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What is a politically exposed person (PEP)?

Learn what PEPs are, why your business should screen for them, and how Persona can help.

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⚡ Key takeaways
  • Common examples of PEPs include heads of government, senior politicians, and other public officials. People connected to these individuals, such as their family members and close associates, may also be considered PEPs.
  • Each country is free to establish its own definition of who they consider to be a politically exposed person (PEP). As such, there is no single database or list that contains all PEPs. 
  • Generally, foreign PEPs are considered to pose a higher risk of money laundering due to the possibility that the financial institution performing the PEP check may be less familiar with the political landscape of a foreign PEP’s country of origin.

The concept of politically exposed persons (PEPs) is often mentioned in the context of Know Your Customer (KYC) and identity verification (IDV) processes. But what exactly is a PEP and how can you protect your business while working with them? 

Below, we define what a politically exposed person is, take a look at the different types of PEPs to be aware of, and discuss the risks that these individuals may pose to a business. We also offer advice on incorporating PEP screenings into your verification flow to help control this risk.

What is a politically exposed person?

A politically exposed person (PEP) is someone in a public, high-ranking position of power and influence, which may put them at a higher risk of being involved in or linked to financial crimes like corruption, bribery, or money laundering

Common examples of PEPs include heads of government, senior politicians, and other public officials. People connected to these individuals, such as their family members and close associates, may also be considered PEPs.

However, a PEP is not necessarily involved in wrongdoing. Their position simply provides an opportunity for them to abuse their public office for private gain and launder the proceeds through the financial system.

While the definition of a PEP varies slightly from country to country, many base their PEP regulations on the standard set by the Financial Action Task Force (FATF) in 2003.

What is a PEP check?

A PEP check is a type of anti-money laundering (AML) screening designed to determine whether or not somebody is a politically exposed person. During the screening process, an individual’s name is cross-checked against one or multiple PEP databases. 

A PEP check typically takes place during the initial KYC process when an individual opens an account. They can also take place periodically or on an ongoing basis, a concept known as perpetual KYC.

If the screening reveals a match or partial match, the individual may be flagged for enhanced due diligence (EDD) to more accurately measure the individual’s risk of money laundering and determine whether or not they should be allowed to open and maintain an account. In cases of a partial match or possible match, the user may also be asked for more information to dynamically assess risk and determine whether someone who entered “William J. Clinton” as their legal name is in fact former U.S. president Bill Clinton, for example. 

Types of PEPs

You may be surprised at the wide range of PEPs. Understand the different types of PEPs that your business may encounter so you can be sure your PEP screenings are configured appropriately. 

Public officials

Public officials are considered PEPs due to their ability to influence public policy — as well as the risk that they could engage in serious financial crimes such as bribery, extortion, blackmail, and embezzlement. 

This category includes government officials such as heads of state, senior politicians, high-ranking judges, agency heads, and high-ranking military officials. It also includes individuals who lead or have high-level positions at state-owned enterprises, such as Freddie Mac and Fannie Mae, and intergovernmental bodies, such as the World Bank. 

Family members and close associates

Family members and close associates of a PEP are also considered PEPs. The nature of their relationship means they could potentially access and abuse the PEP’s level of power.

Spouses or partners, children and their spouses, parents, and anyone who is close to the PEP either personally or professionally would fall under this definition.

Domestic vs. foreign PEPs

In 2012, FATF issued a new set of recommendations and revised their definition to differentiate each of the above groups into domestic and foreign PEPs.

  • Domestic PEPs: Persons who hold or have held an important office or position in their own country.
  • Foreign PEPs: Persons who hold or have held an important office or position in or on behalf of a foreign state.

Generally, foreign PEPs are considered to pose a higher risk of money laundering due to the possibility that the financial institution performing the PEP check may be less familiar with the political landscape of a foreign PEP’s country of origin. This unfamiliarity means the institution could be unaware of the PEP’s status and influence. For this reason, foreign PEPs are often subject to higher levels of scrutiny.

PEP risk levels

PEPs are typically classified into one of four risk tiers. Which tier an individual falls under should inform how your business interacts with the individual:

  • Low-level risk: Mayors and members of local, country, city, and district assemblies, as well as senior officials and functionaries of international or supranational organizations.
  • Medium/low-level risk: Senior management and board of directors of state-owned businesses and organizations.
  • Medium/high-level risk: Senior officials of the military, judiciary, and law enforcement agencies; senior officials of other state agencies and bodies and high-ranking civil servants; senior members of religious groups; and ambassadors, consuls, and high commissioners.
  • High-level risk: Heads of state and government; members of government (national and regional); members of parliament (national and regional); heads of military, judiciary, and law enforcement; board members of central banks; top-ranking officials of political parties.

What determines if a person is a PEP?

Each country is free to establish its own definition of who, exactly, they consider to be a PEP. The status is not static — it changes as individuals retire or move into new roles or organizations. 

As such, there is no single database or list that contains all politically exposed persons. Individual lists are maintained by governments and third-party vendors. Checking an individual’s PEP status will often require checking multiple databases. 

Each business must be aware of the PEP definitions and regulations applicable in their region and use this knowledge to implement necessary measures. When determining if and how to work with a PEP, consider your company’s industry, risk tolerance, and geographic location, the actions customers can take, and any other relevant factors. 

A thorough AML risk assessment should help you determine how your business will respond to a positive PEP check, including any measures for enhanced due diligence and transaction monitoring

Red flags and indicators for suspicion

As noted above, simply having PEP status does not mean that a customer has engaged in wrongdoing. With this in mind, the FATF provides a list of red flags that financial institutions should be on the lookout for, which may be indicative of a PEP engaging in money laundering or other financial crime. This list is not exhaustive, but includes:

  • Attempts to shield their identity: Because PEPs know that their status may trigger increased monitoring, they may try to skirt around this by obscuring their identity — often through the use of corporate vehicles and intermediaries. 
  • Suspicious behavior: If a PEP engages in suspicious behavior, it may be enough to raise a suspicion of money laundering. Examples of such behavior include unusual inquiries into your institution’s AML or PEP policies, an inability to answer questions around source of wealth or source of funds, or a mismatch between financial statements and publicly available information.
  • Position or involvement in a business: The specific position a PEP holds will influence how much risk they pose. Attempts to downplay or obscure how much influence their position sways may constitute suspicious behavior. 
  • Industry or sector: Certain industries carry with them a higher risk of money laundering; if a PEP is involved in these industries, it may be a red flag. Examples include arms trading and the defense industry, finance, government procurement, mining and extraction, and more.
  • Nature of transactions: Transaction monitoring may uncover red flags related to how a PEP spends or transfers their money. Possible examples include if multiple suspicious transaction reports have been submitted about a PEP, the regular use of rounded amounts, the deposit or withdrawal of large amounts of cash, and more. 
  • Services and products: PEPs offering certain products or services may carry a higher risk of money laundering. Examples include those providing private banking, anonymous transactions, wire transfers, and non-face-to-face transactions. 
  • Country-specific factors: Certain countries are deemed to be high risk for money laundering. A PEP hailing from one of these jurisdictions increases the risk associated with that individual.
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Why your business should screen for PEPs

The risk-based approach to AML requires financial institutions to tailor their customer due diligence processes to the specific level of risk an individual poses to potentially launder money. Under this model, individuals deemed to carry a greater level of money laundering risk will undergo enhanced due diligence, while individuals deemed to carry less risk will undergo standard or simplified due diligence. 

Politically exposed persons are, by and large, considered to pose a greater level of risk than non-PEPs. This means that they should in most cases go through enhanced due diligence. But if you don’t know that a customer is a PEP, you won’t know that EDD is required. This opens your business up to legal and regulatory risk.

The only way to know whether or not somebody is a PEP is to conduct a PEP screening. In this way, PEP screenings should be considered a critical piece of your AML tool kit. Any business subject to AML regulations should be conducting PEP screenings as a part of their KYC process. 

How to identify PEPs with Persona

PEP screening can be a time-consuming, difficult process. With Persona, it’s easy to automate multiple checks across databases to ensure you’re getting a holistic picture of a PEP’s risk profile.

With Persona’s Reports solution, you can choose to screen individuals against more than 5,000 PEP lists and databases. Best of all, you are free to customize your match criteria as you see fit, including which PEP categories you check and how close a match needs to be before an account is flagged. 

You can also use Reports to cross-check individuals against watchlists, sanctions lists, adverse media, and more to make sure that you have all of the information you need to make a decision about working with them. 

Persona is fully customizable and offers one of the industry’s widest ranges of verification components. That means you can adjust the verification requirements and process flow based on each individual PEP’s risk level. For example, if the system flags a new account holder for being on a PEP list, you could require them to submit additional identity verification checks, such as a government-issued ID or selfie scan

Start screening for PEPs in your business

Protect your business and customers by enabling a more powerful, intuitive PEP screening system. Get in touch and find out how Persona can help.

Frequently asked questions

How long is a person considered a PEP?

There’s no set time frame defining how long a person remains a PEP.

Well-known, high-risk PEPs may keep their status for life, while others are declassified after some time has passed. Most countries agree it should be at least 12 to 18 months after they leave office. Close associates should be considered a PEP for as long as the relationship continues.

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