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Politically Exposed Persons (PEPs): The 4 Quadrants of Risk

Politically Exposed Person PEP

Politically exposed persons (PEPs) status does not predict criminal behavior, but the additional risk exposure it brings means that financial institutions must apply additional AML/CFT measures when establishing a business relationship. It also means that these institutions must conduct ongoing monitoring to ensure that they don’t miss a change in a PEP’s risk profile. PEP monitoring requirements are preventative in nature and should not be considered indicative of criminal behavior.

What is Politically Exposed Person (PEP)?

The definition of politically exposed person (PEP) is an individual with a high profile political role, or who has been entrusted with a prominent public function. They present a higher risk for involvement in money laundering and/or terrorist financing because of the position they hold.

Defining Politically Exposed Persons

The term “politically exposed person”, sometimes used interchangeably with “Senior Foreign Political Figure”, emerged in the late 1990s in the wake of the Abacha Affair: a money-laundering scandal in Nigeria which galvanized global efforts to prevent abuse of the financial system by political figures.

Politically Exposed Person Criteria

Providing a politically exposed person list is difficult as the criteria is broad and varies from country to country. The Financial Action Task Force (FATF) also issue frequent recommendations on PEPs, adding to the challenge of a having a definitive PEPs “list”.

However, most countries base their PEPs definitions on the guidance issued by the FATF, which categorize PEPs as:

Government Officials

Government officials that could be politically exposed persons are current or former officials appointed to domestic government positions, or positions in a foreign government. This may include heads of state or individuals working in executive, legislative, administrative, military, or judicial branches, in elected and unelected roles.

Political Party Officials

Senior officials appointed to roles in major political parties at home or in foreign countries could be categorized as PEPs.

Senior Executives

Senior executives that are individuals serving in senior executive roles, such as directors or board members, in government-owned commercial enterprises or international organizations may be considered a PEP.

Relatives and Close Associates

Relatives and Close Associates (RCA) could also be a PEP. These are immediate family members of a government or political official, or senior executive – meaning spouses, parents, siblings, children, and spouses’ parents and siblings.

The 4 Quadrants of Risk

Politically Exposed Persons PEPs

The 4 quadrants represents varying degrees of risk levels that a politically exposed person can bring, depending on his/her position.

It is important for financial institutions to be aware of the risk level their client brings because this can determine how much scrutiny is placed upon said client as part of the risk-based approach.

What This Means for Businesses

Financial regulators require businesses to implement PEP screening measures as part of their AML programs to determine their clients’ PEP status. Businesses must be aware of the PEP regulations applicable in their jurisdiction so they can implement the appropriate AML measures.

PEPs legislation also changes over time, meaning that businesses must monitor these legislation changes and how it affects their business, in addition to having a PEP screening process in place.

Implement a PEPs Screening Process

Our enhanced, structured PEP profiles are categorized for flexible searching, allowing you to stay up-to-date with PEP changes. Click here to find out more.

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