What is PEP According to FATF?
- In governmental bodies: A senior government official in the legislative, judiciary, or executive bodies and diplomatic roles who has a prominent public function. Examples of politically exposed persons in governmental bodies, 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
- Associates: Close associates who are closely connected to a PEP, socially or professionally. For instance, family members and close relatives of parliament members, someone with the beneficial owner of a legal entity or a company in which the government is the sole or majority shareholder.
Who is Considered a Politically Exposed Person?
Types of Politically Exposed Persons
According to FATF, there are six main types of PEPs: Foreign, Domestic, International Organizations, Family Members, Close Associates, and National PEPs.
|Prominent individuals holding political positions in other countries, including heads of state, government ministers, diplomats, and high-ranking military officers.
|Significant political figures within their own country, such as heads of state, government ministers, members of parliament, and senior government officials.
|Family Members of PEPs
|Close relatives of PEPs, like spouses, children, and siblings, may be susceptible to engaging in corrupt or money laundering activities on behalf of the politically exposed individual.
|Close Associates of PEPs
|People closely linked to PEPs, including business associates, advisors, or personal friends, may be at risk of engaging in illicit activities due to their proximity to influential figures.
|International Organization PEPs
|Officials working in international organizations, such as the United Nations or the European Union, are subject to exposure to corruption and money laundering risks.
|Notable political figures within their own country, which can include regional or local government officials, mayors, and other influential figures, even if they lack international prominence.
Examples of Politically Exposed Persons
To clarify who qualifies as a politically exposed person (PEP) and who doesn't, let’s examine various examples and their qualifications:
- Can mayors be labeled as PEPs? Yes, since they possess significant control over urban administrations, they have the capability to influence or fall victim to fiscal wrongdoings.
- Do celebrities meet the criteria to be classified as PEPs? Typically, they do not. Although possessing wealth and social influence, celebrities lack the authority over the essential systems of governance, finance, law enforcement, or the military that would categorize them as PEPs.
- Are judges considered to be PEPs? Indeed, they are. Given their role in the interpretation and application of the law, judges are exposed to potential financial influences that could sway legal interpretations.
- Could being a family member make one a PEP? This hinges on the nature of their relationship to an established PEP. If strong social, business, or legal connections to a PEP are present, then they might also be regarded as PEPs. In the absence of such ties, they likely would not be.
PEP Risk Levels Based on FATF Guidelines of Red Flags
- Supranational or international business officials, senior functionaries.
- Mayors and local, state district, and urban assembly members.
- Head officials of judiciaries, banks, military, law enforcement
- Senior members of state agencies
- High-ranked civil servants and religious organizations
- Heads and government members
- Parliament members
- Head officials of judiciaries, banks, law enforcement, military, and religious organizations are also publicly exposed.
- Prominent political party members.
What are the Red Flags for FATF?The Financial Action Task Force (FATF) has introduced red flags of politically 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.
- 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
To streamline the implementation of these measures and enhance the detection of PEP-related risks, financial institutions often leverage advanced AML compliance software. This technology facilitates the systematic identification of red flags, aiding corporations in effectively managing the complexities associated with Politically Exposed Persons and PEPs potential involvement in illicit activities.
- 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
- 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.
- Banking and Finance
- Military and defense
- Businesses that work with the government or state agencies
- Construction, mining, and extraction
- Public goods provision
- 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
- 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
- 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, several changes have occurred to the PEP status and how governments and financial institutions worldwide perceive it.
Changes in PEP Meaning
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 and their close associates.
Changes in PEP Monitoring
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 PEP screening tools that allow them to identify PEPs more accurately, thanks to advanced AML compliance software.
Changes in Treatments for PEP
There has been a shift in how governments and financial institutions treat Politically Exposed Persons. Previously, politically exposed person lists were often viewed as including 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.
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 with power and influence are held accountable for their actions.
Why is PEP Screening Important?
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