Politically Exposed Person (PEP)

What is a 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. 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.

The PEP Definition According to FATF

  • Senior government official executive bodies, diplomatic roles, legislative bodies, judiciary bodies
  • Close family members 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 Political Exposed Person, either socially or professionally.
  • A senior official of a major political party.

Different 3 Types of Political Exposed Persons Defined By FATF

There are three different types of pep defined by FATF. These are;

Foreign PEPs:

Individuals entrusted with prominent public functions by a foreign country, such as Heads of State or government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, and important political parties officials. Also, foreign PEPs are always a high risk.

Domestic PEPs:

Individuals entrusted domestically with prominent public functions, such as Heads of State or government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, and important political parties officials.

International organization PEPs:

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.

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 ongoing due diligence checking the status. Financial Action Task Force is an intergovernmental AML/CFT institution regulating financial crimes. It is also a fundamental reference for any other regulatory action.e

FATF rules perform our PEP scans. Political Exposed Person risk categories:

Low-level risk includes supranational or international business officials, senior functionaries and 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.

 Medium-level risk includes head officials of judiciaries, banks, military, law enforcement, senior members of state agencies, high-ranked civil servants and religious organizations, commissioners, consuls, and ambassadors.

High-level risk includes heads and government members, parliament members, 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. 

Red Flags to Watch Out for in FATF

Financial Action Task Force 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. 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:

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 control or owning over DNFBP for financial institutions. 

The Industry: Industries are considered high-risk depending on the place and vary 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 receives or uses money might expose a lot about them:

  • The account shows ongoing activity in a short period of time after a long period.
  • Private banking;
  • 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 a clear reason

Services and Products: FATF deemed some of the products and services are prone to 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.

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, and for this, they need Political Exposed Person screening during customer account opening processes. AML regulators punish organizations that do not follow these screening procedures.

Sanction Scanner provides sanction, PEP, and Adverse Media Screening Software. 

You can contact us for more information.

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