PEP: Politically Exposed Persons 

What are politically exposed persons (PEP)?

PEPs are individuals who are or have been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing.

The Financial Action Task Force (FATF) which has been empowered to establish anti-money laundering and counter terrorist financing guidelines, requires that financial institutions and designated non-financial businesses and professions (DNFBPs) implement measures to prevent the misuse of the financial system and non-financial businesses and professions by PEPs, and to detect such potential abuse if and when it occurs. It is important to note that according to the FATF, PEP is not a derogatory mark. It is the decision of the obligated entity to determine the risk of the individual.

FATF does not provide a list of PEPs, instead requiring that regulated entities take a risk-based approach when developing standards that are specific to the company and its own risk profile. Below are several examples of PEP positions which LexisNexis captures to assist in identifying PEPs.

Legislatures

Legislative roles include individuals who are elected or appointed to a senior position within a government’s legislative branch and who are typically responsible for law-making in a sovereign nation. Senior roles include officials who occupy offices at the national, regional, and in certain cases the local level and their governing institutions for each sovereign state and entity.

Govt Branch Members

A government branch member is an individual who is elected or appointed to a senior position or a civil service position within a national government's executive branch. Civil servants are individuals who are employed in national executive government institutions and who are appointed or hired by decision of an authorized public institution in accordance with the civil service law and a structured hiring process. Civil servants differ from elected officials in that these individuals occupy permanent positions and their employment does not change with a political change of government.

Militaries

A military role includes an individual who currently serves or has previously served in a sovereign state’s armed forces where they have made combat, operational, or policy decisions. This role includes individuals in leadership positions within a national internal security force, and military advisory functions to senior executive and legislative decision makers. Judicial bodies Any public organization or branch of government that enforces the law and responsible for the administration of justice.

Chiefs of State

A chief of state is an individual, individuals, or body of persons that acts as the formal public representative of a sovereign country. This role and its functions vary according to the country’s political system. Chiefs of state include heads of government who are responsible for the daily executive and legislative decision-making for the country; and heads of state who serve as the highest-ranking representative of the sovereign state. Relatives of Politicians

Diplomats

An individual who represents the interests of a government in its sovereign relations with other sovereign states, entities, and international organizations or regional organizations through an embassy or permanent mission.

Family Members

Individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership.

Close Associates

Individuals who are closely connected to a PEP, either socially or professionally.

Performing Due Diligence on PEPs

FATF requires that financial institutions apply a risk-based approach. This requires that regulated entities perform customer due diligence. What risk management system is appropriate for a financial institution depends on the nature of the institution’s business, the nature of its client profile, expected transactions and on other risk factors. However, when performing customer due diligence FATF provides that this should include,

• Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.
• Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.
• Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
• Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.

In cases with higher business risk relationships FATF requires additional review known as enhanced due diligence such as,

• having appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person;
• taking reasonable measures to determine whether a customer or beneficial owner is a domestic PEP, a person who is or has been entrusted with a prominent function by an international organization, or a foreign PEP which FATF says always requires enhanced due diligence;
• obtaining senior management approval for establishing (or continuing, for existing customers) such business relationships;
• taking reasonable measures to establish the source of wealth and source of funds; and
• conducting enhanced ongoing monitoring of the business relationship.

FATF permits the use of Third Party providers as part of a robust customer due diligence program.

Nexis Diligence+™ is a web-based third party risk and compliance tool for conducting due diligence screenings. This due diligence software aggregates PEPs data from multiple sources to enable thorough checks of politically exposed persons.

Search & Retrieve API enables ongoing monitoring of specific records, such as PEP and watchlists, for integration with in-house systems for screenings.

Why are PEPs potentially risky?

Due to their position and influence, it is recognized that many PEPs are in positions that can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing. For example, the Panama Papers published in 2016 revealed details of 140 PEPs who had used letterbox companies to launder money or disguise their ownership of dirty money.

What risks do organizations face if their PEP due diligence is insufficiently thorough?

Organizations that fail to perform adequate due diligence their clients, business partners, and supply chains risk not only reputational damage but also fines. For example, in 2015 a bank was fined 72 million pounds sterling because the required PEP checks had not been performed.

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