Politically Exposed Persons (PEP): what they are and why they matter
A politically exposed person (PEP) is an individual who is or has been entrusted with a prominent public function. PEPs are higher-risk customers for financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) because they have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking and thus are more likely to launder money. That said, being a PEP does not in itself equate to being a criminal or suggest a link to abuse of the financial system.
After determining that a customer is a PEP, financial institutions and DNFBPs in most jurisdictions must apply additional AML/CFT measures to the business relationship. They are also responsible for conducting ongoing due diligence specifically tailored to the client’s PEP status. These requirements are preventive in nature and should not be interpreted as meaning that all PEPs are involved in criminal activity.
The term “politically exposed person” emerged in the late 1990s in the wake of the Abacha affair, a money laundering scandal in Nigeria which galvanised global efforts to prevent abuse of the financial system by political figures. A similar term, often used interchangeably with PEP, is “Senior Foreign Political Figure”. Although there is no universal definition of who classes as a PEP, most countries base their definitions on the guidelines created by the Financial Action Task Force (FATF). The FATF defines a PEP as:
- a current or former senior official in the executive, legislative, administrative, military, or judicial branch of a government (elected or not)
- a senior official of a major political party
- a senior executive of a government owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual
- an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse’s parents or siblings
- any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate.
Different types of PEP are usually regarded as presenting different levels of risk. The below categorisations are not intended to be absolute, but might prove useful in thinking about which PEPs require the most careful due diligence work.