TerM

Politically Exposed Person

TerM

Politically Exposed Person

Introduction

There are certain administrative positions in society where a person is more vulnerable to financial crime (or has more opportunities to commit it themselves). And due to their influence, damage caused by them becoming involved in bribery, corruption, money laundering, and other illegal transactions often extends far beyond finance. That’s why financial institutions will often label a politician, judge, company head, or military leader as a politically exposed person.

So what is a politically exposed person, specifically? And how does that person’s status affect how their financial affairs should be handled?

We’ll start by giving a more thorough politically exposed person definition so you can understand what kinds of people may qualify as one, and why.

What is a Politically Exposed Person (PEP)?

Politically exposed persons are people who either are or have been in roles where they wield significant administrative influence, either nationally or internationally. This makes them greater targets for financial crimes and gives them unique opportunities to perpetrate these crimes themselves.

The 3 Types of Politically Exposed Persons

The definition of a politically exposed person isn’t clear-cut; it can vary between countries and contexts. However, it usually refers to one of three types of people:

  1. Domestic PEPs: People with considerable administrative influence within a particular country. These include high-ranking members of government, the judiciary, the military, or state-owned corporations.
  2. Foreign PEPs: Ambassadors, consuls, and other people who wield significant influence in negotiating relationships between individual countries.
  3. International Organization PEPs: High-ranking members of bodies that govern particular interactions between multiple countries, such as central banks or sporting committees.

In addition, it may also refer to:

  1. Family Members: Those who hold close social ties to PEPs have a greater risk of being targeted by, or becoming involved in, financial crimes related to their relatives. As such, they can sometimes be treated as PEPs themselves.
  2. Close Associates: People in strong professional or legal partnerships with PEPs also have many of the same risks and opportunities for becoming involved in corruption, bribery, or money laundering. So they, too, are often considered PEPs as well.

Who is Considered a Politically Exposed Person?

Again, the meaning of “politically exposed” can depend on where you go in the world and what people’s relationships with each other are. But most countries follow the guidelines of the Financial Action Task Force (FATF), a global intergovernmental organization dedicated to preventing money laundering, terrorist financing, and other financial crimes. According to the FATF, people in these types of roles typically count as politically exposed people:

  • Heads of state: Top-ranking national political officials, such as presidents, prime ministers, secretaries of state, governor generals, and so on are definitely counted among PEPs. This is especially true because they often deal with international affairs.
  • Other notable political officials: Members of other national legislative bodies, such as members of parliament, senators, regional governors, and leaders of prominent political parties may also qualify as PEPs (depending on the country).
  • Leaders of government-owned businesses: Directors and executives of state-owned corporations are PEPs, as they can exert government-backed financial influence. They may continue to be PEPs even after stepping down because they often retain influence from having served in one of these positions.
  • Senior military officers: As a nation’s military is often closely tied to its security, high-ranking military officials are powerful national influences and are thus considered to be PEPs.
  • Diplomats: Government officials who specialize in international negotiations are PEPs, as they may exert or be the target of foreign influence.
  • Directors of key financial institutions: Anyone that is part of the leadership group of an international bank or other financial oversight committee is a PEP, as their position involves overseeing financial dynamics between countries and multinational corporations.
  • International sports committee executives: A country or city that’s awarded the privilege of hosting an international sporting event can reap a massive economic boost from it. As such, the people who make these decisions are considered PEPs.

Politically Exposed Person Examples

To further illustrate what is considered a politically exposed person and what is not, we’ll list some types of people and explain why each one’s status does or doesn’t make them a politically exposed person.

  • Is a mayor a politically exposed person? Yes. A mayor wields a degree of administrative power over a city or town, so they can affect significant changes if they perpetrate or are targeted by financial crime.
  • Is a celebrity a politically exposed person? Usually not. It’s true that celebrities are often wealthy and hold some socio-cultural authority. However, they rarely have any real power over administrative systems such as government, finance, law, or military.
  • Is a judge a politically exposed person? Yes. Judges and other key legal officials are tasked with interpreting laws to uphold justice. So they are vulnerable to financial coercion that causes them to interpret laws in unintended ways.
  • Is a family member a politically exposed person? That depends on if they are related to a PEP, and the nature of that relationship. If they have strong social, professional, or legal ties to a PEP, they may be counted as a PEP themselves. Otherwise, they likely won’t be.

How to Identify Politically Exposed Persons: Screening & Checks

PEPs require enhanced due diligence measures, both when onboarding them as clients and in their subsequent transactions with your organization. These include steps like:

 

  • Getting onboarding approval from senior management familiar with anti-financial-crimes policies
  • Conducting extensive “know your customer” identity verification
  • Vigilantly researching and establishing where the PEP’s funds are coming from
  • Continually monitoring the PEP’s financial activities and business relationships

But how can you find out who is a politically exposed person in the first place? Below are some recommendations for how to screen current and potential clients.

How to Check if Someone is a Politically Exposed Person

As we’ve mentioned, who is considered a politically exposed person can differ based on national regulations and other contextual factors. However, your company can use several tools and resources to run a politically exposed person check. 

Here are some suggestions:

  • Be aware of the specific politically exposed persons regulations in your country.
  • Look for a politically exposed person database on a government or other legislative website.
  • Search commercial databases; many will include a politically exposed person list, as well as lists of their family members and close associates who may also be PEPs.
  • Stay up-to-date with news reports from credible sources; they will often have the first public announcements that someone has achieved or been appointed to a position that makes them a PEP.
  • Consult other reputable public information sources, such as company registries, for corporate leaders who may be PEPs.
  • Invest in AML technology software that automatically checks the above sources for PEPs; this makes for much easier compliance.

Unit21 Provides AML Solutions to Help with Screening PEPs

PEPs can be especially problematic for Fintech startups and neobanks. These types of institutions are typically more focused on providing good customer service to win and keep clients, so bad actors may count on them being less scrutinizing.

That’s why it’s critical to treat all potential PEPs as having higher risk profiles than average customers and to invest in cutting-edge anti-fraud and AML systems for maximum compliance and security.

Schedule a demo today to see how Unit21’s system can give your business a powerful yet simple way to comply with PEP regulations, and to guard against the elevated risk of financial crime that PEPs pose.