What is a Politically Exposed Person?

A politically exposed person or “PEP” is defined as an individual who is entrusted with a prominent public function, other than as a middle-ranking or more junior official, or a family member or known close associate of such persons.

Since they often have the power to direct public funds, PEPs are particularly vulnerable to what Transparency International calls ‘grand corruption’. Financial firms need to comply with anti-money laundering legislation which obliges them to identify PEPs and scrutinise them to a higher standard than ordinary clients.

Who should be treated as a PEP?

Examples of prominent public functions are :

• Ministers, deputy or assistant ministers, heads of state or heads of government
• Members of parliament or of similar legislative bodies
• Members of governing bodies of political parties
• Members of supreme courts, of constitutional courts or of any judicial body
• Courts of auditors as well as the board’s members of central banks ambassadors, charges d’affaires and high-ranking officers in the armed forces
• Members of the administrative, management or supervisory bodies of state- owned enterprises
• Directors, deputy directors and members of the board or equivalent function of an international organisation

Who should be treated as family members or known associates of a PEP?

Family members and known close associates of PEPs are known in the industry as ‘relatives or close associates’ or RCA for short. RCAs generally include the following:

• spouses, or civil partners
• children alongside their spouses or civil partner
• parents
• siblings

What are the requirements?

All clients should be screened for PEPs, usually alongside sanctions screening.  Should you discover that your client is a PEP, you must do the following:

• get senior management approval for the business relationship
• take adequate measures to establish the source of wealth and source of funds
• closely monitor the business relationship

In short, you should apply enhanced due diligence measures.

Risk Factors / red flags of dealing with PEPs

Not all PEPs present the same level of risk. For example, a PEP from the UK (a relatively free and corruption-free state) shouldn’t be scrutinised to the same standard that a PEP from Afghanistan  should be. Your PEP risk management framework should therefore factor these nuances in. If you’re unsure, the FCA and Wolfsberg Group’s guidance on PEPs might be a good places to start.

Below are the some risk factors you should watch out for when dealing with PEPs that may indicate higher risk associated with the relationship:

• Attempt to obscure identity via the use of corporate vehicles without valid business reason
• Inaccurate or incomplete information
• Hesitance to provide information about source of wealth or source of funds
• Relations to the arms trade, defence industry, banking, finance, or provision of public goods and utilities
• Multiple historic suspicious activity reports
• Transactions between non-client corporate vehicles and personal accounts
• Inability or  or reluctance to provide details or credible explanations for establishing a business relationship, opening an account or conducting transactions
• Unusually large or complex funds transfers to an account
• Country specific red flags, such as the foreign PEP being from a higher risk country, or they have been identified by credible sources as having a high affinity to corruption, for example through adverse media searches

What next?

You should keep your PEP arrangements under continuous review. Should you require an expert review of your PEP risk management framework, drop us a message and we'll be happy to assist.