A politically exposed person (PEP) is an individual who has or has had the authority to perform significant public functions that play or have played a vital role in the public life of a particular country or at the international level.
Such persons are singled out as a separate category because, due to their position and influence, they pose a higher risk of engaging in bribery and corruption. Accordingly, financial monitoring bodies pay increased attention to their financial activities in combating money laundering and terrorist financing.
There is no single global definition of politically exposed persons. At the international level, it is customary to adhere to the definition proposed by the FATF in 2003 and revised in 2012.
Also, each country has unique regulations governing the identification of politically exposed persons and the specifics of relations with them. For instance, in the Czech Republic, these are the Law on Combating Money Laundering and Methodological Instruction No. 7 from FAÚ.
The term “politically exposed person” (PEP) originated in the late 1990s with the infamous “Abacha case”. Nigerian dictator Sani Abacha had been robbing his country for years and withdrawing funds to bank accounts in the UK and Switzerland. In 2001, when the country’s new government tried to return the stolen assets, members of the dictator’s family began to oppose it actively. This started a large-scale investigation, during which the concept of politically exposed persons appeared.
For those subjected to anti-money laundering (AML) laws and regulations, it is especially important to determine whether their potential client is politically exposed and requires heightened control.
Who is a politically exposed person?
There are several criteria to determine if someone is a politically exposed person as defined by the FATF. This category includes:
- Persons involved in the work of state bodies. These include high-ranking government officials from administrative, governing, and supervisory bodies. For example, presidents, prime ministers, ministers, senior officials, members of parliament, ambassadors, judges of the Supreme Court, etc.
- Organization employees. This refers to the heads of state commercial enterprises, high-ranking officials of major political parties, and the leadership of significant international organizations.
- Persons related to the individuals listed above socially or professionally. These can be family members, close relatives, business partners, and others.
Politically exposed persons are also usually divided into:
- domestic PEPs;
- foreign PEPs;
- international organizations PEPs.
The FATF has developed detailed guidelines to help determine whether a person is a PEP and what requirements should be followed when conducting business or transactions with them.
How to detect if a person is a PEP?
It is assumed that a person must indicate their PEP status when filling out bank documents for account opening. However, only some people adhere to this rule. Since there are no consolidated lists of politically exposed persons, financial institutions must use any available resources during the customer due diligence process. These resources may include open government databases and registries, international commercial databases, paid online resources, etc.
For politically exposed persons, it is essential to be aware that bank employees will be interested in the origin of their finances, and they may also monitor the movement of funds in their accounts.
How to interact with politically exposed persons?
A PEP status does not prohibit financial institutions from conducting business with such individuals. However, in accordance with anti-money laundering and counter-terrorist financing laws and regulations, banks must diligently verify the source of income of politically exposed persons, and their family members and business partners.
