In the dynamic world of financial services, a term that often raises eyebrows is “politically exposed person” (PEP). These individuals hold prominent public positions, having been entrusted with high-ranking roles by community institutions, international bodies, or states within the last 12 months.

But are all PEPs as high-risk as they are made out to be? In this article, we delve into the reality behind the perception and explore effective strategies to manage the risks associated with PEPs.

Who is a Politically Exposed Person or PEP?

A PEP refers to an individual who holds a prominent public position or has held such a position in the recent past. PEPs encompass a wide range of roles, such as: ●

• Heads of state, heads of government, ministers, and deputy or assistant ministers
• Members of Parliament 
• Members of courts of auditors or of the boards of central banks 
• Ambassadors and high-ranking officers in the armed forces 
• Members of the administrative, management or supervisory bodies of state-owned enterprises 
• Members of supreme courts, constitutional courts or high-level judicial bodies 

PEPs also include: 

• The person’s family members 
• Close business associates 
• Beneficial owners of the person’s property

Additionally, Politically Exposed Persons include their immediate family members, close business relationships, and beneficial owners of their property. For a comprehensive list of roles considered high-profile under The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, please refer to legislation.gov.uk.

Why are PEPs considered to be a higher risk?

Politically Exposed Persons are considered high-risk due to several factors associated with their positions and potential vulnerabilities to financial crimes.

1. Influence and power

PEPs hold influential positions in government, politics, or public administration. Their ability to make decisions, allocate resources, and exert authority can attract individuals seeking to gain undue advantages, engage in bribery, or exploit their positions for personal gain.

2. Access to public funds

PEPs often have access to public funds and government resources, which can be misused or misappropriated for illicit purposes. This includes embezzlement, money laundering, or diverting public funds for personal enrichment.

3. Bribery and corruption

The nature of their roles and the potential for influencing policies, contracts, and regulatory decisions make Politically Exposed Persons susceptible to bribery and corruption. They may be targeted by individuals or organisations seeking favours or preferential treatment in exchange for financial incentives.

4. Concealing illicit wealth

PEPs may use their positions to conceal the origins of illicitly obtained wealth. They might engage in money laundering schemes to legitimise proceeds of corruption, fraud, or other criminal activities, making it difficult to trace the dirty money.

5. Reputation and reputational risk

Associations with PEPs can pose reputational risks for businesses and financial institutions. Being involved with individuals linked to corruption or financial crimes can damage an organisation’s reputation, lead to legal and regulatory consequences, and undermine public trust.

6. International cooperation and regulations

International efforts to combat money laundering and terrorist financing emphasise the need to identify and monitor PEPs. Regulatory frameworks, such as those outlined by the Financial Action Task Force (FATF), require enhanced due diligence measures for PEPs to mitigate the risks they pose.

It is important to note that not every politically exposed person is involved in illicit activities, and being a PEP does not imply wrongdoing. However, the higher risk associated with their positions necessitates additional scrutiny, enhanced due diligence, and monitoring to ensure compliance with anti-money laundering regulations and to protect organisations from potential risks.

Should I avoid working with Politically Exposed Persons?

Not necessarily! Many PEPs are legitimate and trustworthy individuals; however, the significant risk they can pose requires a higher level of scrutiny as part of your due diligence processes. The Financial Conduct Authority (FCA) expects regulated businesses to use information that is reasonably available to help you identify PEPs, including:

• Public domain information, such as reliable parliament and government website
• Public registers, such as the Companies House
• Reputable commercial databases that include lists of PEPs, their family and known close associates

Financial institutions and regulated businesses must ensure that they are aware of the individual’s standing in public office – and that they have the correct controls and procedures in place to identify and mitigate any risks.

At the outset, regulated businesses are required to ensure that they satisfy KYC due diligence requirements for every client. But, in the case of a PEP, additional scrutiny is required to not only prevent criminal activity but also protect the organisation from reputational, legal and operational risk while providing the PEP with services.

How can you manage Politically Exposed Persons? 

As part of the Money Laundering Regulations 2017, if a client is politically exposed, businesses must:

• Have approval from senior management to establish or continue a business relationship 
• Take adequate measures to establish the source of wealth and source of funds involved in the proposed relationship
• Conduct enhanced, ongoing monitoring of the business relationship with the PEP throughout

Once established that a specific client is a PEP, you can take a risk-based approach to evaluate their level or risk, as well as the nature of the project or work they may be asking you to undertake. This will help you make sure that your due diligence is both proportionate to the level of perceived risk, comprehensive and, importantly, effective.

Crucially, the identification and monitoring of a PEP’s status is key to mitigating undue risk or incidents of money laundering. Monitoring should be undertaken to protect your business from being used for this purpose, or any other financial crime. After the initial due diligence process, these checks need to be performed at regular intervals – for both known PEPs and other clients.

A known Politically Exposed Person may change roles or seniority (such as from senior management to senior executive) or step down from an exposed role altogether. Similarly, an existing ‘normal’ client may step into a role which would categorise them as PEP within your organisation’s risk profile. This is why ongoing monitoring is so important; however, doing this can be resource-intensive and costly.

To address this challenge, automated software solutions, like ours at NorthRow, continuously monitor changes in a PEP’s status, associated media coverage, and related parties. Our software tools enable businesses to confidently know whom they are doing business with. By identifying PEPs and providing real-time alerts of any changes in their circumstances or status, such software solutions assist businesses in maintaining ongoing compliance with the latest anti-money laundering (AML) regulations.

Would you work with a politically exposed person (PEP) now?

Understanding the risks associated with PEPs and implementing effective management strategies is crucial for regulated businesses. While PEPs can present higher risks, thorough due diligence, ongoing monitoring, and the use of automated software solutions can help organisations protect themselves from potential financial crimes, ensure compliance, and maintain their reputation in the market.

Last updated: Tuesday 25th July 2023