In the world of finance, the term “PEP” holds a significant weight. But what exactly is a Politically Exposed Person (PEP), and why should you be concerned about working with them?
PEPs are high-ranking public officials who are vulnerable to bribery and corruption due to their authority. While PEPs may carry elevated risks, avoiding them entirely isn’t the solution. Instead, it’s about effective due diligence, informed decision-making, and comprehensive risk mitigation strategies.
In this article, we provide a thorough definition of what a PEP is, the roles they encompass, and why conducting PEP screening is of utmost importance
What is a PEP?
A Politically Exposed Person (PEP) is someone who is more susceptible to being involved in bribery and corruption due to their public position or function. These individuals may have been entrusted with a high position by a community institution, an international body or a state within the last 12 months.
Examples of PEP roles
Anyone in these positions would be considered a politically exposed person:
- Members of Parliament
- Members of supreme courts, constitutional courts or high-level judicial bodies
- Heads of state, heads of government, ministers, and deputy or assistant ministers
- 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
A PEP is not just high risk when they are active within their position. They may still pose some risk once they have left office by remaining a target. Due to this, continued due diligence is often wise to ensure the risk is managed.
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.
It is important to note that PEPs also include the person’s close family members, business associates, and other beneficial owners of the person’s property.
A full list of the roles considered to be high-profile can be found in the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.
Why is PEP screening important?
Research has shown that there are approximately one trillion dollars worth of bribes processed each year, with this amount of corruption predicted at around 2.6 trillion dollars.
The importance of identifying politically exposed persons is so that financial institutions can monitor their activity and, in doing so, identify people who are most high-risk and prevent them from being involved in crime. Financial institutions are required to have complete and current data records so that the databases used for PEP screening contain sufficient identification data.
The minimum information required by financial institutions for a thorough PEP screening involves:
- Full name
- Date of birth or year
- Country of political exposure
- Politically exposed roles, appointment dates, and years
- The date PEP left their post
When onboarding, PEP screenings should be carried out during the customer’s first engagement period as part of its Know Your Customer (KYC) onboarding process.
The responsibility of identifying PEPs lies with the business that is in direct contact with the customer and must be included in the CDD processes. On-going monitoring is critical for your compliance and should be undertaken to protect your business from money laundering and other financial crimes under 6AMLD
Targeting Politically Exposed Persons
As much as PEPs can be a target for money laundering and bribery, there are many cases where the person themself is actively involved in the crime. Therefore, financial institutions need to monitor the transactions of any PEP to ensure they are not leveraging proceeds of corruption or bribery.
Red flags would be raised in banks if it was noted that a PEP was living beyond their documented means. Financial institutions pay close attention to a PEP’s spending patterns and look for indications of money laundering.
In 2019, the house of former Malaysian Prime Minister Najib Razak was raided by authorities after large sums of money went missing from the government-funded company, 1Malaysia Development Berhad (1MDB).
It was noted by financial services that around the time the money went missing, Razak’s personal account received transfers of hundreds of millions of dollars from unknown overseas accounts. Investigators recovered over $200 million worth of luxury goods from Nijab Razak’s home after the suspicious activity led to the house raid. Razak was initially sentenced to 12 years in prison for abuse of power, along with a further 60 years for counts of money laundering and breach of trust.
Watch Dirty Money Season 2, Episode ‘The Man at the Top’ on Netflix to see how much impact this scandal had on the country.
Should I avoid working with PEPs?
The increased risk that a PEP may pose means that a higher level of scrutiny is required as part of your due diligence processes, but that does not make it necessary to avoid working with them altogether.
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 websites
- Public registers, such as the Companies House
- Reputable commercial databases that include lists of PEPs, their family and known close associates
It is crucial that financial institutions and regulated businesses are aware of an individual’s standing in public office, as well as having the correct controls and procedures in place to identify and mitigate any risks.
Last updated: Thursday 2 November 2023