The term politically exposed person (PEP) refers to someone with a prominent public position or function. The role they play may make them particularly vulnerable to bribery or other types of corruption and money laundering. Domestic PEPs or foreign PEPs are also vulnerable to money laundering and have specific characteristics.
Table of Content:
- Key Takeaways
- What Are Political Exposed Persons (PEPs)?
- What Risks Are Involved When Dealing With Politically Exposed Persons (PEPs)?
- Types of Politically Exposed Persons (PEPs)
- Domestic Politically Exposed Persons (PEPs)
- Foreign Politically Exposed Persons (PEPs)
- FATF Recommendations for Foreign PEP Identification
- A politically exposed person (PEP) is someone who holds a prominent public position or function.
- A PEP’s high-profile political role increases their potential for illegal asset acquisition, since they often have greater access to public resources than other citizens.
- PEPs include domestic PEPs and foreign PEPs, as defined by the Financial Action Task Force (FATF).
What Are Political Exposed Persons (PEPs)?
A PEP is typically someone who holds a senior position in the government, their family members, close associates, and senior executives of a public company. PEPs can also include officials of major political parties.
Regulations on anti-money laundering (AML) deal with organizations’ obligations to combat financial crimes. AML regulations define PEPs as those who have the potential to commit crimes such as bribery, corruption, and money laundering based on their profiles. To this end, financial institutions must identify PEPs during their customer account opening processes.
What Risks Are Involved When Dealing With Politically Exposed Persons (PEPs)?
PEPs are high-risk customers who have greater opportunities to illegally acquire assets than ordinary citizens, since they often have a high profile political role. Criminal acts like money laundering, terrorism financing, and bribery are examples of illegal activity.
Establishing a business relationship with a PEP requires enhanced Anti-Money Laundering and Counter-Terrorist Financing measures. In addition, institutions should continuously monitor PEP screenings, and changes in risk.
Types of Politically Exposed Persons (PEPs)
Several types of PEP have been defined by the Financial Action Task Force (FATF), including domestic PEPs and foreign PEPs.
Domestic Politically Exposed Persons (PEPs)
The FATF Guidance on PEPs also defines domestic PEPs as individuals who are high-risk and living in the same country as the financial institution they are affiliated with and have a domestic address. A domestic high-risk individual is defined as a local political party official, a senior politician, the head of a state company, or a military general.
The place of residence of PEPs is not important when determining the type of PEP, but can be important when determining the risk level of a particular Domestic PEP. Domestic PEPs are generally considered to be less risky than Foreign PEPs.
In general, a financial institution is more likely to find a domestic PEP than a foreign PEP when looking at PEP clients. Some countries publish lists of domestic PEPs or leaders within public functions, sometimes voluntarily.
The FATF, however, does not have such a standard and does not consider it necessary. FATF considers such lists to be potential shortcomings and could present challenges to effective implementation. There are two types of lists that countries can publish. One is a list of the functions of PEPs and one is a list of the names of those PEPs.
Foreign Politically Exposed Persons (PEPs)
Foreign politically exposed persons are defined in the FATF guidelines for PEPs as persons holding important public positions on behalf of governments that differ from those of the governments where financial institutions are located.
Foreign PEPs may include the following roles:
- Head of government
- Council of ministers
- Members of the government’s executive board
- Central bank manager
- Director of any state-owned company
- Senior officials of an important political party
Even if individuals only maintained such roles in the past, they might still be considered Foreign PEPs and, therefore, high risk. Foreigners in the above status are directly included in the high-risk PEP category. This means while determining their risks as Domestic PEPs, factors such as place of birth, residence, citizenship does not matter.
Financial institutions face a higher risk in doing business with Foreign PEPs than domestic PEPs. To minimize these risks, financial institutions also conduct a greater level of scrutiny on Foreign PEPs.
FATF Recommendations for Foreign PEP Identification
For this reason, FATF recommends that appropriate risk management be used to address these specific risks during the account opening process and customer relationship monitoring phase.
- Obtaining additional information about customers
- Obtaining additional information about the intended nature of the business relationship or the reasons for the transactions carried out
- Obtaining information about the customers’ funding source
- Increasing the number and timing of potentially implemented controls
- Identifying transaction patterns that require additional review to follow the business relationship in an improved way
Politically exposed persons (PEPs) are individuals who have prominent positions or functions in public. PEPs are high-risk customers because they typically have high-profile political roles. This makes them more likely to illegally acquire assets than ordinary citizens.
There are different kinds of PEPs. The Financial Action Task Force (FATF) defines domestic PEPs and foreign PEPs. A domestic PEP is a high-risk individual who is associated with a financial institution in the same country they live in and has a domestic address. A foreign PEP is someone holding an important public position on behalf of a government that differs from the government of the financial institution where they operate.
Doing business with Foreign PEPs presents a higher level of risk for financial institutions than doing business with Domestic PEPs. Thus, financial institutions also conduct greater scrutiny on Foreign PEPs.