What Is a Politically Exposed Person?

03 July 2024

A man in formal attire having a conversation with a woman.

In the world of regulated services and anti-money laundering (AML), the term "Politically Exposed Person" (PEP) holds significant importance. A PEP is an individual who occupies a prominent public position, making them more susceptible to corruption and financial crimes, including money laundering and terrorist financing. Understanding who PEPs are, the risks they pose, and how financial firms manage these risks is crucial for maintaining the integrity of the global financial system.

Defining a Politically Exposed Person

A Politically Exposed Person includes individuals who hold or have held influential public roles. This designation extends beyond the individual to include their immediate family members and close associates, who may also be at elevated risk of engaging in or benefiting from corrupt activities. Common examples of PEPs include:

Senior politicians
Senior government, judicial, or military officials
High-ranking executives of state-owned enterprises
Financial or national sporting committee members
Important political party officials
Diplomatic individuals, such as ambassadors
Military personnel of General Officer rank
Close associates of the above, such as parents, partners or friends

How Do You Identify a Politically Exposed Person?

Identifying a PEP can be straightforward if their role is declared, but not everyone is forthcoming about their position or role.

PEPs can be domestic, foreign, or part of international organisations such as the United Nations, the World Trade Organisation or NATO. Therefore, it is critical to have robust procedures in place to identify a PEP or potential PEP.

As stated by the Law Society, the FCA “expects firms to use information that’s reasonably available to them to help identify PEPs”, such as public domain information, reliable public registers and commercial databases that contain lists of PEPs.

You can identify a PEP by following these key steps:

Asking the Individual: When engaging in financial activities, individuals are usually asked if they or their immediate family members are PEPs. This is part of the due diligence process to comply with AML and counter-terrorism financing (CTF) regulations and saves the firm a lot of time if they comply properly. However, it must be borne in mind that this method on its own can be insufficient.
Check Public Positions: If the individual fails to provide an answer on if they are a PEP, determine if the individual currently holds, or has held, a significant public role such as a senior politician or military official.
Include Family and Associates: Remember, close associates are also considered PEPs, so identify immediate family members and other closely related individuals.
Use Screening Tools: Utilise technology, such as databases and screening software. Electronic ID and verification applications often include a PEP check, but they are not 100% reliable; there have been recent incidents where EID/V platforms have erroneously reported that individuals were not a PEP, even though they were.
Conduct Background Checks: Perform thorough background checks using screening tools to verify the individual's political status and assess potential risks.
Ongoing Monitoring: Continuously monitor the individual and their transactions and activities to be alert for signs of suspicious behaviour or changes in their PEP status. Using screening software, news of changes to a PEP’s status can sometimes be automated.

Why Are Politically Exposed Persons Considered High Risk?

PEPs are considered high risk because their influential positions provide opportunities to engage in, or be impacted by, corruption, bribery, and other illicit activities, potentially enabling them to acquire or support significant illicit wealth. Their access to public funds and decision-making power increases the risk of money laundering and other financial crimes. The association with high-profile roles makes their financial activities more complex and harder to scrutinise.

Why Are Close Associates Sometimes Higher Risk?

Associates of PEPs are considered higher risk because they may benefit from (or participate in) a PEP's illicit activities. These individuals can serve as conduits for money laundering, hiding the origin of corrupt funds and facilitating illegal transactions on behalf of a PEP. Their close connections to PEPs make it easier to obscure financial dealings and transfer illicit wealth, further complicating the detection of suspicious activities. This emphasises the need for enhanced due diligence to manage the risk of financial crime, especially when it comes to these close associates.

Indicators of Suspicious PEP Activities

There are many red flags to watch out for when it comes to the financial activities of PEPs. If you’re wary of any unusual activities that could indicate financial crime related to a PEP, flag it with your firm’s money laundering reporting officer (MLRO) without delay. Indicators of suspicious activities involving PEPs include;

Significant increases in wealth that cannot be justified by the PEP’s known income
Using multiple bank accounts for no apparent commercial reason
Transactions involving countries known for high levels of corruption or tax havens
Hesitation or refusal to provide detailed information about the source of funds
Engaging in transactions involving large sums of money without a clear explanation
Bank account displaying high-volume activity with substantial cash transactions
Domestic cash deposits potentially originating from the cross-border transfer of funds
Transactions that appear to be influenced by the PEP's political connections or position
Involvement of family members and close associates in financial transactions
Regular changes to account signatories, beneficiaries, or related parties
Investments in high-value assets like real estate, luxury goods, or artwork
Establishing domestic companies or businesses with no evident commercial activity

How to Handle PEP Clients - Enhanced Due Diligence

Given the heightened risks, firms are expected to implement Enhanced Due Diligence (EDD) measures when dealing with PEPs. EDD involves more rigorous checks and monitoring processes to monitor for money laundering or other illegal activities, or concerning the Terrorist Financing and Transfer of Funds Regulations (2017). It is also important to note that firms should not act for a PEP without first obtaining approval to do so from the firm's designated Board.

Key EDD measures involve;

In-depth background checks to verify their identity, political status and source of wealth
Continuous scrutiny of transactions and account activities to detect suspicious activities
Gaining approval from senior management and ensuring that decisions are carefully documented
Obtaining detailed information on how the PEP acquired their wealth.
Identifying the origin of the funds involved in transactions

Ongoing Monitoring

The ongoing monitoring of PEPs and their close associates includes continuous scrutiny of their transactions, account activities, and changes in their personal or political status. Firms must employ advanced monitoring tools and regularly update PEP profiles to identify any unusual or suspicious behaviour. Risk data about each PEP should be a part of a firm’s regular monitoring, inspected closely by the MLRO. Analysis of associated risk data should also be included in the firm-wide risk assessment.

Keeping an eye on any changes in any business interests of the PEP could pinpoint suspicion of money laundering early on if it arose.

Finally, an existing client who was not a PEP when first utilising the firm’s services can become a PEP during the course of their relationship with the firm, and so continuous scrutiny is also required here.

Reporting Suspicious Activity Related to a PEP

If money laundering or other financial crimes are suspected concerning a PEP, it is important to report this to your MLRO without delay. It is your moral and legal responsibility to report suspicious behaviour. Reports take the form of a Suspicious Activity Report (SAR) and can be submitted through the National Crime Agency (NCA) using the NCA SAR portal.

Our AML Training Services Can Help Your Firm Manage Money Laundering Risk

At PDA Legal, we offer a range of related AML services, from training to audits. We understand that every business has different requirements, so we offer a tailored approach based on your needs. Contact us for a FREE consultation today.