What is a Politically Exposed Person (PEP)?
A Politically Exposed Person (PEP) is someone who, through their position or influence, is more susceptible to being involved in bribery or corruption. This is usually someone who has been entrusted with a prominent public function. Close business associates and family members are also considered PEPs. PEPs represent a higher risk for financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) because they are more likely to become involved in financial crimes like money laundering.
The Politically Exposed Person (PEP) regulations
As part of AML regulations, many countries have established rules for identifying Politically Exposed Persons (PEP). In Europe, this is mandated as part of the Anti-Money Laundering Directive (AMLD). In particular, PEP regulation was strengthened significantly as part of the fifth directive (5AMLD), implemented in 2020.
A PEP presents a higher risk for money laundering activities or terrorist financing. As such, financial institutions must identify whether potential clients are PEPs and apply appropriate extra due diligence if so. Being a PEP does not imply that the person has been involved in illegal activity, but extra care must be taken when checking the person and transactions.
Who is classified as a Politically Exposed Person (PEP)
Anyone who presents a higher risk for potential involvement in bribery and corruption by virtue of their position is considered a PEP. Anyone currently or formerly holding such a position could be a PEP.
This includes, but is not limited to, the following:
- Heads of state.
- Government officials. This includes MPs, senior ministers, and those in senior military or judicial positions.
- Senior roles in state-owned enterprises.
- Diplomatic roles, including ambassadors, consuls, or charge d'affaires.
- Certain roles within central financial institutions, including Court of Auditors and board members.
- Relatives of any of the above PEPs. This will include parents, children, partners, uncles/aunts, and in-law relations.
- Close business associates of PEPs. This includes anyone with a close business relationship with a PEP or joint beneficial ownership of a legal entity with a PEP.
Politically Exposed Person (PEP) list
Under the EU Anti-Money Laundering Directive, member states must release a publicly available list of PEPs in the country. These should be identified by role, not by individual name. The EU will also make available an EU-wide PEP list. These lists are designed to help compliance teams identify PEPs that they should be screening for. In addition, several third-party vendors will hold lists of PEPs that can be used as part of KYC procedures.
How do you check if someone is a Politically Exposed Person (PEP)?
Regulators require businesses to implement PEP screening measures as part of their AML programs. This typically follows a risk-based approach, where different roles are assigned different risk levels.
Checks should be conducted when taking on a new business relationship as part of KYC and KYB procedures. There should also be ongoing checks to ensure that a change in PEP risk profile is not missed.
These checks can be carried out independently by the organization, making use of country and EU lists where appropriate, or conducted in collaboration with a third-party supplier. Most organizations will use a combination of automated checks and searches with manual oversight and monitoring.
At IDnow, we offer the option of conducting AML checks with on-time screening against PEP and global sanction lists in combination with our IDnow AutoIdent solution.