1. What’s the difference between a PEP and a Sanction?
A Politically Exposed Person (PEP) is a person in an influential and prominent political position operating within a domestic or foreign capacity. In their role as senior government officials, they have access to resources and power that can influence government, policy and people.
Sanctions are tools used by governments that can be applied to individuals, countries, groups, and companies to prohibit illicit activity and curb undesirable actions by certain high-risk persons or groups. For more information on sanctions, view our Sanctions Screening Best Practice Guide.
Sanctions can be compiled into Sanctions lists, which are preventative measures to change behaviours and prohibit illicit activity, including freezing assets that can be used to fund crime. Lists of PEPs, however, are created to provide organisations with the information they require to ensure that the activity associated with their customers, including their family members and close associates, is honest and abides by local laws. Fundamentally, lists of PEPs foster transparency between the government, the financial institution, and its customer base.
2. What’s the difference between a PEP and a foreign public official?
Although the definition of a foreign public official (FPO) has similarities to that of a PEP, there are key differences. The term PEP is used primarily in anti-money laundering (AML) regulation, while the term foreign public official is chiefly used in anti-bribery regulation. FPOs are typically connected to national laws against corruption in international trade.
3. Why does political exposure increase money laundering risk?
The more senior the role a person holds in government, the more exposure that person has to the people and resources that can influence or corrupt the laws that govern financial actions. Those that are politically exposed are more likely to have the opportunity to manipulate and misuse the financial system for illicit gain and personal advantage.
4. What regulations mandate controls relating to PEPs?
There are a variety of laws that define PEPs. The Financial Action Task Force (FATF), which is an inter-governmental body tasked with developing and promoting policies to combat money laundering and terrorist financing, produces the guidelines for compliance that organisations must follow.
The Wolfsberg Group, a non-governmental association of 11 global banks, aims to set the standards for implementation of the FATF’s anti-money laundering and counter terrorism financing guidelines.
Organisations must also comply with the individual interests and risk appetites of each country in which they operate, and consider the legal framework for each.
You can read more about FATF’s rules and recommendations for dealing with PEPs here:
You can read more about PEPs in the Wolfsberg Group’s paper here:
5. What is a PEP list?
A PEP list is a database of politically exposed individuals and entities built from rigorous investigative and research processes. The list could include personally identifiable information such as date of birth, gender, aliases or nicknames, titles, roles, and nationality. They also examine relationships and close associates to the PEP, which can include business partners, family members and related companies.
6. How are PEP lists generated?
PEP lists are generated by researching and collating data about politically exposed persons from public records, authenticated media channels and news websites all over the world. Efforts are made to ensure that the profiles generated are fully substantiated with links and references to the underlying sources of information.
These records need to be continuously monitored and updated for any changes to circumstances such as a politician leaving office or a PEP getting married.
7. How do I identify a PEP? How do I check if any of my customers, prospects or associates are PEPs?
To identify whether a customer, prospect or associate is a PEP, the individual can be screened against a PEP list. Screening can be achieved through a number of methods ranging from individual searches using a web-based interface, batch screening entire databases en masse or integrating a database with pep and sanction screening software. The status of a politically exposed person can change overnight, therefore it is vital to carry out PEP checks on an ongoing basis to mitigate risk.
8. Can an existing customer become a PEP? If so, should they be screened on an on-going basis?
Yes, an existing customer can become a PEP. For example, a customer of a bank can become involved in politics at a later date by becoming an MP or running for a local election. This only applies to those running in high status, senior political roles. As any customer has the potential to become a PEP, the need for on-going screening by the organisation to flag any changes in the customer’s political exposure is crucial.
9. Can I do business with a PEP?
Yes, organisations should consider PEPs as desirable prospective customers, and these customers should be treated the same as any other business opportunity. A political official listed in a PEP database does not necessarily pose a threat to the organisation. As such, a bank should take every effort to lessen the stigma associated with being a PEP. When doing business with a PEP, organisations must ensure that they perform enhanced due diligence, while abiding with data protection rules.
10. How is it possible to establish family members and close associates of a PEP?
Relationships between PEPs, family members and close associates can be mapped together by combining automated monitoring systems, data analytics and in-depth research methods using freely-available public records and reputable media outlets.
11. Do I have to manage client relationships with family members and close associates of PEPs as if they were PEPs themselves?
The extent to which family members and close associates of PEPs are screened and monitored is determined by each individual organisation, and the decision is made based on risk appetite. It must be considered that a customer who does not meet the criteria of a PEP may be related to or closely associated to an individual who is considered high risk. As these relationships can offer valuable information to the organisation and authorities about the behaviour of their customers, many organisations choose to manage them closely.
12. Should foreign and domestic PEPs be treated differently?
PEPs should be treated on a case by case basis following a risk-based assessment in accordance with a number of factors including the financial institution’s relationship, geography, and business line.
The FATF guidance states: “In accordance with FATF’s definition of PEPs, other factors, such as country of domicile or nationality, are not relevant in determining the type of PEP, but may be relevant in determining the level of risk of a specific domestic PEP. Foreign PEPs are always considered high risk. It should also be noted that a domestic PEP is subject to the foreign PEPs requirements if that individual is also a foreign PEP through another prominent public function in another country.”
With the implementation of the 4th EU Money Laundering Directive, domestic PEPs will be subject to the same level of scrutiny and enhanced due diligence as foreign PEPs. However a case by case risk-based approach should continue to be applied.
13. What are the expectations for an organisation that deals with PEPs?
Currently, UK-based organisations must follow specific provisions that incorporate both European and UK law. Organisations must comply with the rules set out by the Fourth EU Money Laundering Directive. This regulation, which is focused on the transfer of funds, represents the revised EU framework on anti-money laundering and terrorist financing.
Under the directive, a reshaping of the risk-based approach for customer due diligence will see financial institutions and law firms obliged to check the identity of their customers and to report suspicious transactions.
EU member states need to comply with the directive by ensuring this information is stored centrally in a register outside of the company for security reasons.
14. I’ve flagged one of my clients or business associates as a PEP. What do I do now?
Once a PEP has been identified, the EU’s Fourth Money Laundering Directive states the following measures must be applied in cases of business relationships with PEPs:
- Obtaining senior management approval for establishing or continuing business relationships with such persons;
- Taking adequate measures to establish the source of wealth and source of funds that are involved in business relationships or transactions with such persons;
- Conduct enhanced, ongoing monitoring of those business relationships.
15. I work in politics. Does that make me a PEP?
Those who possess mid to lower-level political positons are generally not considered PEPs or high risk because they do not typically have access to the resources that influence senior level decisions and law making. However, it is the responsibility of the investigating party to make a risk-based decision on an individual’s PEP status.
Anti-bribery regulations do not specify the extent they apply to party officials. Organisations must take appropriate steps to identify and monitor the status of a PEP on their customer database through Know Your Customer (KYC) and Enhanced Due Diligence (EDD) checks.
16. How long should a PEP status last after the termination of the official activity?
How long a PEP status remains after the official activity ends varies according to country, the organisation’s risk appetite and the regulatory atmosphere at the time or until it is deemed that the person does not pose further risk.
Source: LexisNexis Risk Solutions