PEPs or politically exposed persons are defined as high-risk clients with more opportunities than ordinary nationals to gain assets through illegal means like bribe-taking and money laundering.
Classifying a potential client as a PEP doesn’t mean that a corporation can’t work with them at all. Discovering a client is a PEP is just a part of the process allowing DNFBPs (Designated Non-Financial Businesses and Professions) and financial institutions to make a whole risk evaluation. With PEP check is vital to be aware of the red flags. Sometimes matching just one of these politically exposed person indicators might be linked with financial abuse.
The FATF defines a PEP as:
•Senior government official: executive bodies, diplomatic roles, legislative bodies, judiciary bodies
•Close family members: are individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership.
•Organizations and Institutions: a senior executive of a government-owned commercial enterprise.
•Close associates: are individuals who are closely connected to a PEP, either socially or professionally.
•A senior: official of a major political party.
Individuals who are or have been entrusted with prominent public functions by a foreign country, for example, Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials.
Individuals who are or have been entrusted domestically with prominent public functions, for example, Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials.
Persons who are or have been entrusted with a prominent function by an international organization refer 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.
It is the country which has entrusted the individual with the prominent public function. Pursuant to the definition of PEPs, other factors, such as country of domicile or nationality, are not relevant in determining the type of PEP but may be relevant in determining the level of risk of a specific domestic PEP (as foreign PEPs are always a high risk). It should also be noted that a domestic PEP is subject to the foreign PEPs requirements if that individual is also a foreign PEP through another prominent public function in another country.
Every regulated corporation must fit the guidelines while working with a politically exposed person. After the client is uncovered as a PEP, corporations are responsible for ongoing due diligence fitting the client’s status of PEP.
Financial Action Task Force is an intergovernmental AML/CFT institution regulating financial crimes. It is also a fundamental reference for any other regulatory action.
All of our PEP scans are performed in accordance with FATF rules, depending on their risk level. PEP risk categories:
•Low-level risk includes supranational or international business officials and senior functionaries and mayors and members of local, state district and urban assemblies.
•Medium/Low-level risk includes the governmental board and top-ranking officials of state-owned organizations and businesses.
•Medium-level risk includes head officials of judiciaries, banks, military, and law enforcement, senior members of state agencies, high-ranked civil servants and religious organizations and commissioners, consuls and ambassador.
•High-level risk includes heads and members of the government, members of parliament, head officials of judiciaries, banks, law enforcement, military and religious organizations and prominent political party members.
Compliance software such as Sanction Scanner helps you to comply with regulations. Sanction Scanner AML screening complies with all global and local regulations such as FATF, FINMA and FCA, minimizing false positives.
Financial Action Task Force has introduced red flags of PEPs to help corporations detect illegal activities. Based on their information matching several of these indicators should raise some suspicions. In some cases, it might even lead to money laundering. A particular nation or state may also have its own PEP indicators for suspicion that must be considered crucial.
According to the FATF, the measures that will enable companies to detect and control PEPs:
▪ Identity Shielding: As PEPs are aware of their status, sometimes they try and hide their identity or avoid being in the spotlight. For example:
-Assigning legal ownership to somebody;
-Abnormally or constantly interacting with intermediaries;
-Using corporate vehicles without valid business reasons or for confusing involved ownership and industries.
▪ Suspicious Behavior: PEPs behavior may give them up.
-Being secretive or uncomfortable about the source of funds and wealth.
-Providing false, inaccurate or insufficient information.
-PEPs information doesn’t match with publicly available data.
-Eagerness to explain the reason behind their business in the country’s DNFBP or financial institution.
-PEP has been denied an entry visa.
-Funds belonging to PEP moves from one country to another.
-A steady flow of wire transfers or cash out or into the account of PEP.
-No credible explanations or details for certain business relationships, transactions or account openings.
-In PEP’s country, it becomes prohibited to hold property or accounts in other countries.
▪ Position in the Company: PEP’s position can become a reason for concern.
-Access, authority and control over funds, operations and policies of the corporation.
-Informal/formal ability to control mechanisms against TF/ML.
-Influence/control over government or corporate accounts.
-Having control or owning over DNFBP for financial institutions.
▪ The Industry: Industries being considered high-risk depending on the place and varies from nation to nation. Instances of higher risk industries are;
-Banking and finance.
-Military and defense.
-Businesses that work with the government or state agencies.
-Construction; Mining and extraction.
-Public goods provision.
▪ Transactions: The way PEP receives or uses money might expose a lot about them:
-PEPs account shows steady activity in a short period of time after a long period.
-Wire transfers without economical explanation or lacking beneficiary information.
-Anonymous payments or transactions received from an unknown third party.
-Funds are moved constantly from one account to another or between financial institutions without a business rationale.
-Steady cashflows, huge global funds transfers or wire transfers.
-Having and using multiple bank accounts without a clear reason
▪ Services and Products: FATF deemed some of the products and services are prone to risk and vulnerable to being used by PEPs;
-Businesses catering to foreign clients.
-Service and trust providers.
-Dealers in high-value transport vehicles like ships, sports cars, planes, and helicopters.
-Dealers invaluable stones, metals and luxury goods.
▪ Local Indicators: The FATF explains how some countries are considered to be high risk is based on geographic risk factors. These indicators must also be taken into account when scanning a PEP.
-Domestic or foreign high-risk country.
A country with a high risk of corruption.
Countries with mono-economies.
A country that did not sign a relevant anti-corruption convention like the OECD Anti-Bribery Convention and the UNCAC.