Politically Exposed Persons (PEPs): Identification, Risks, and Compliance

Key takeaways

Identifying Politically Exposed Persons (PEPs) is crucial for financial institutions to comply with anti-money laundering (AML) regulations and avoid hefty fines.

PEPs are categorized into three groups: domestic, foreign, and international organizations, and their status duration varies depending on the regulatory body.

Financial institutions must conduct thorough Customer Due Diligence (CDD) and include PEP checks as part of their KYC and AML compliance processes.

Companies should obtain management approval before engaging with PEPs, verify the origin of funds, and continuously monitor transactions to minimize risks and ensure regulatory compliance.

Identifying and working with Politically Exposed Persons (PEPs) has become a challenge for companies. At stake are hefty fines for non-compliance with regulations that can reach astronomical figures.

For example, in 2015, Barclays Bank was fined £72 million for failing to conduct due diligence on Politically Exposed Persons in a single transaction. But this is just one example of the many consequences of overlooking PEP detection in the fight against money laundering (AML) and other regulatory compliance.

But what exactly is a Politically Exposed Person? How can you identify them? To answer all these questions, at Didit, we have prepared this guide to explain the best way to identify them, how to work with them, and the best strategies to minimize risks while ensuring regulatory compliance.

What is a Politically Exposed Person (PEP)?

A Politically Exposed Person (PEP) is defined as an individual who holds or has held a prominent public position or is closely associated with such a person (family members, business partners, or other associates). As such, PEPs are considered high-risk individuals in the financial sector due to their potential ability to misuse their influence for personal gain through corruption, bribery, or money laundering.

While identifying and working with PEPs requires special attention, being identified as a Politically Exposed Person does not imply criminality.

The Abacha Case: Key to Defining the PEP Concept

The concept of PEPs emerged in the mid-1990s after the well-known 'Abacha Case.' Sani Abacha was a Nigerian dictator, and both he and his associates embezzled enormous amounts of money from the country's national bank.

This scandal forced international organizations, such as the Financial Action Task Force (FATF), to implement measures to prevent the misappropriation of public funds by high-ranking officials.

Types of PEPs

PEPs can typically be categorized into three groups based on their role: Domestic, Foreign, or International Organizations.

• Domestic: Individuals holding prominent public positions within their own country. This includes government members, judges, high-ranking military officials, etc.
• Foreign Persons: Individuals holding public positions in countries where the business operates. For example, ambassadors, diplomats, military personnel, etc.
• International Organizations: Individuals holding positions of authority in important international organizations, such as the United Nations, the World Bank, or the International Monetary Fund.

In addition to the individuals holding these relevant positions, their close family members and those with whom they may have any business relationship would also be considered PEPs according to the Financial Action Task Force.

How Long Does PEP Status Last for Individuals?

There is no single universal rule that defines the duration of PEP status for individuals. While it is true that prominent or high-risk Politically Exposed Persons may maintain this label indefinitely, others may lose this status after some time. These are the most common durations:

Why is it Important to Identify PEPs in the Context of KYC and AML Compliance?

Identifying Politically Exposed Persons is crucial, especially in the context of KYC (Know Your Customer) and AML (Anti-Money Laundering) regulatory compliance. Their risk profile is high, particularly due to their access to public capital.

Considering that, according to the United Nations Office on Drugs and Crime (UNODC), it is estimated that between 2% and 5% of global GDP is laundered annually (between 715 billion and 1.87 trillion euros each year), complying with these regulations is more important than ever.

Anti-money laundering regulations define PEPs as individuals who hold or have held prominent public positions. As such, financial institutions (fintechs, banks, etc.) must pay special attention to these profiles. This investigation includes measures such as knowing more about the origin of these individuals' assets, periodic reviews of their accounts, or monitoring transactions to detect signs of possible money laundering.

PEP Risk Levels

Politically Exposed Persons can be classified according to their level of risk. We can primarily make three divisions based on the positions these PEPs hold:

• Low Risk: This includes mayors, officials of national companies, or high-ranking officials.
• Medium Risk: For example, high-ranking judiciary, banking, military, ambassadors, or consuls.
• High Risk: Primarily, prominent members of political parties, parliamentarians, or law enforcement agents.

How to Identify Politically Exposed Persons (PEPs) and Work with Them? The Most Effective Three-Step Checklist

Identifying politically exposed persons is essential to comply with anti-money laundering regulations. Therefore, it is crucial for companies to develop a proactive, risk-based approach, as well as a few additional measures, which we will explain.

• Cross-check individuals with PEP databases (also known as PEP Lists)
• Conduct a thorough Customer Due Diligence (CDD) during the user onboarding process
• Include PEP checks as part of KYC and AML regulations

If an individual is detected who falls within the definition of a PEP, it is important to be alert:

• Obtain management approval before admitting the individual and initiating a business activity with them
• Verify the origin of funds and continuously monitor new transactions that occur

By following these steps, companies can control Politically Exposed Persons, comply with the most important regulations, and, of course, avoid significant financial penalties.

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