A Politically Exposed Person (PEP) is an individual who is or had a prominent public function, either elected or appointed, with substantial authority over policy, operations or the use or allocation of government-owned resources. Example of PEPs includes heads of state, members of legislative bodies, government ministers, judges, high ranking members of the armed forces and senior officials of state-owned enterprises. The Fourth Directive extended the definition of PEPs to include domestic citizens, as well as foreign ones.
PEPs are higher-risk clients for institutions and financial firms to onboard, simply because they are exposed to more opportunities to accept bribes, be involved in corruption by virtue of their position and launder money.
PEPs, as well as their families and persons known to be close associates, are required to be subject to enhanced scrutiny by regulated firms. A family member of a PEP includes spouse, parents, siblings, children, and spouse’s parents or siblings. A known close associate of a PEP means an individual known to have joint beneficial ownership of a legal entity or any other close business relationship, or an individual who has sole beneficial ownership of a legal entity which was set up for the benefit of the PEP.
If a client does have a PEP status, this does not automatically signify guilt or suggest a link to money laundering activities, it simply means the appropriate due diligence and ongoing monitoring needs to be conducted.
How Do You Determine a High-Risk PEP from a Low- Risk PEP?
Due to the broad scope of who is considered a PEP, determining between a high-risk and low-risk PEPs can be difficult, particularly when you are processing transactions or checks en masse.
The general PEP definition is primarily based on the Financial Action Task Force (FATF) Guidance on Politically Exposed Persons, but there are official definitions found in the 4th and 5th MLD, amongst others.
While such definitions are valid sources to define a mandated approach to compliance, NorthRow believes they are not sufficiently detailed for its clients to verify a between a high or low risk PEP efficiently. The definitions treat all PEPs equally from a risk approach, and doesn’t go into the granular detail needed to easily differentiate between a low and high risk PEPs.
For this reason, NorthRow has a ‘PEP Tiering Guidance’ system that can serve as a framework for its to follow due diligence investigations.
While several categories must be treated with care in certain contexts, the general guidelines should cover most governance systems spanning all jurisdictions in the world.
In accordance with a risk-based approach, the categories are divided into 4 different priority levels please see below the diagram.
4 Tiers of PEPs Checks
Politically Exposed Businesses and Organisations
NorthRow also checks and monitors Politically Exposed Businesses. According to the FATF Guidance on Politically Exposed Persons, the PEP could be either the account holder or the beneficial owner of an account-holding legal entity.
If a PEP is the beneficial owner or has majority control of a company or organisation, that person may be able to use the organisation in furtherance of corrupt purposes. For this reason, FATF recommends that regulated business should have appropriate risk management systems to determine whether the client or the beneficial owner (BO) is a foreign PEP, or has a relationship or business connection to a foreign PEP, along with ensuring measures to provide the source of wealth and source of funds. Similarly, for domestic PEPs and international company PEPs, financial firms are recommended to take reasonable measures to determine whether such a relationship exists and assess the degree of risk.
NorthRow approach to PEP identification and classification also maps out the relationship between PEPs and legal entities and arrangements, either directly (as director, shareholder, or similar) or indirectly (as ultimate beneficial owner), where such information is publicly known, to help establish if someone is high or low risk.
About NorthRow’a PEPs & Sanctions Solutions
NorthRow’s solution delivers the industry’s most robust AML & KYC solution to help regulated firms to automate the client onboarding journey whilst mitigating their business risk. Our single API includes one of the industries leading listings of PEPs & sanctions data, enquire now for more details.
Download NorthRow’s PEPs and Sanctions overview document to learn more.