Are all Politically Exposed Persons (PEPs) high-risk?
In the regulation of financial services, a politically exposed person (commonly known as a PEP) is one who has been appointed to a prominent public function. These individuals may have been entrusted with a high-position by a community institution, an international body or state, within the last 12 months.
In general, a Politically Exposed Person is considered to be higher risk simply due to the potential for involvement in bribery and corruption, by virtue of their position and the influence that they can hold.
Who is a Politically Exposed Person or PEP?
PEPs can be:
- 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
A full list of the roles considered to high-profile under The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 can be found on legislation.gov.uk.
Why can PEPs pose a higher risk?
Given the position a PEP holds, they can present a higher risk of involvement in money laundering and/or terrorist financing.
Particularly high risk PEPs include heads of state and government, MPs, heads of military and high-ranking officials of public parties. The nature of their position means they typically have more opportunity to acquire assets and funds through unlawful means such as bribery and corruption. In turn, this increases the potential to launder these ill-gotten funds.
Should I avoid working with Politically Exposed Persons?
Not necessarily! While many can be ‘above board’, the significant risk that a PEP can pose means that a higher level of scrutiny is required 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 parliament and government website reliable
- 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 to 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 evaluate and analyse their risk level, and assess the nature of 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 PEPs is key to mitigating undue risk or incidents of money laundering. Monitoring should be undertaken to protect your business from being used for money laundering and other financial crimes. 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 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, ongoing monitoring can often be a resource-intensive and costly task.
Automated software that continuously monitors for changes in a PEP’s status, associated media coverage and related parties can enable businesses to remain confident in who they are doing business with.
Such software, like NorthRow, can identify PEPs and monitor your clients daily. It will alert you immediately of any changes to their circumstance or status, helping to ensure ongoing compliance with the latest AML regulation.