A politically exposed person (PEP) is someone who has a high-profile political role or has been entrusted with a high-profile public duty. Because of their position, they are more likely to be involved in money laundering and/or terrorist financing.
In simple terms, a Politically Exposed Person is someone who is more likely to be involved in bribery or corruption due to their prominent position or influence. Furthermore, any close business colleague or family member of such a person will be considered a risk and may be added to the PEP list.
Having a PEP status does not mean that the person is involved in criminal activity. However, financial institutions must take precautions if they have PEPs as their customers as these people are of high risk.
People who are politically exposed include:
It’s tough to compile a list of politically exposed people because the criteria are so broad and differ from country to country. The Financial Action Task Force (FATF) makes periodic suggestions on PEPs, making a precise PEPs list even more difficult.
Most countries, on the other hand, base their PEP definitions on FATF recommendations, which categorises PEPs as follows:
Current or former government officials who have been assigned to positions in the domestic government or in a foreign government could be politically exposed. This could include leaders of state or people in elected or unelected positions in the executive, legislative, administrative, military, or judicial departments.
One category of PEPs is senior officials appointed to positions in major political parties in the United States or abroad.
Individuals functioning as senior executives in government-owned commercial firms or international organisations, including directors or board members, may be labelled PEPs.
PEPs might also include relatives and close associates (RCA). They include immediate family members such as spouses, parents, siblings, children and spouses’ parents and siblings. Support staff, especially of a government official, are also part of the list.
It is critical for financial institutions to understand the level of risk that their clients pose because this can influence how much scrutiny is applied to them as part of the risk-based strategy. Although the status of PEPs does not predict criminal activity, the heightened risk exposure it involves necessitates additional anti-money laundering and counter-terrorist financing (AML/CFT) protocols when establishing a commercial partnership.
It also means that these organisations must conduct ongoing monitoring to ensure that any changes in a PEP’s risk profile are not overlooked. The purpose of the PEP screening regulations is to prevent illegal behaviour.
Depending on one’s position, there are varying degrees of risk that a politically exposed person can bring.
This category generally includes:
This category includes:
This risk category includes senior management and board of directors of state-owned businesses and organisations.
This category includes:
Businesses must utilise PEP screening techniques as part of their anti-money laundering (AML) programmes to determine their clients’ PEP status, according to financial regulators. In order to implement acceptable AML practises, businesses must be aware of the PEP legislation in effect in their country.
In addition to having a PEP screening procedure in place, PEP policy varies over time, requiring businesses to keep track of these changes and how they influence their business.
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