PEP: Politically Exposed Persons
When working with PEPs you need to be particularly careful.
Detect cover-ups in order to identify links.
What are PEPs?
PEPs are individuals who are or have been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing.
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. Below are several examples of PEP positions which LexisNexis captures to assist in identifying PEPs:
Legislatures
Legislative roles include individuals who are elected or appointed to a senior position within a government’s legislative branch and who are typically responsible for law-making in a sovereign nation. Senior roles include officials who occupy offices at the national, regional, and in certain cases the local level and their governing institutions for each sovereign state and entity.
Govt Branch Member
A government branch member is an individual elected or appointed to a senior or civil service position within the national executive branch. Civil servants are appointed through a structured, law-governed hiring process and hold permanent roles within government institutions. Unlike elected officials, their employment remains stable regardless of political changes.
Militaries
A military role refers to individuals who currently serve or have served in a sovereign state’s armed forces, making combat, operational, or policy decisions. It also includes leaders within national security forces and military advisers to senior government officials. Judicial bodies are public institutions responsible for enforcing the law and administering justice.
Chiefs of State
A chief of state is the formal public representative of a sovereign nation, with responsibilities that vary by political system. This category includes heads of government, who oversee daily executive and legislative functions, and heads of state, who serve as the nation’s highest-ranking representatives.
Diplomats
An individual who represents the interests of a government in its sovereign relations with other sovereign states, entities, and international organizations or regional organizations through an embassy or permanent mission.
Family Members
Individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership.
Performing Due Diligence on PEPs
FATF requires that financial institutions apply a risk-based approach. This requires that regulated entities perform customer due diligence. What risk management system is appropriate for a financial institution depends on the nature of the institution’s business, the nature of its client profile, expected transactions and on other risk factors.
However, when performing customer due diligence FATF provides that this should include,
- Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.
- Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.
- Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
- Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.
In cases with higher business risk relationships FATF requires additional review known as enhanced due diligence such as,
- having appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person;
- taking reasonable measures to determine whether a customer or beneficial owner is a domestic PEP, a person who is or has been entrusted with a prominent function by an international organization, or a foreign PEP which FATF says always requires enhanced due diligence;
- obtaining senior management approval for establishing (or continuing, for existing customers) such business relationships;
- taking reasonable measures to establish the source of wealth and source of funds; and
- conducting enhanced ongoing monitoring of the business relationship.
FATF permits the use of Third Party providers as part of a robust customer due diligence program.
Nexis Diligence+ is a web-based third party risk and compliance tool for conducting due diligence. This due diligence software aggregates PEPs data from multiple sources to enable thorough checks of politically exposed persons.
Search & Retrieve API enables ongoing monitoring of specific records, such as PEP and watchlists, for integration with in-house systems for screenings.
Why are PEPs potentially risky
Due to their position and influence, it is recognized that many PEPs are in positions that can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing.
What risks do organizations face if their PEP due diligence is insufficiently thorough?
Organizations that fail to perform adequate due diligence on their clients, business partners, and supply chains risk not only reputational damage but also fines. For example, in 2015 a bank was fined 72 million pounds sterling because the required PEP checks had not been performed.
Frequently Asked Questions
Why are PEPs particularly risky?
Politically exposed persons are assumed to be at greater risk of corruption and money laundering because of their influential position.
Who is classed as politically exposed?
Who is classed as politically exposed?
What is a politically exposed domestic person?
People who hold position in domestic public offices, like Heads of State Government, judicial or military officials, senior officials of state owned corporations, important political party officials.
Is a mayor a politically exposed person?
It would depend on who is the observer. Mayor of California is a domestic PEP for an American bank but a foreign PEP for its European counterpart.
How long is a person considered a PEP?
A Politically exposed person is continued to be considered a PEP for a period of at least 12 months from the day he/she leaves the public office position.
What is PEP and sanction list screening?
Politically Exposed Persons and Sanctions screening allows for companies to avoid regulatory and reputational risks by identifying sanctioned companies and the risks involved allowing to mitigate them.
Get in touch
E-Mail: information@lexisnexis.com
Telephone number: +31 (0)20 485 3456