What Are Politically Exposed Persons (PEPs) And The 4 Levels of Risk

3 mins

What is a politically exposed person?

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.

What is an example of a politically exposed person?

People who are politically exposed include:

  • Heads of state or heads of government
  • Senior government officials and politicians
  • Officials from the military or the judiciary
  • Senior officials from government-owned businesses
  • Members of high-ranking political parties

PEPs include close associates such as immediate family members and support employees.

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:

Senior government officials

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.

Members of political parties

One category of PEPs is senior officials appointed to positions in major political parties in the United States or abroad.

Senior Executives

Individuals functioning as senior executives in government-owned commercial firms or international organisations, including directors or board members, may be labeled PEPs.

Relatives, Close Associates and Support Employees

PEPs might also include relatives and close associates (RCA). Spouses, parents, siblings, children, and spouses’ parents and siblings are all members of a government or political official’s or leading executive’s immediate family.

Learn More: Money Laundering Risks in Malaysia

What are the 4 risk levels for PEPs?

Depending on one’s position, the four quadrants symbolise varying degrees of risk that a politically exposed person can bring.

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 politically exposed persons (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 monitoring regulations is to prevent illegal behaviour, and they should not be perceived as such.

High Risk Level 1

  • Political party officials at the highest levels
  • Members of parliament (national and regional)
  • Military, judicial, and law enforcement leaders, as well as members of the central bank board of directors
  • Members of the government (national and regional)

Medium Risk level 2

  • Military, judicial, and law enforcement officers at the highest levels
  • High-ranking civil employees and officials from various governmental agencies and entities.
  •  Senior members of religious organisations
  • Diplomats include ambassadors, consuls, and high commissioners, to name a few.

Medium Risk level 3

  • State-owned businesses and organisations’ senior management and board of directors.

Low-Risk level 4

  • Members of municipal, country, city, and district assemblies, as well as mayors.
  • International or supranational organisations’ senior leaders and functionaries

How Does This Effect Financial Institutions and Banks?

Businesses must utilise PEP screening techniques as part of their 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.

A complete revamp of existing PEP screening processes is imperative for financial institutions given that the AML compliance space is becoming more complex. It is time to embrace modern-era intelligent technology to enhance efficiency and effectiveness in AML compliance programs, establish next-gen financial crime surveillance and ensure robust risk management practices.

For more details on our Smart Screening solution, speak to our experts.

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