PEP declassification: Once a PEP, always a PEP?

Politically exposed person (PEP) screening is crucial to anti-money laundering and combatting the financing of terrorism (AML/CFT) programs worldwide. It helps identify individuals vulnerable to money laundering activities and protect financial systems and their institutions. 

However, once an individual steps down from their prominent political office or public role, it may be possible to declassify them as a PEP to reflect the reduced level of AML/CFT risk they present. 

What is PEP declassification?

Declassifying a PEP’s status involves re-examining their relationship to political influence and power positions while determining whether their risk profile aligns with the established PEP classification criteria. 

Some AML/CFT approaches hold that PEP classification should be permanently maintained. Others reject the “once a PEP, always a PEP” philosophy and suggest that PEPs can be safely declassified if they meet specific criteria.

AML regulations on PEP declassification

There’s no globally accepted process for PEP declassification, and regulations vary by jurisdiction. Most countries impose a statutory time limit from when the client leaves political office – usually around 12 to 18 months. If a firm chooses to implement a declassification process, any time limit imposed is arbitrary and should be applied in conjunction with ongoing risk assessment.

Here’s a reminder of PEP definitions for some key jurisdictions:

EU PEP definition

Set out in the 4th and 5th Anti-Money Laundering Directives, this includes individuals like heads of state, government ministers, members of parliament, judiciary, diplomatic representatives, and their close associates and family members.

UK PEP definition

As defined in the Money Laundering Regulations 2017, the UK version is similar to the EU’s; it includes senior officials of international organizations, political parties, and public officials with “prominent functions.” The Financial Conduct Authority (FCA) had additional guidance on interpreting the definition.

US PEP definition

As set out by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), this includes foreign and domestic PEPs, focusing on individuals holding high-level governmental, judicial, military, political, or religious roles. While it excludes family members and close associates, the US covers more individuals than the EU and UK.

Advantages of PEP declassification for financial institutions

Declassifying PEPs offers certain advantages but must occur without compromising AML/CFT compliance. With this in mind, firms should carefully consider how they manage their PEP risk liabilities and how they might adjust their approach to accommodate PEPs who have left their political roles.

Firms that implement PEP declassification appropriately can unlock business and compliance advantages such as:

• Ensuring higher client satisfaction by removing friction at onboarding.
• Engaging with a broader customer base and creating new, potentially lucrative business relationships.
• Satisfying their AML/CFT obligations quicker – allowing them to divert necessary customer due diligence (CDD) and enhanced due diligence (EDD) resources towards high-risk individuals.

How do you decide whether to declassify a PEP?

Many financial institutions attribute the “once a PEP, always a PEP” philosophy to customers even after they’ve left their political or public roles. 

This approach suggests that, while the PEP may not have the direct power and authority they held while in office, they may have retained levels of influence and access or accumulated illegal funds that now need to be laundered. 

Maintaining PEP classification, regardless of a change in status, ensures that clients are subject to high scrutiny throughout the business relationship.

However, while this approach minimizes a firm’s immediate compliance risk, it is not necessarily consistent with the risk-based approach (RBA) to AML/CFT recommended by the Financial Action Task Force (FATF) and implemented in most jurisdictions. Under an RBA, a firm must adjust its AML/CFT response to reflect the level of risk presented by individual customers, applying more scrutiny to PEPs, given their implied vulnerability to money laundering.

With that in mind, although some very high-risk PEPs should retain their “once a PEP, always a PEP” status on a permanent (or at least indefinite) basis after they leave office, others may be declassified based on a holistic consideration of certain factors, such as changes in the individual’s political status, reduced influence, or the passage of time.

PEP declassification considerations & best practices

While PEP declassification depends on whether a PEP’s money laundering risk will progressively reduce when they leave office, the declassification process should also consider the following factors:

• The level of corruption inherent in the entity’s country.
• Any links to industries that have a high risk of money laundering.
• The risk associated with the entity’s previous political position, i.e., its susceptibility to corruption.
• How long has the entity held its political position, and what is the likelihood it will hold office again?
• The source of the entity’s wealth and the source of funds acquired while they had their political position.
• The plausibility of the entity’s risk profile and net worth.
• The transparency of transactions associated with the entity’s account.
• Adverse media stories involving the entity.
• The client’s ongoing connections to the political establishment.

In addition to the considerations above, senior managers should review on a case-by-case basis and document internally in case financial authorities subsequently receive suspicious activity reports (SARs) concerning the client.

The importance of advanced AML solutions in declassifying PEPs

Many advanced solutions offer tools for EDD, allowing deeper investigation and analysis of PEPs’ financial transactions, sources of wealth, and business relationships – enabling firms to make informed risk assessments and decisions regarding declassification. 

As the risk associated with former PEPs doesn’t completely disappear after declassification, firms should choose a solution that allows them to continuously monitor the transactions and activities of declassified PEPs, identifying any suspicious patterns or red flags that may indicate money laundering or other financial crimes.

Monitoring and managing declassifications manually can be time-consuming and resource-intensive – automated workflows and streamlined data analysis can improve efficiency and save resources for other essential tasks.