Politically Exposed Person (PEP)

politically_exposed_persons_PEP_compliance

What are Politically Exposed Persons (PEP)?

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.

Who could be a Politically Exposed Person?

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).

What are the 3 Types of Politically Exposed Person?

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.

  • Foreign PEPs are those that are/have been in the past – in positions of public functions in a foreign jurisdiction – heads of state/government, senior politicians, senior government/judicial/military officials, and prominent political party officials.
  • Domestic PEPs are those that are/have been in the past – in positions of public functions within the country – heads of state/government, senior politicians, senior government/judicial/military officials, and prominent political party officials.
  • Those entrusted with foremost positions in either state-owned enterprises or multi-national organizations – such as senior management (i.e. directors or members of boards).

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.

Are All PEPs High Risk?

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).

FATF Recommendations for Politically Exposed Persons

The FATF’s recommendation 12 directly deal with Politically Exposed Persons. Recommendation 12 notes that the compliance procedure related to PEPs should be to;

  1. have appropriate risk-management procedures in place to determine if a client/UBO is a PEP;
  2. obtain senior management approval for establishing/continuing formal client relationships;
  3. take reasonable measures to identify the source of wealth/funds;
  4. conduct stringent ongoing monitoring of client relationships.
FATF_Politically_Exposed_Persons
Politically_Exposed_Person_PEP
From the “FATF Guidance on Politically Exposed Persons (Recommendation 12 & 22)

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.

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