Work with Politically Exposed Persons in Financial Institutions

Posted in Markets Compliance on February 28, 2024
Politically Exposed Persons

A politically exposed person in financial regulation is one who has been entrusted with a prominent public function. Because of their position and potential influence, PEPs are more likely to be involved in bribery and corruption. Financial inclusion is a process of introducing open, timely, and full access to a wide range of financial products and services, disseminating their usage in society with the help of existing and innovative approaches.

It is very important not to unjustifiably refrain from the unreasonable de-risking application, restricting access to services for certain categories of persons. For example, for financial institutions, a separate category of customers is PEPs or “Politically Exposed Persons.”

Politically Exposed Persons

Who are Politically Exposed Persons or PEPs? 

Politically exposed persons are individuals who perform or have performed significant public functions. They are presidents, prime ministers, ministers, deputies, deputies, high-ranking politicians, high-ranking officials of the judiciary, law enforcement agencies, justice, defense, etc.

The list of public figures in the PEP category is approximately the same in all countries. It is in line with the recommendations of the FATF on Money Laundering and Terrorist Financing.

PEPs are divided into the following categories:

  • National politically exposed persons
  • Foreign politically exposed persons
  • Figures that perform public functions in international organizations

National politically exposed persons are individuals who perform or have performed in Ukraine significant public functions, namely:

  • The President of Ukraine, the Prime Minister of Ukraine, members of the Cabinet of Ministers of Ukraine, and their deputies
  • The Head of the permanent subsidiary body formed by the President of Ukraine and their deputies
  • The Head and Deputy Heads of the State Management of Affairs
  • The Chiefs of staff or secretariats of state bodies that are not civil servants, whose positions belong to category “A”
  • The Secretary and Deputy Secretaries of the National Security and Defense Council of Ukraine
  • People’s Deputies of Ukraine
  • The Head and members of the Board of the National Bank of Ukraine, members of the Council of the National Bank of Ukraine;
  • The Head and judges of the Constitutional Court of Ukraine, the Supreme Court, and specialized supreme courts
  • Members of the High Council of Justice, members of the High Qualification Commission of Judges of Ukraine, members of the Qualification and Disciplinary Commission of Prosecutors
  • The Prosecutor General and their Deputies
  • The Head of the Security Service of Ukraine and their Deputies
  • The Director of the National Anti-Corruption Bureau of Ukraine and their Deputies
  • The Director of the State Bureau of Investigation and their Deputies
  • The Director of the Bureau of Financial Investigations and their Deputies
  • The Head and members of the National Council of Television and Radio Broadcasting of Ukraine, the Head and members of the Antimonopoly Committee of Ukraine, the Head of the National Agency on Corruption Prevention and their Deputies, the Head and members of the Accounting Chamber, the Head and members of the Central Election Commission, heads and members of other state collegiate bodies
  • Ambassadors Extraordinary and Plenipotentiary
  • The Chief of the General Staff – the Commander-in-Chief of the Armed Forces of Ukraine, commanders of the Ground Forces of the Armed Forces of Ukraine, the Air Forces of the Armed Forces of Ukraine, the Naval Forces of the Armed Forces of Ukraine
  • Civil servants whose positions belong to category “A”
  • Heads of prosecutor’s offices, heads of regional territorial bodies of the Security Service of Ukraine, heads, and judges of courts of appeal
  • Heads of administrative, managerial, or supervisory bodies of state and state-owned enterprises, business entities, the state share in the authorized capital of which directly or indirectly exceeds 50 percent
  • Members of the governing bodies of political parties
Politically Exposed Persons

Foreign politically exposed persons in Ukraine are considered to be individuals who perform or have performed significant public functions in foreign countries, namely:

  • The Head of the state, government, and ministers
  • Members of the parliament or other bodies performing the functions of the state legislative body
  • The Head and members of boards of central banks or accounting chambers
  • Members of the Supreme Court, the Constitutional Court, or other judicial bodies whose decisions are not subject to appeal, except for appeals in connection with exceptional circumstances
  • Ambassadors Extraordinary and Plenipotentiary, heads of central military administration bodies
  • Heads of administrative, managerial, or supervisory bodies of state-owned enterprises

The category of PEP also includes members of families of politically exposed persons such as husband or wife or persons equated to them, son, daughter, stepson, stepdaughter, adopted person, a person under guardianship or custody, son-in-law and daughter-in-law and persons equated to them, father, mother, stepfather, stepmother, adoptive parents, guardians or custodians.

It also includes related persons who have joint beneficial ownership of a legal entity, trust, or other similar legal subjects with the PEP or have other close business links with politically exposed persons. Those also included are ultimate beneficial owners of a legal entity, trust, or other similar legal subject known to have been de facto formed for the benefit of the PEP.

When does a Person Lose the PEP Status?

Following the provisions of the current legislation of Ukraine on financial monitoring, the PEP status is a lifelong status that does not disappear after the dismissal of the person who is classified as a PEP and does not depend on the period during which the person performed political functions.

Granting the lifelong status of the PEP category is one of the international requirements, which was voiced in one of the reports of the Committee of Experts of the Council of Europe MONEYVAL concerning the assessment of Ukraine for compliance with international standards for combating money laundering.

Politically Exposed Persons

A Risk-Oriented Approach to Work with PEPs

The Law of Ukraine “On Prevention and Counteraction to Legalisation (Laundering) of Proceeds from Crime, Terrorist Financing and Financing of Proliferation of Weapons of Mass Destruction” allows financial institutions to use a risk-oriented approach to work with PEPs.

This means that at first, a financial institution must examine a potential customer belonging to the PEP category, assess their influence and public functions performed by the person, and assign a level of risk to such a customer following the received information.

There are several exceptions:

  • Financial institutions must assign a high level of risk to foreign PEPs; and
  • Insurance companies that conclude life insurance contracts with national PEPs assign a high risk to such customers.

The level of risk of a customer from the PEP category may be revised, taking into account ongoing risks that remain active for the PEP after 12 months from the date of resignation.

At the same time, the following criteria are applied to assess ongoing risks:

  • The level of influence that a PEP pertains or information concerning corruption-related practices, involvement in high-profile cases/scandals, etc., available in open sources;
  • The scope of authority that a PEP had which can be significant or insignificant; and
  • The level of the position held by a PEP.

Detecting the Sources of PEPs’ Wealth

Suppose a customer is identified as belonging to the PEP category. In that case, a financial institution must take several actions aimed at obtaining the permission of the Head of the institution to establish or continue business relations with such a customer, detecting the sources of wealth and sources of funds as per recommendation 12 of the FATF on Money Laundering and Terrorist Financing.

How to Detect That a Customer Belongs to the PEP Category?

The official sources, the public information, information received from the customer, and information available to the institution from different sources may be used to determine the customers in the PEP category.

Such sources may include the following:

  • Official Internet representations of systems for declaring income by politically exposed persons:
  • Databases of service providers that provide free or paid information services;
  • Public data sources on the Internet, including official Internet representations of the state authorities, etc.

Final Thoughts

The term “politically exposed person,” which is sometimes used interchangeably with “Senior Foreign Political Figure,” emerged in the late 1990s in the aftermath of the Abacha Affair, a money-laundering scandal in Nigeria that galvanized global efforts to prevent political figures from abusing the financial system.

While it may be useful for financial institutions to compile a list of designated PEPs for reference, doing so is frequently difficult because the criteria for qualifying an individual as a PEP are broadly defined and vary by country. The FATF also issues new AML/CFT recommendations on PEPs on a regular basis, complicating the implementation of any ‘definitive’ PEP list.