Persons Exposed Persons (PEPs) are defined as high-risk customers who have more opportunities to illegally acquire assets than ordinary citizens, as they can have a high-profile political role. Crimes such as money laundering, financing of terrorism, and bribery are examples of illegal ways of existence. Financial institutions need to implement more AML / CFT measures when establishing a business relationship with PEPs. At the same time, institutions should ongoing monitor PEPs screenings and changes in risks. PEPs pose a high risk to Designated Non-Financial Businesses and Professions (DNFBPs) and financial institutions.
Generally, senior government officials, their family members, close associates, and senior executives of any state-owned business enterprise are defined as PEPs. Officials of major political parties are defined as PEPs. Anti-money laundering regulations deal with firms' obligations to combat financial crimes. Under AML regulations, PEPs are defined as having the potential to commit crimes such as bribery, corruption, and money laundering due to their profiles. For this reason, financial institutions have to detect PEPs, and for this, they need PEP screening in their customer account opening processes. There are different types of PEP defined by the Financial Action Task Force (FATF). Domestic PEPs and Foreign PEPs come first among these types. You can find detailed information about Domestic PEPs and Foreign PEPs in the rest of your article.
The FATF Guidance for PEPs also defines Domestic PEPs as high-risk individuals located in the same country as the financial institution of which it is a client and has a domestically located position. These domestic high-risk individuals are defined as officials of a local political party, senior politicians, heads of state companies, or senior military officials. Other factors, such as the PEPs place of residence, are not important in determining the type of PEP. Still, these factors can be an important factor in determining the risk level of a particular Domestic PEP. Domestic PEPs are generally considered less risky than foreign PEPs. But there is an important point that a financial institution in any country is more likely to have Domestic PEPs than Foreign PEPs when looking at PEP clients.
Some countries publish lists of Domestic PEPs or leading public functions, sometimes voluntarily. However, FATF does not have such a standard and did not see it as necessary. Rather FATF considers such lists to be potential shortcomings and could pose potential challenges for effective implementation. According to the FATF, countries can publish two types of lists: a list of functions maintained by a PEP or a list of the real names of the PEPs.
In the FATF's Guidance for PEPs, Foreign Political Exposed Persons are defined as persons holding an important public position on behalf of a government that differs from the government's public position in which the financial institution is located. Foreign PEPs are generally defined for the following people.
Even if Foreign PEPs performed these tasks in the past, they are still defined as Foreign PEPs and are considered 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 do not matter. For financial institutions, doing business with Foreign PEPs carries a higher risk than domestic PEPs. To cope with these high risks, financial institutions must conduct further scrutiny of Foreign PEPs. As a result, Foreign PEPs carry more risk than domestic PEPs.
According to the FATF, Foreign PEPs can make it more difficult to evaluate information during the account opening and customer relationship monitoring phases. Therefore, appropriate risk management is required to address these specific risks within these processes. Foreign PEPs are always considered high-risk, and therefore Enhanced Due Diligence (EDD) measures must be applied instead of Customer Due Diligence (CDD) measures, as with all high-risk customers. Some of the steps of Enhanced Due Diligence (EDD) measures are:
Sanction Scanner provides a PEP screening service. Sanction Scanner has a comprehensive database of global Sanctions, PEP, and Adverse Media. You can also perform CDD and EDD measures by the obligations with our AML Name Screening Software for PEP Screening.