Politically Exposed Persons: Who They Are and Why They Matter

January 24, 2015 3 minute read

In the world of finance, the phrase “politically exposed person|politically exposed persons”, otherwise known as PEP, is one that you will often see. The basic definition of this term is an individual who has a well-known public function, or an individual who has a close relationship to someone who does. Because of PEP’s status in society, as well as the power and influence that usually accompany their vocations, these individuals are substantially more likely to be involved with bribery, corruption, and money laundering. Another term that is oftentimes associated with the concept of politically exposed persons is “Senior Foreign Political Figure”. It is not unusual to see these terms used interchangeably, and both of them are almost always used in the international sense.

The term politically exposed person dates back to the 1990s and originates from a money laundering scandal that took place in Nigeria. Despite the fact that it has been a concept for over 20 years, it is very difficult to find a universal definition of the term Politically Exposed Person|PEP. Some countries define the phrase in different ways, and no unanimous international definition has ever been decided on. For instance, Canada considers an individual to be a politically exposed person only if they pose a direct threat due to money laundering and terrorism. Conversely, many countries believe that individuals can be politically exposed persons even if a direct threat is not present. However, a majority of states tend to base their own definitions of PEP on that of the Financial Action Task Force, also known as the FATF.

The [[FATF]] is an inter-governmental institution that was created for the primary purpose of regulating the financial industry and combating corruption within it. It has been in existence for over 20 years, and it is in charge of creating recommendations for its members to implement in order to reduce the risk of money laundering and bribery, especially when done by politically exposed persons.

The FATF has several qualifications for an individual to be truly considered a politically exposed person. For instance, he or she must currently be or have previously been an official for a foreign government. Politically exposed persons can be in the legislative, executive, judicial, and military branches, and they do not have to be elected into office. If he or she is not a foreign government official, they can also be considered a politically exposed person if they are a senior official for a political party in a foreign country, a senior official for a business entity that is owned by a foreign country’s government, or an immediate family member or professional associate of one of the above.

One of the most major points of the FATF’s definition of politically exposed persons is that they must be senior officials, rather than people who only hold middle ranks.

Additionally, the FATF has stated that the goal of their work is not to condemn politically exposed persons for criminal activity when no evidence has been found, but rather to help institutions prevent misuse of the financial system from occurring.