A Guide to Anti-Money Laundering for Crypto Firms

Who Are Politically Exposed Persons (PEP) And Why Do They Matter?

PEPs Knowledge & Training

While politically exposed person (PEP) status does not predict criminal behavior, the risk exposure that it brings means that financial institutions must apply additional AML/CFT measures when establishing a business relationship and conduct ongoing monitoring to ensure that they capture changes in their customer’s risk profile. PEP monitoring requirements are preventative in nature and should not be considered indicative of criminal behavior.

What is a PEP / Politically Exposed Person?

A politically exposed person is an individual with a high profile political role, or someone who has been entrusted with a prominent public function. These individuals present a higher risk of involvement in money laundering and/or terrorist financing because of the position they hold.

Defining a Politically Exposed Person

The term “politically exposed person”, sometimes used interchangeably with “Senior Foreign Political Figure”, emerged in the late 1990s in the wake of the Abacha Affair: a money-laundering scandal in Nigeria which galvanized global efforts to prevent abuse of the financial system by political figures.

The Financial Action Task Force (FATF) subsequently codified the term in its AML guidance, setting out the following 3 classifications of PEP:

  • Foreign PEP: Individuals entrusted with prominent public functions by a foreign country. This category of PEP may include ‘heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials’.
  • Domestic PEP: Individuals entrusted with prominent domestic public functions. This category includes ‘heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials’.
  • International PEP: The FATF sets out a third category of ‘International PEP’ – known as ‘persons who are or have been entrusted with a prominent function by an international organisation’. This category of PEP covers ‘members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions’.

The FATF points out that its three classifications of PEP are ‘not intended to cover middle ranking or more junior individuals’.

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Identifying Politically Exposed Persons

While it may be useful for financial institutions to build a list of designated PEPs to reference, doing so is often challenging since the criteria that qualify an individual as a PEP are broadly defined and vary from country to country. The FATF also periodically issues new AML/CFT recommendations on PEPs which further complicates the implementation of any ‘definitive’ PEP list. 

However, most countries base their politically exposed person definitions on FATF guidance which broadly covers the following roles and positions as PEPs:

  • Government Officials
  • Political Party Officials 
  • Senior Executives
  • Relatives and Close Associates

Government Officials

Government officials are current or former officials appointed to domestic government positions, or positions in a foreign government. This type of PEP may include heads of state or individuals working in executive, legislative, administrative, military, or judicial branches, in elected and unelected roles.

Political Party Officials

This type of politically exposed person includes senior officials appointed to roles in major political parties at home or in foreign countries. 

Senior Executives

This type of PEP includes senior executives serving in senior executive roles, such as directors or board members, in government-owned commercial enterprises or international organizations.

Relatives and Close Associates

Relatives and Close Associates (RCA) of the individuals outlined above may also be categorized and treated as a politically exposed person.. This category refers to immediate family members or close social or professional contacts of a government or political official, or senior executive – meaning spouses, parents, siblings, children, and spouses’ parents and siblings.

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The 4 Quadrants of Risk

Some PEPs pose a greater AML/CFT risk than others. With that in mind, the levels of PEP risk may be organized into the following 4 quadrants:

It is important for financial institutions to conduct suitable customer due diligence in order to establish a client’s PEP status and accurately determine the level of risk that they present. Accordingly, firms should assess new clients at onboarding as part of the risk-based approach to AML recommended by the FATF. 

Risk-Based PEP Screening

A risk based approach requires firms to deploy AML/CFT measures commensurate with the level of risk their clients present – applying enhanced due diligence measures (EDD), for example, to higher risk customers. In the context of PEP screening best practices,

firms should ensure that their definition of the term is broad enough to capture all relevant roles and positions, along with family members and close associates. 

A risk based approach to PEP screening should be built around the following principles: 

  • Fuzzy searches: PEP search settings may be less fuzzy than those deployed for sanctions searches. Unlike sanctions targets (which should never be onboarded), PEPs are less likely to vary their names. 
  • Search frequency: While sanctions lists change constantly, the PEP landscape is less volatile. Accordingly, PEP screening processes may take place on a weekly or monthly basis. 
  • True positives: When sanctions screening returns a hit, firms must apply enhanced due diligence and freeze the relevant transaction. For PEP screening, however, certain jurisdictions allow for firms to adjust their compliance response: for example, it may be permissible to apply less intensive EDD measures to domestic PEPs than foreign PEPs. 

Changes in PEP Status

Customers become PEPs in a variety of ways including through electoral victories, changes in employment, political appointments, and promotions – and firms must be able to capture that change in risk profile as soon as possible. Similarly, firms should also know when customers may be declassified as PEPs. 

The FATF also sets out guidance for detecting changes in PEP status: 

  • Customer due diligence: Firms should monitor non-PEP customer accounts on an ongoing basis to capture changes in PEP status. Practically this means ensuring effective customer due diligence processes are in place. 
  • Employee training: Firms should train their employees to detect changes in PEP status. The FATF recommends ongoing training programs incorporating real-life case studies and input from human compliance experts. 
  • Adverse media: Changes to a customer’s PEP status may be revealed in news stories before confirmation by official sources. Accordingly, firms should search for media involving their customers, across both internet, screen, and print sources.
  • Commercial databases: PEPs are listed in a variety of commercially-available databases. While these databases should not be regarded as a replacement for CDD measures, firms may use them to add depth to their PEP screening measures. 
  • Government PEP lists: Many governments maintain lists of PEPs and lists of public roles that qualify their holders as PEPs. Like commercial databases, these lists may help firms add depth to their PEP screening process but should not replace CDD. 

PEP declassification: When an individual steps down from their government or prominent public role, it may be possible to declassify them as a PEP. However, in some cases, leaving a political role may not alter a customer’s risk profile. Accordingly, firms should consider a range of factors when seeking to declassify a customer as a PEP, including how long the customer held office, the customer’s ongoing links to the political system, and the level of corruption associated with the territory in which they reside. 

Although there is no accepted time limit for PEP declassification, the FATF emphasizes that the declassification process should be based ‘on an assessment of risk and not on prescribed time limits’

What This Means for My Business

Financial regulators require businesses to implement PEP screening measures as part of their AML programs. Businesses must be aware of the PEP regulations applicable in their jurisdiction so that they can implement AML/CFT measures in line with money laundering regulation.

With that in mind, an effective PEP screening process should be built on the following principles and considerations: 

  • High quality data: The quality of the data that firms collect on their customers is vital to establishing PEP status with speed and accuracy. 
  • Supplementary screening: The PEP screening process should be supported by additional screening checks, including adverse media searches. 
  • Ongoing monitoring: PEP legislation changes over time, meaning that businesses must monitor regulatory trends – and how they affect their business – on an ongoing basis.  

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Originally published November 21, 2019, updated June 26, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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