, the financial landscape and crime.
Bribery
Bribery, a form of corruption, is promising or giving something of value – such as money, position, privilege or preferential treatment – in return for corrupt behaviour. Bribing or attempting to bribe public officials – an unfortunately prevalent practice worldwide – is a crime with serious penalties for both individuals and organisations. In today’s global business environment, it’s critical to minimise the legal and financial risks of a PEP impacting your organisation. This means doing your research to better understand your customers, your employees and your vendors.
PEP Regulations and Compliance
Politically Exposed Persons are subject to stringent regulations both from a UK and an international perspective. These regulations aim to mitigate the potential risks they pose due to their influence and susceptibility to corruption or financial crimes.
The UK, under the Financial Conduct Authority (FCA), defines PEPs and provides guidance for financial institutions in dealing with them. The Proceeds of Crime Act 2002 (POCA) and the Money Laundering Regulations 2017, for instance, set the UK's legal framework for Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) efforts. These regulations stipulate that financial institutions must apply enhanced due diligence measures when establishing business relationships with PEPs.
From an international perspective, the Financial Action Task Force (FATF), an intergovernmental organisation, has established guidelines that many countries, including the UK, have adopted. The FATF requires member nations to ensure that financial institutions implement adequate measures to prevent misuse of their services by PEPs. This includes conducting enhanced ongoing monitoring of business relationships with such persons.
Compliance requirements for financial institutions and other entities dealing with PEPs include establishing appropriate risk management systems, maintaining up-to-date PEP lists, applying enhanced due diligence procedures, and continuously monitoring PEP-associated transactions. The goal is to identify and manage potential risks effectively.
Non-compliance with these regulations can have severe consequences for institutions. In the UK, failure to comply with money laundering regulations can result in hefty fines, reputational damage, and in extreme cases, imprisonment. For instance, under POCA, penalties for non-compliance can range from unlimited fines to up to 14 years of imprisonment. In addition, the FCA can impose administrative sanctions, such as public censures and prohibitions on individuals performing certain roles within regulated firms.
Risk Management and Mitigation
Effective risk management and mitigation strategies are essential for institutions dealing with Politically Exposed Persons. These practices begin with accurate identification of PEPs. An institution should have access to up-to-date and comprehensive databases to identify whether a potential client or existing customer is a PEP. Some firms use sophisticated software that cross-references client data with PEP lists from reliable international sources.
Once a PEP has been identified, the next step involves a thorough risk assessment. This should consider the nature and extent of the PEP's political exposure, the level of public transparency in their role, their country of origin or operation, and any historical or ongoing allegations of corrupt activities. The risk assessment should also scrutinise their financial behaviour, looking for irregularities or suspicious transactions.
The role of continuous monitoring in managing PEP risk cannot be overstated. Institutions should regularly update their PEP list and assess any changes in a PEP’s status or risk level. Changes in a PEP's political role, legal status or behaviour should trigger a re-evaluation of their risk profile. Automated monitoring systems can be valuable tools in maintaining up-to-date assessments and identifying potential red flags in real time.
Risk mitigation measures include applying enhanced due diligence, limiting exposure to high-risk PEPs, or in some cases, severing the business relationship if the risk is deemed too high.
Finding Relevant Information
Without the right resources, background checks can be time-consuming and overwhelming, as they involve using large databases to uncover reputable, factual information. With robust background checks, you can identify PEPs before you establish a business relationship with them, as well as monitor your current employees, partners and customers for potential legal, financial or reputational risks.
A background check is a comprehensive review of an individual or an organisation for information including:
- Names
- Dates of birth
- Identification numbers
- Photographs
- Education
- Employment history
- Commercial activities
- Financial records
- Criminal records
Challenges in PEP Identification and Management
The process of identifying and managing Politically Exposed Persons can be fraught with difficulties. One of the most common challenges lies in the ambiguity of who should be classified as a PEP. While senior political figures are obviously included, the status of lower-ranking officials or their family members can sometimes be unclear, particularly when considering different cultural contexts and political structures.
Globalisation and digital technology have added to the complexity of identifying PEPs. With the ease of cross-border transactions, PEPs can hold accounts or perform transactions in multiple countries, making it more challenging for any single institution to accurately track and monitor their activities.
Financial institutions also face the risk of "false positives" – individuals wrongly identified as PEPs due to shared names or other identifying features. These can lead to unnecessary resources being devoted to unnecessary investigations.
Overcoming these challenges requires a comprehensive and ongoing approach. Institutions need access to extensive, regularly updated databases to ensure the accuracy of their PEP lists. Investment in advanced analytics tools can also help manage the risk of false positives by cross-referencing and verifying customer information.
Continuous education and training for employees involved in compliance and risk management roles is also essential. This training should cover regulatory updates, best practices, and case studies to ensure that they are well-equipped to identify and manage PEP-associated risks effectively.
Addressing these challenges requires an understanding of the evolving nature of the risks associated with PEPs, a commitment to thorough due diligence, and an investment in both technology and personnel. By doing so, organisations can enhance their ability to manage PEP risk effectively, protecting both their reputations and their bottom lines.
