Politically Exposed Person (PEP)

Politically Exposed Persons (PEP) are high-risk clients with more opportunities than ordinary nationals to gain assets through illegal means like bribe-taking and money laundering. The potential risk of using titles for criminal activity makes them high-risky individuals. Among PEPs, there are different levels in terms of risk levels. For instance, foreign PEPs generally have higher risks than domestic PEPs have.
Classifying a potential client as a PEP doesn't mean that a corporation can't work with them. PEP control is only part of the process that allows financial institutions to conduct a complete risk assessment, and awareness of red flags is essential in this assessment. Sometimes matching just one of these politically exposed person indicators might be linked with financial abuse.

What is PEP According to FATF?

There are several criteria to decide who PEP is according to FATF definition;
In governmental bodies
A senior government official in the legislative, judiciary or executive bodies and diplomatic roles. For instance, parliament members, ambassadors, or judges in the supreme court
In organizations
A senior executive of a government-owned commercial enterprise or senior official of a major political party. For instance, board members in a central bank, party presidents or high-ranking soldiers
Close associates who are closely connected to a PEP, socially or professionally. For instance, family members and close relatives of parliament members, someone with beneficial ownership of a legal entity or a company in which the government is the sole or majority shareholder

3 Types of Political Exposed Persons Defined By FATF

There are 3 types of peps according to FATF as foreign peps, domestic peps, international organization peps

PEP Risk Levels Based on FATF Guidelines of Red Flags

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 the ongoing due diligence checking process. FATF recommendations include four levels of risk for PEPs because some of them have a higher risk, whereas some have lower. The categories are listed as follows;

Low-level risk includes;
  • Supranational or international business officials, senior functionaries
  • Mayors and local, state district, and urban assemblies members.  
Medium/Low-level risk includes the governmental board and top-ranking officials of state-owned organizations and businesses. For example;
  • Head officials of judiciaries, banks, military, law enforcement
  • Senior members of state agencies
  • High-ranked civil servants and religious organizations
  • Commissioners
  • Consuls
  • Ambassadors
High-level risk includes;
  • Heads and government members
  • Parliament members
  • Head officials of judiciaries, banks, law enforcement, military and religious organizations
  • Prominent political party members.
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Red Flags to Watch out for in FATF

Financial Action Task Force (FATF) has introduced red flags of Political Exposed Persons to help corporations detect illegal activities. Several of these indicators should raise some suspicions based on their information matching. In some cases, it might even lead to PEP money laundering. Additionally, a particular nation or state may also have indicators for suspicion that must be considered crucial.

According to the FATF, the measures that will enable companies to detect and control these people are listed below.

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:
  • Being secretive or uncomfortable about the source of funds and wealth
  • Providing false, inaccurate, or insufficient information
  • The 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 move from one country to another
  • A steady flow of wire transfers or cash out
  • No credible explanations or details for certain business relationships, transactions
Position in the Company: Position can become a reason for concern.
  • Access, authority, and control over the corporation's funds, operations, and policies
  • Informal/formal ability to control mechanisms against TF/ML
  • Influence/control over government or corporate accounts
  • Having authority or ownership over DNFBP for financial institutions.

The Industry: Industries are considered high-risk depending on the place, and the risks vary from nation to nation. 

  • Banking and finance
  • Military and defense
  • Businesses that work with the government or state agencies
  • Construction; Mining and extraction
  • Public goods provision

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FCA's Finalised Guidance for PEPs - Round-Up

FCA clarifies its PEP's manual on how companies should use PEP definitions in MLRs in the UK context.

PEP Screening Compliance by Region

PEP Screening compliance has some differences according to countries. Would you like to learn about requirements of your region?

Why PEP Screening Is Important for Business?

Approximately $ 1 trillion in bribes are processed each year, and the amount of corruption is estimated at almost 2.6 trillion. These numbers have serious implications, so financial institutions prevent these crimes.

  • The account shows ongoing activity in a short period after a long period
  • Private banking demands
  • Wire transfers without economic 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, massive global funds transfers, or wire transfers
  • Having and using multiple bank accounts without an apparent reason
Services and Products: FATF deemed some of the products and services are prone to have higher risk and vulnerable to being used;
  • Businesses are catering to foreign clients
  • Service and trust providers
  • Concentration/correspondent accounts
  • Real estate
  • 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 high risk based on geographic risk factors.
  • 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.

Changes in PEP Status

Over the years, there have been several changes to the PEP status and how it is perceived by governments and financial institutions worldwide. One of the most notable changes in the PEP status is the way in which it is now defined. Initially, the term was used to describe only senior government officials and their immediate family members. However, this definition has since been expanded to include individuals who hold prominent positions in international organizations, as well as their close associates. This change was made to reflect the evolving nature of the global economy, where non-governmental organizations and international institutions wield significant power and influence. By broadening the definition of PEPs, governments and financial institutions can better identify and mitigate potential risks associated with money laundering and corruption.

Another significant change in the PEP status is the way in which it is now being monitored. Previously, governments and financial institutions relied primarily on self-disclosure by PEPs to identify their status. However, this approach was often ineffective, as some PEPs may have chosen to hide their status or failed to disclose it accurately.

Today, governments and financial institutions have access to sophisticated databases and screening tools that allow them to identify PEPs more accurately. This approach has significantly enhanced the ability of financial institutions to detect potential money laundering and corruption risks associated with PEPs.

In addition to these changes, there has been a shift in the way that governments and financial institutions treat PEPs. Previously, PEPs were often viewed as high-risk customers who needed to be closely monitored to ensure that they were not involved in illegal activities. However, this approach has shifted in recent years, with many governments and financial institutions recognizing the valuable role that PEPs can play in promoting economic growth and development. Today, many financial institutions offer specialized services and products designed to meet the unique needs of PEPs, such as enhanced due diligence and risk management tools. These services are designed to help PEPs navigate the complex regulatory environment and maintain compliance with anti-money laundering and anti-corruption laws.

Despite these changes, the PEP status remains a complex and evolving concept. As governments and financial institutions continue to refine their approach to identifying and monitoring PEPs, it is likely that further changes will be made in the years to come. However, one thing is clear: the PEP status will continue to play a critical role in the fight against money laundering and corruption, ensuring that individuals who hold positions of power and influence are held accountable for their actions.

PEPs are at reduced risk when they leave their duties, while the risk always remains for companies.

Why is PEP Screening Important?

Financial crimes pose major threats all over the world. Anti-money laundering regulations include firms' obligations to combat financial crimes. Institutions have to detect customers with more potential for financial crime. So, they need Political Exposed Person screening during customer account opening processes. AML regulators punish organizations that do not follow these screening procedures.

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