What is a Politically Exposed Person?

A politically exposed person (PEP) is a high-profile individual in a position of power and influence who’s at greater risk of being involved in bribery, corruption, money laundering, or terrorist financing. The Financial Action Task Force (FATF) regularly updates guidelines for who should be considered a PEP, and financial institutions should have a system for identifying and monitoring PEPs, whether they’re new or established clients. 

Introduction

In 1887, Lord Acton wrote that “power tends to corrupt and absolute power corrupts absolutely.” While government leaders and heads of prominent organizations are expected to use their authority fairly and justly, the unfortunate reality is that, as Acton observed, some people let that authority go to their heads.

That can mean being swayed to engage in criminal or unethical behaviors, including financial crime.

A politically exposed person (PEP) – sometimes also called a senior foreign political figure – is a high-profile individual in a prominent position. They are more at risk of being involved in bribery, corruption, money laundering, or terrorist financing because of their role and influence.

The term “politically exposed person” was coined during an investigation into the money-laundering schemes of Nigerian dictator Sani Abacha. This event, called the Abacha Affair, was the catalyst that would influence nations around the world to enact legislation related to financial services regulation to fight political corruption.

Identifying and classifying PEPs

Since the Abacha Affair, the Financial Action Task Force (FATF) has established guidelines for which high-profile individuals should be considered PEPs. While qualifying criteria is extensive and regularly updated (meaning there’s no definitive list), the basics of who should be included are:

• Members of government (think heads of state, senators, ambassadors, supreme court justices)
• Individuals who are part of government-owned or international organizations/institutions (such as high-ranking military officers, international sports committees, or members on the board of central banks)
• Known close associates of prominent individuals (like friends or business partners) 
• An influential person’s immediate or extended family members (such as in-laws)

Additionally, the FATF has established three classifications for people identified as PEPs:

1. Foreign PEPs: Individuals who are or have been entrusted with prominent public functions by a foreign country
2. Domestic PEPs: Individuals who are or have been entrusted domestically with prominent public functions
3. International PEPs: Persons who are or have been entrusted with a prominent function by an international organization

It’s important to note that having a process to identify and investigate PEPs isn’t a nice-to-have, but a must-have. FinCEN requires financial institutions to do enhanced due diligence work to discover and report transactions that may involve proceeds of foreign corruption. These proceeds include assets acquired through embezzlement, theft, bribery or extortion, misappropriation, or property that was acquired by converting any of these assets.

Doing your due diligence

Financial institutions should be working to identify PEPs when establishing new client relationships and escalating PEPs to senior management for approval. But what if you learn an existing client is now a PEP? First, don’t panic – just because someone is a PEP doesn’t mean they’ve engaged in criminal activity. Second, establish a procedure that will enable you to regularly monitor the client for any red flags that may crop up. Finally, be sure to always keep KYC information up to date throughout your relationship with the client.

If your client eventually leaves their prominent position, don’t forget about them just yet. There’s no expiration date for PEP status, and FATF recommends continued monitoring based on risk. Financial institutions need to consider the level of influence that individual still holds, the seniority of the position they held when they were identified as a PEP, and whether their previous and current roles are linked in any way.

Wrap Up

Creating a program to accurately identify and monitor for PEPs is a crucial step in preventing financial crime, and one that FinCEN requires of financial institutions. Thorough due diligence procedures to identify PEPs will help you create a streamlined process so you can do your most efficient, effective investigative work. And remember: identifying PEPs is a preventative measure. An individual may be classified as a PEP, but it doesn’t mean they’ve engaged in any crime. Keep your KYC information regularly updated and monitor for anything that may need a closer look.