PEP: Politically Exposed Persons 

What are politically exposed persons (PEP)?

Politically exposed persons (PEPs) pose a particularly high risk if you are involved in a business relationship with them. PEPs are Individuals who hold or have held important public office in the past. Before entering into a business relationship with prominent PEP individuals or through organizations as customers or suppliers, running them through a PEP list and doing thorough due diligence on them would reveal any financial crimes they may be associated to avoid issues in the future.

PEPs natural person may include:

• Legislative Bodies: Political institution which holds the legislative power in a state, and often controls the executive power.
• Executive Bodies: A part of the government with authority and responsibility that enforces the law for the daily administration of the state.
• Security Forces: These are statutory organizations with an internal security commission tasked with the provision of public security.
• Judicial Bodies: Any public organization or branch of government that enforces the law and is responsible for the administration of justice.
• Bureaucrats: A bureaucrat within an institution of government can compose the administration of any organization of any size.
• Relatives of Politicians: Parents, children, siblings, in-laws, etc. are considered relatives of politicians. 

Why are PEPs risky?

Because of their influential public position, politically exposed persons are assumed to be at greater risk of corruption. PEPs are not infrequently found to be involved in the payment of bribes to influence decisions on the awarding of contracts, finance terrorism, evade tax or launder illegally obtained money.

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.

Conducting due diligence on PEPs 

PEPs call for enhanced due diligence, governance risk and compliance checks. 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 or financial regulators 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 action task 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 organizations 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 risk and compliance 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 political figure.

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 public position at national level.

What if an organization’s 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. For example, in 2015 a bank was fined 72 million pounds sterling because the required PEP checks had not been performed.

How can LexisNexis help with PEP due diligence?

Nexis Diligence+™ is a web-based third party risk and compliance check tool for conducting due diligence. This due diligence software aggregates PEPs data from multiple sources database to enable thorough checks of politically exposed persons or political figures.

START A FREE TRIAL