PEP: Politically Exposed Persons
If you're a business, it's important to be aware of politically exposed persons (PEPs) and the risks they pose. PEPs are individuals who have been entrusted with a prominent public function, such as politicians, government officials, and judiciary members. Because they often have access to sensitive information or hold powerful positions, they can be targets for bribery or extortion. Protecting your business from dealings with a politically exposed person is essential for mitigating risk. Here's what you need to know.
What is a Politically Exposed Person (PEP)?
According to the Financial Action Task Force, PEPs (meaning politically exposed persons) are natural persons who hold or have held public office—either domestically or in a foreign country.
For businesses, a politically exposed person (PEP) can pose a high risk. Before entering into a business relationship of any kind, it’s important to conduct thorough due diligence. Whether it’s an international organization, customer or supplier, running them through a PEP list will reveal any financial crimes they may be associated with—as well as minimizing future risk.
Examples of a Politically Exposed Person (PEP):
Government Officials
For those trusted with senior government positions—either domestically or in foreign countries—PEP status applies. This includes individuals in prominent public functions in: law enforcement, executive bodies, security forces or the judicial branches of government. Bureaucrats also fall under this category, as they hold significant authority and responsibility.
Senior Politicians
Senior figures in major political parties are associated with higher risk, and should be subjected to a PEP screening. This includes senior political figures in foreign countries, as well as officials appointed to roles closer to home.
Senior Executives
Senior management roles are considered a PEP risk, as they are more likely to be involved in crimes within the financial system—such as laundering money and terrorist financing. This applies to directors, senior executives and board members at either a local or international organisation.
Family Members & Close Associates
According to the Financial Action Task Force, this definition also includes immediate family members of those in office—as well as extended family e.g. in-laws. PEPs’ close associates, whether social or professional, are also generally given PEP status.
Why are PEPs particularly risky?
Because of their influential position, PEPs are assumed to be at greater risk of corruption and money laundering. PEPs are often found to be involved in the payment of bribes to:
For example, the Panama Papers published in 2016 revealed details of 140 PEPs who had used letterbox companies to launder money or disguise their ownership of dirty money.
- Influence decisions on the awarding of contracts.
- Finance terrorism.
- Evade tax.
- Launder illegally obtained funds.
For example, the Panama Papers published in 2016 revealed details of 140 PEPs who had used letterbox companies to launder money or disguise their ownership of dirty money.
Be on the alert: Doing Due Diligence on PEPs
PEPs call for enhanced due diligence checks under Section 6 of the German Money Laundering Act (GWG). Among other things, the checks must clarify the origin of assets in order to prevent money laundering. In a risk-based approach, PEPs are automatically classed as high risk. A robust PEP check uses PEP lists of politically exposed persons. The regulatory authority established by the government is responsible for providing guidance, assessing and enforcing compliance with PEP standards to banks. Banks may oversee enhanced due diligence measures or legal actions based on the risk assessment. This may require intensive due diligence for higher-risk customers, especially those for whom the sources of funds are not clear.
In many businesses, there is a widespread but mistaken idea that because you have worked with your business partners for many years, you know them sufficiently well and therefore do not need to perform a thorough check. This insight is usually lacking if you go further along the supply chain and realize that it affects the beneficial owner. This means that it is essential to check suppliers and also their suppliers against PEP lists to see if someone is a PEP—whether a senior foreign political figure or a senior executive in the financial system.
With regard to holders of public office at sub-national level, PEP checks are usually regarded as unnecessary unless the person’s political importance is similar to that of a person in a similar position at national level. In addition, KYC PEP checks are not necessary for business relationships that involve only occasional or very small financial transactions.
Nexis Diligence® is a web-based solution for conducting due diligence. It aggregates PEPs data from multiple sources to enable thorough due diligence checks.
A Search & Retrieve API enables ongoing monitoring of specific records, such as PEP and watch lists, for integration with in-house systems for proactive risk management and anti-money laundering (AML) checks.
What risks do organizations face if their PEP due diligence is insufficiently thorough?
Organizations that fail to check their business partners sufficiently thoroughly can expect not only reputational damage but also fines of an unlimited amount to stay safe from this avail Anti-money laundering services (AML) For example, in 2015 a bank was fined 72 million pounds sterling because the required PEP checks had not been performed. To stay safe from this, avail anti-money laundering services (AML) and actively manage PEP risk.
Guidelines on managing PEP risks
Our guidelines summarize the most important information on how to manage PEP risk. Read about issues including the risks of working with PEPs, where the PEP risk is greatest and how organizations can avoid PEP risks. There are certain levels of PEP risk: dependent on the nature of their position, and their position in the political system.
Frequently Asked Questions
Answers to some popular questions
What are domestic PEPs?
Unlike foreign PEPs, domestic PEPs are people who hold positions in domestic public offices. This can include Heads of State Government, judicial or military officials, senior executives of state owned corporations, and important political party officials.
Is a mayor a politically exposed person?
It would depend on who the observer is. The mayor of California, for example, is a domestic PEP for an American bank: but would fall into the category of foreign PEPs 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 one year from the day he/she leaves the public office position.
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