Knowledgebase

Determination of a PEP

The determination that a customer is a PEP is not an aim in itself but forms part of the process that enables financial institutions and DNFBPs (Designated Non-Financial Businesses and Professions) to assess the different types of higher risks related to PEPs.  Determining that a customer is a PEP does not absolve financial institutions and DNFBPs of further ongoing due diligence specifically tailored to the fact that the client is a PEP.

Red flags indicators

Being a PEP does not prejudge a link to criminal activities, or equate to being a criminal and / or subsequent abuse of the financial system. Similarly, the fact that a person is a domestic/international organisation PEP does not automatically imply that he/she poses a higher risk. Financial institutions and DNFBPs need nevertheless to be aware of the risks that a PEP may abuse the financial system to launder illicit proceeds, and financial institutions and DNFBPs need to be aware of the red flags / indicators that can be used to detect such abuse.

The FATF has developed a collection of red flags / indicators that can be used to assist in the detection of misuse of the financial systems by PEPs during a customer relationship. This list of red flags / indicators is relevant to detect those PEPs that abuse the financial system, and does not intend to stigmatize all PEPs. Often, matching one or more of these red flags / indicators may only raise the risk of doing business with a customer (red flags, risk factors), and several red flags may need to be met to create a suspicion. However, in some cases and depending on the specific circumstances, matching just one or more of these red flags / indicators will directly lead to a ML (money laundering) suspicion14 (indicators of suspicion).

These PEP red flags are not an exhaustive list and are complementary to the usual ML (money laundering) red flags that a reporting entity may be using. The methods of those PEPs that engage in illicit activity change and therefore indicators of their activity will do so as well. Also, there may be other red flags that should be considered as equally important in a particular country or region.

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