What is a PEP and why is it important to identify them?

PEP stands for politically exposed person. But what makes someone politically exposed and why is it significant when they are identified as a PEP?

Why it’s important to identity a PEP

A politically exposed person, or PEP, is someone who performs a public function or holds public office. They could, for instance, be an elected member of parliament or have been appointed into a role by the state or an international body.

Before giving a PEP access to financial products it is important to identify them and to understand what makes them politically exposed. This informs their risk profile. It’s not to deny them access to financial products or services, but to ensure risk-based decisions can be made about onboarding and risk monitoring.

Financial institutions run checks for PEPs as part of their anti-money laundering (AML) and know your customer (KYC) due diligence compliance processes. These checks are done prior to onboarding and at regular intervals throughout the customer lifecycle, not because being a PEP makes someone inherently untrustworthy, but because it can make them a higher risk when it comes to bribery and corruption.

It’s also possible to be a PEP "by association”. These people might perhaps be married, related, or closely connected to a politically exposed person. Again, a financial institution might check for PEPs by association before onboarding because these customers could pose an increased risk through their relationship with a PEP.

If identified as a PEP or PEP by association and onboarded with a financial product, financial institutions must also decide how and when to monitor the accounts for suspicious activity. The monitoring process and its regularity will be set by the institution depending on their appetite for risk and or the PEPs perceived risk level. 

Who qualifies as a PEP?

The exact definition of a politically exposed person can vary from country to country, but generally it relates to political officials, which might include people who are part of a sitting government or other significant political parties.

Executives of government enterprises and organizations can also be considered PEPs, along with senior members of the judiciary, ambassadors, and high-ranking soldiers.

In the UK, an individual who has had a notable public role outside the country within the last 12 months could also be considered a PEP. And, any close personal friend, family member, wife/husband or partner may also be considered a PEP by association.

Most countries have their own criteria for defining a politically exposed person. There is, therefore, no one definitive list of PEPs globally because there is a spectrum of interpretation about what constitutes being politically exposed.

However, the Financial Action Task Force (FATF) on Money Laundering has a general-purpose international standard which dozens of countries follow. And global data providers have established trusted and robust lists of PEPs that are researched and updated daily. These updates could be based on things such as changing political regimes, births, deaths, and marriages.

Risks associated with PEPs

There are plenty of reasons why financial institutions want and need to identify the PEPs in their network. They might be part of a sanctioned regime for example. The main reason is that they can be a target for bribery and corruption due to their position of power and influence.

Identifying a PEP before they are offered a financial product helps banks and other providers make better risk-based decisions about how to proceed with the customer. For example, following AML and KYC checks, a PEP might be onboarded and regularly monitored, or they might be off-boarded because they are considered too high a risk.

When it comes to a PEP, it is important that financial services companies - even those with a high tolerance for risk - complete their due diligence. Not to deny access to products unfairly but to ensure they aren’t inadvertently supporting financial crime.  

Get in touch

PassFort is a platform that automates AML and KYC checks including checks for PEPs and sanctions. This can make the process of due diligence more efficient and enable firms to make better risk-based decisions.

For more information on how we can help you, please get in touch – we would love to hear from you.