What is a PEP?
A PEP, or Politically Exposed Person, is someone that is in a noticeable and significant public function. Being in such a position associates an individual to potential risks to include bribery and corruption, money laundering and terrorist financing. Additionally, it’s worth knowing that an individual will remain a PEP for at least 12 months after being in such a position.
Examples of PEPs (this list is not exhaustive):
- High ranking officer in the armed forces
- Government Official
- Senior Management from a state owned company
- Immediate family members or known close associates of a PEP
How do you identify a PEP?
Domestic and International standards require regulated firms, be they a multinational bank or a FinTech startup, to carry out KYC when creating new business relationships. This will be the key source of information for determining if a client is a PEP. Examining government issued PEP lists, commercial databases, and media sources is a key part of a robust KYC process. Additionally, there is something very valuable that a company will have access to: their client. Companies should allow for their prospective client to declare whether they are, or are not, a PEP. There can be times when an individual may not be aware that they are one or may give an untruthful answer. The KYC controls are in place to help you manage that risk.
What if a client is a PEP?
If a client is identified as a PEP, this creates a ‘high risk situation’. Regulation 14 of the Money Laundering Regulations 2007 states that you will need to apply enhanced due diligence on a risk-sensitive basis. There is no defined industry standard with regard to the exact steps needing to be taken however, and companies may develop procedures that go above and beyond the standard based on their risk appetite and client type(s). These can include:
- Obtaining approval from the Senior Management Team
- Seeking further verification of the client or beneficial owner’s identity
- Obtaining more details on the ownership and control structure
- Establishing the client’s source of wealth and funds
- Closely monitoring transactions to ensure they’re in proportion of the client’s known wealth
There are many different types of PEPs and almost as many ways of managing them. However your business approaches them, though, it’s important to be aware of the risks they pose, and to identify, determine and mitigate those risks in order to tackle money laundering and comply with regulations.