A Politically Exposed Person or ‘PEP’ is an individual of high public office that may wield significant influence, have access to inside knowledge of government, be in a position to siphon public funds or the awarding of public contracts.
PEPs abusing their position of power (i.e. corruption) comprise a growing threat for many jurisdictions.
In addition, Politically Exposed Persons has become more important to financial institutions, crypto-asset exchanges and other obliged entities due to the ongoing trade war between China and the US, amongst other trade-related disputes between other nations. This fragmentation has led sanctions and counter-sanctions to be imposed on various jurisdictions against one another.
Politically Exposed Persons include those prominent people in government/military/judiciary.
Additionally, families and close associates of PEPs are also incorporated as the trust from the relationship with a prominent person could be abused by both parties (i.e. the PEP using these relationships as ‘representatives’ or the associate using inside knowledge).
The Financial Action Task Force (FATF) – the global Anti-Money Laundering (AML) watchdog set up by the G7 – defines Politically Exposed Persons into three categories of; foreign PEPs, domestic PEPs and those individuals entrusted with prominent positions in the public-private sector.
Not every country believes that domestic PEPs must be regarded as high risk. In the US, Section 312 of the Patriot Act gives clear provisions for EDD for SFPFs (Senior Foreign Political Figure) only. Domestic PEPs in the US are thus not automatically treated under regulations as high-risk, however, most financial institutions in the US keep them on file.
According to the FATF, Politically Exposed Persons should automatically be labeled in a higher risk category when conducting due diligence.
PEP financial transactions should not be processed using Simplified Due Diligence (SDD), but rather Enhanced Due Diligence (EDD).
The FATF’s recommendation 12 directly deal with Politically Exposed Persons. Recommendation 12 notes that the compliance procedure related to PEPs should be to;
Under the EU’s AMLD4, obliged entities must continue to conduct Enhanced Due Diligence (EDD) on PEPs for up to 12 months after they have vacated their official post.