Politically Exposed Persons Or PEP. Subsequentially to any form of customer due diligence, you will most likely have to deal with a group of customers called PEPs. A PEP is nothing more than an individual. An individual that has been entrusted with a prominent public function or political role.
Politically Exposed Persons Or PEP
Why should this be of money laundering concern? These individuals’ positions can be abused to launder illicit funds or other predicate offenses such as corruption or bribery. Generally speaking, it is true that having PEPs as customers or doing business dealings with PEPs represents a higher money laundering risk for organizations. Examples in which politicians or their associates abuse their positions for money laundering purposes are manifold. You have to look no further than at the Panama Papers; this is quite a rich resource for such examples. Over 140 politicians from 50 countries have been implicated in the Panama Papers.
Qualifying as a PEP is one of the drivers for a customer to require enhanced due diligence. These customers will automatically be treated as high-risk customers. The circumstance that organizations such as banks and financial institutions have to apply enhanced due diligence on PEPs means that they have more effort to have PEPs as customers.
Elements Of PEP
The enhanced due diligence measures that have to be applied to PEPs contain four elements.
The first of these elements cannot be counted because it is the requirement to identify PEPs. How do you do this? There are many different databases in place that list persons with current or previous political roles or other prominent functions. In practice, though, something interesting is going on. Because banks want to avoid any regulatory fines, they sometimes over comply with regulatory requirements.
For some banks, the PEP status of an individual never expires. So, let’s say one of their customers was a member of a country’s parliament 20 years ago. Some banks still treat them as PEPs and therefore need to apply enhanced customer due diligence.
And then there is something else that is quite interesting to note. Some countries are extending the regulatory scope of PEPs to their close associates and immediate family members. Regarding associates, anyone who has a close business relationship with a PEP is also a PEP. The next consecutive question is, what is a close business relationship? This can also differ depending on the prudent regulators’ expectations and also from bank to bank. For some, a person has joint beneficial ownership of legal entities or legal arrangements with a PEP.
For others, a person is the sole beneficial ownership of a legal entity known to have been set up for the benefit de facto of the PEP. The PEP definition can also include immediate family members who, in turn, are also considered PEPs. This includes parents and children of PEPs, spouses or partners, siblings, and others. Determining who is a PEP and who isn’t is a science in itself.
Once a PEP is identified, enhanced due diligence measures need to be applied. These are the other three elements of what to do with PEPs. The actions that need to be taken are obtaining senior management approval for establishing or continuing 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.
Types Of PEPs
The AML/CTF Act classifies PEPs into three categories.
- Domestic PEP – someone in an Australian government body who holds a prominent public position or role.
- Foreign PEP – someone with a prominent public position or role in a government body in a country other than Australia. This includes foreign PEPs who work or live in Australia.
- PEP – a person with a prominent public position or role in an international organization, such as the United Nations (UN), the World Trade Organization (WTO), or the North Atlantic Treaty Organization (NATO).
A politically exposed person (PEP) in financial regulation is someone who has been entrusted with a prominent public function. Because of their position and potential influence, a PEP is more likely to be involved in bribery and corruption. In international forums, the terms “politically exposed person” and “senior foreign political figure” are frequently used interchangeably. Foreign officials are individuals who are considered government officials under the Foreign Corrupt Practices Act, or FCPA, and while definitions are similar to PEP, there are significant differences, and the terms should not be used interchangeably.