A Politically Exposed Person (PEP)

What is a 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.

The Financial Action Task Force (FATF) which has been empowered to establish anti-money laundering (AML) and counter terrorist financing guidelines, requires that financial institutions and designated non-financial businesses and professions (DNFBPs) implement measures to prevent the misuse of the financial system and non-financial businesses and professions by PEPs, and to detect such potential abuse if and when it occurs. 

FATF does not provide a list of PEPs, instead requiring that regulated entities take a risk-based approach when developing standards that are specific to the company and its own risk profile.

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.

Real-World Examples of High-Risk PEPs

Teodoro Nguema Obiang Mangue, Vice President of Equatorial Guinea, has been the subject of multiple international corruption investigations. In 2014, the U.S. Department of Justice seized around $30 million in assets, including luxury vehicles and a Malibu mansion, linked to embezzled public funds. In 2023, further assets were confiscated, including a superyacht and several luxury properties.

Pavlo Lazarenko, former Prime Minister of Ukraine, was convicted in 2004 for money laundering, wire fraud, and extortion, exposing how political power can facilitate large-scale financial crimes. These cases illustrate how PEPs can exploit their positions for illicit financial gain, highlighting the critical need for PEP screening and continuous monitoring within compliance programs.

How to Manage PEP Risk Effectively

To reduce exposure, organisations should adopt a risk-based approach to PEP management, which includes:

• Conducting enhanced due diligence (EDD) for all identified PEPs and their associates.
• Implementing ongoing monitoring systems to detect suspicious behaviour.
• Ensuring compliance teams are equipped with reliable PEP screening tools and global watchlist data.

These measures help financial institutions comply with FATF recommendations, AML regulations, and international sanctions frameworks while protecting against reputational and financial harm.

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.

UK PEP Regulations and Compliance Explained

Politically Exposed Persons (PEPs) are subject to strict regulatory requirements in the UK and internationally due to their potential exposure to corruption, bribery, and financial crime. The UK’s financial regulations require institutions to implement robust Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) controls to identify, assess, and monitor PEP-related risks effectively.

UK Regulatory Framework for PEPs

Under the Financial Conduct Authority (FCA), the UK provides clear guidance for financial institutions on managing relationships with PEPs.

Key legislation includes:

• The Proceeds of Crime Act (POCA) 2002, and
• The Money Laundering Regulations 2017.

Together, these form the foundation of the UK’s AML and CTF framework. They require firms to apply Enhanced Due Diligence (EDD) when engaging with PEPs or individuals linked to them. This includes verifying the source of funds, understanding the nature of the business relationship, and continuously monitoring transactions to detect suspicious activity.

FATF and International PEP Compliance Standards

From a global perspective, the Financial Action Task Force (FATF), an intergovernmental organisation that sets international AML standards has established principles that the UK and other member countries follow.

The FATF guidelines ensure that financial institutions implement effective risk-based approaches to prevent misuse of the financial system by PEPs. This involves:

• Conducting enhanced monitoring of PEP business relationships.
• Implementing strong internal controls and reporting mechanisms.
• Ensuring ongoing compliance with cross-border due diligence obligations.

Compliance Requirements for Financial Institutions

To remain compliant with UK and FATF standards, financial institutions must:

• Establish and maintain comprehensive risk management frameworks.
• Keep up-to-date PEP screening lists and monitoring tools.
• Apply enhanced due diligence for all PEPs and their close associates.
• Conduct ongoing transaction monitoring and periodic reviews.

These measures enable institutions to identify and manage potential money laundering and reputational risks linked to PEP exposure.

UK PEP Screening Regulations

The UK Government has introduced The Money Laundering and Terrorist Financing (Amendment) Regulations 2023 (SI 2023/1371) as a Statutory Instrument to modify the treatment of Politically Exposed Persons (PEPs) within the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Specifically focusing on domestic PEPs – individuals with significant public roles in the UK – the amendment directs banks and regulated firms to initially categorise them as lower risk compared to non-domestic PEPs. This aims to reduce the burden on domestic PEPs and their associates by requiring a lower level of enhanced due diligence, unless additional risk factors are present. The change aligns with the government's broader strategy for anti-money laundering and counter-terrorism financing controls, emphasising a proportionate and risk-based approach to prevent undue hardships for law-abiding citizens holding prominent public positions.

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.