Politically exposed persons (PEPs) are individuals who have been entrusted with prominent public functions, such as government officials, politicians, or high-ranking members of the military. PEPs may also include their family members and close associates. The term "PEP" is often used in the context of anti-money laundering (AML) and financial crime prevention efforts as PEPs may be at higher risk of corruption and may abuse their position for personal gain.

Revelations of grand corruption, such as the plundering of state assets and embezzlement of public funds, have led to increased scrutiny of business relationships with PEPs.

Financial institutions are expected to take extra precautions when dealing with PEPs as there is a higher risk that they may use their position to engage in illicit activities, such as accepting bribes, misusing state resources, and using financial systems to launder the proceeds of their crimes.

To mitigate the risk of money laundering and financial crime, financial institutions are required to conduct enhanced due diligence on PEPs and their related parties, and to report suspicious activity to the appropriate authorities. Financial institutions may also be required to implement additional controls and procedures to ensure compliance with AML and financial crime prevention regulations.

PEPs represent a higher risk of money laundering and financial crime due to their potential abuse of position and influence, and financial institutions are expected to take extra precautions when dealing with them to prevent illicit activities and protect the integrity of the financial system.

To ensure that financial institutions are fully compliant with AML rules, it is essential to know who or what a politically exposed person (PEP) may be, so as to conduct enhanced due diligence checks.

Providing a definitive list of who could be classified as a PEP is a tough challenge as international definitions vary and the Financial Action Task Force (FATF) frequently issues updated recommendations.

According to FATF’s International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (2012), there are three categories of PEPs:
  • 1

    Foreign PEPs: Individuals who are or have been entrusted with prominent public functions by a foreign country and with a certain influence which makes him/her more susceptible of being involved in bribery or corruption.

  • 2

    Domestic PEPs: Individuals who are or have been entrusted domestically with prominent public functions and with a certain influence which makes him/her more susceptible of being involved in bribery or corruption.

  • 3

    International Organization PEPs: Persons who have been entrusted with a prominent function by an international organization, and refers to members of senior management or individuals who have been entrusted with equivalent functions, i.e. directors, deputy directors and members of the board or equivalent functions.

Which position should be considered a PEP?

The following positions should always be considered as PEP:

  • Legislative organs as member of Parliament
  • Executive organs from the head of state down to the assistant ministers
  • Diplomatic roles, can be ambassadors or chargé d’affaires
  • Judiciary organs are key people working within supreme courts, constitutional courts or high-level judicial agents
  • Anyone from senior executive upwards in a state-owned company, important to say that even former members of the board of directors no longer associated with the organisation still be flagged as PEP’s since they may retain their influence.
  • Examples of some international organisations are: United Nations, International Monetary Fund, Belgium Government, BNB
  • Central Financial Institutions: Court of Auditors and members on the boards of central banks
  • Armed Forces, in this situation a PEP rating would typically only apply to a high-ranking officer
  • International Sports Committees, the Members of these committees may be influenced to vote on the location of major sporting events/contracts for building venues, etc., hence they have recently been included by FATF under their definition of a PEP
  • Anyone with a close business relationship or joint beneficial ownership of legal entities or legal arrangements with a PEP and/or anyone having the sole beneficial ownership of a legal entity which is known to have been set up for the benefit de facto of the PEP
  • Parents and children, spouse or partner, siblings, uncles and aunts, even slightly indirect family members (such as in-laws) of PEPs will be considered as politically exposed persons.
  • In most countries, there is a statutory time limit, ranging from 12 to 18 months, from the point at which a customer leaves political office, during which they are considered a PEP (politically exposed person).
  • The FATF precognises that after one year the former pep no longer contains the risk for the company. This needs to be considered carefully as in practice it will depend on the influence and power that the PEP has had during its active life.
  • For example, Annelies Verlinden will always retain an influential status and therefore should always be considered a PEP. Hence, if a firm decides to implement a declassification process, any time limit imposed should be based on an ongoing risk assessment and may not necessarily conform to the statutory time limit.

What are the regulations concerning PEPs?

The FATF Recommendations outline a number of specific measures that financial institutions and other regulated entities should take when dealing with PEPs, including the following:

Fatf Recommendations

Overall, the FATF Recommendations encourage financial institutions and other regulated entities to be vigilant in detecting and preventing money laundering and terrorist financing, particularly when dealing with PEPs.

GB United Kingdom
In the UK, the definition of a PEP (politically exposed person) is found in the Money Laundering Regulations 2017 Section 35 and is identical to the 2012 FATF definition, including the inclusion of domestic PEPs. A PEP is any individual who holds a prominent public function outside the UK in a state or international institution. The definition explicitly excludes middle-ranking or more junior officials. PEP status also extends to the relatives and close associates of PEPs, including spouses, partners, and children, as well as individuals with joint beneficial ownership of a legal entity or close business relations. The Financial Conduct Authority and Joint Money Laundering Steering Group provide guidance on PEPs and other KYC matters to assist firms in complying with their legal obligations.

US United Sates of America
The term "foreign official" is used by US enforcement agencies to refer to individuals similar to PEPs (politically exposed persons) as defined by the Foreign Corrupt Practices Act. This term is used in all industries and is similar to the term "Senior Foreign Political Figure" defined by the USA PATRIOT Act. The term PEP refers to high-ranking individuals in positions of public trust, such as heads of state, government officials, and senior executives of state-owned enterprises, but excludes middle-ranking or junior individuals. FinCEN did not use the term PEP in its regulations as of 2010 and requires financial institutions to report suspicious activity.

ZA South Africa
In South Africa, the Financial Intelligence Centre has amended the Financial Intelligence Centre Act to refer to Politically Influential Persons (PIPs) rather than PEPs (politically exposed persons). This change was made in order to include private sector officials who have business dealings with public sector officials and elected officials in public services procurement deals.

The importance of screening PEPs

Politically exposed persons are more susceptible to money laundering and corruption and are therefore considered a high risk for a financial institution. They could have access to confidential information, abuse a prominent position and/or even manipulate, bribe other persons of influence.

Once a client has been identified as a PEP, an advanced verification of all possible data of the person must be performed to decrease (or at least control) the risk of money laundering.

To mitigate this risk, financial institutions must conduct enhanced due diligence on PEPs and report any suspicious activity to the appropriate authorities. It is essential for financial institutions to be aware of who may be classified as a PEP and to implement additional controls and procedures to ensure compliance with AML and financial crime prevention regulations.

How is a political exposed person (PEP) screened?

Pep 2
To determine whether someone is a PEP, consider the following tips:
  • Use native character searching to reduce false positives from transliteration issues and properly handle local and national PEPs.
  • Use the date of birth and age to refine the search and reduce the number of hits.

Appropriate steps must be taken to identify PEPs, including checking if the client appears in a PEP database, taking measures to establish the sources of wealth and funds, obtaining senior management approval of the business relationships, and conducting ongoing monitoring.

When screening PEPs, here are some practices to consider:
  • 1

    Take a risk-based approach: once a client has been identified as a foreign or domestic PEP, they should be considered a high-risk client and should be subjected to enhanced due diligence.

  • 2

    Gather information from various sources: that you can on the PEP. Sources include but are not limited to: up-to-date customer due diligence information, internet and media searches, all public available information, commercial and in-house databases and additional sources of information like government-issued PEP lists, asset disclosure systems, customer self-declaration statements, and general information that may be shared by competent authorities.

  • 3

    Conduct enhanced due diligence: the FATF recommends obtaining senior management approval and taking reasonable measures to establish the source of wealth or funds.

  • 4

    Monitoring and reviewing: the company should regularly monitor and review (at least once a year) its controls to ensure they are effective and to identify any changes that may affect the risks associated with the PEP. This may involve regular reporting, internal audits, and risk assessments.

If the PEP is found to have had past issues with corruption, money laundering, or other crimes, their onboarding process should be stopped.

Close associates must be identified only when their relationship with a PEP is publicly known or when the institution suspects there is a relationship.

Furthermore, the language of Recommendation 12 is consistent with a possible open-ended approach (i.e. “once a PEP could always remain a PEP”). The handling of a client who is no longer entrusted with a prominent public function should be based on an assessment of risk and not on prescribed time limits. The question of how long the PEP status should continue after the termination of official activity is mentioned as a contested issue. Certain financial institutions adopt a “once a PEP, always a PEP” approach.

The importance of Enhanced Due Diligence for PEP’s

Enhanced due diligence (EDD) offers a more robust customer assessment framework to help determine the overall risks presented by PEPs and help financial institutions make informed decisions about client onboarding, monetary transfers, and investment opportunities.
Enhanced due diligence efforts typically address risk factors in the following areas:

  • Customer data: Information about the potential customer's current role in political parties or their relationship to PEPs, along with any business activities
  • Geographic location: Different countries have varying risks of money laundering, as indicated by the FATF's list of high-risk countries
  • Banking activity: If PEPs use high-revenue private banks with little transparency, there is an increased risk of money laundering as the organization has limited insight into current transactions.

The effectiveness of controls for identifying and managing relationships with PEPs may vary depending on the type of business within an institution. In retail banking, for instance, a different set of controls may be more suitable than those used in private banking or wealth management. It is important for institutions to carefully consider which controls are most appropriate for their specific business activities.

Baseline Model

What to consider when selecting an AML solution for PEP screening?

It is essential to recognize that not all tools are the same. It is the responsibility of financial institutions to evaluate the quality of the tools they use and the expertise of the developers. When looking for technological solutions for PEP screening, compliance professionals should consider the following factors:.
Golden Visas EU CDD

  • 1

    The vendor: It is important to choose products from a reputable vendor rather than a potentially unreliable one. Ultimately, the financial institution is responsible for compliance, not the developer. It is essential to select a vendor that is trusted and has a good track record.

  • 2

    The scope of the product: Does the database only include information about PEPs, their families, and associates, or does it also include other high-risk individuals or those listed on government watchlists?

  • 3

    The complexity of the matching program: It is essential to remember that financial institutions must evaluate both PEPs and other high-risk customers to satisfy regulators. It is crucial to thoroughly assess these individuals to ensure compliance with relevant regulations.

  • 4

    The methodology: How does the vendor compile the database? What sources does the database use? Are the sources reputable? How does the software filter matches? How often is the product updated?...

Example of corruption linked to PEPs

Below are concrete examples of PEPs linked to corruption or money laundering scandals:

Pavel Lazarenko, the former prime minister of Ukraine, had accounts in San Francisco at Bank of America, Commercial Bank, Pacific Bank, WestAmerica Bank, and various securities firms, including Fleet Boston, Robertson & Stephens, Hambrecht & Quist and Merrill Lynch, where millions of dollars he allegedly extorted as head of state of Ukraine were held.

Zamira Hajiyeva, the spouse of Jahangir Hajiyev, a former chairman of the state-controlled International Bank of Azerbaijan, utilized the illicit funds procured by her spouse during his tenure from 2001 to 2015 to acquire an assortment of luxury goods totaling £16m.
Are you looking for improve your screening of PEPs? One of our specialized experts will be delighted to provide responses to your inquiries related to the execution of requisite vigilance protocols concerning politically exposed persons (PEPs), as well as any other queries regarding AML and compliance.
Add your comment

Related articles

The 5th AML Directive has been adopted by the Council of the European Union. Learn the history of the directives and wh...

EU Sat 12 May 2018

What is open banking? Learn about how this innovation allows banks to better understand the needs of their retail, SME,...

EU Sun 15 September 2019

An AML EWRA overall risk assessment allows financial institutions to identify and appropriately manage the ML / FT risks...

EU Tue 18 June 2019
Experts in risk management and regulatory compliance

Pideeco is a consultancy firm providing legal services, business solutions, operational assistance and educational material for professionals in the financial industry.

We are based in Brussels and we specialize in regulatory risk compliance services covering the Eurozone.

Pideeco combines professional Regulatory knowledge and technical expertise to safeguard your business’ reputational and operational risk. Our unique customer-centric approach helps us build strategical and legitimate cost-efficient remedies.

Working with us means reaching out to complementary people, allowing for original thinking and innovative vision.

Our Network Learn more about us