Politically Exposed Persons (PEP)

In order to ensure an organization’s accurate compliance with the latest financial regulations related to Politically Exposed Persons (PEPs), it is imperative for the financial institutions and banks to fathom the complex structure and meaning of a PEP.

There is no concrete universal definition of who can be classified as a PEP, as the criteria varies across countries. Also, the Financial Action Task Force (FATF) frequently issues updated recommendations regarding the scope of PEPs.

In simple words, a Politically Exposed Person may be broadly classified as someone in a prominent position who can exert influence and is more susceptible to corruption. Additionally, any family member or close associate of such a person is also deemed to be a possible risk and hence is also considered a PEP.

Three broad categories of a PEP would include the following classification:

  • A Political Figure: a senior official in the executive, legislative, administrative, military or judicial branches of government.
  • The Immediate Family of Political Figure: typically includes the politician’s parents, siblings, spouse, children, and in-laws.
  • A Close Associate of a Political Figure: a person who is widely and publicly known to maintain an unusually close relationship with the political figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the political figure.

 

It is important to note that each country may have different local regulations defining a PEP which need to be understood and followed while conducting business with that jurisdiction.

PEPs are considered to be high risk customers for financial institutions because owning to their position of prominence, they are more likely to be presented with opportunities for acquiring assets through unlawful means or being involved in embezzlement, corruption or other serious offences of money laundering.

Different Politically Exposed Persons pose different levels of risk. The level of risk differs depending on many factors including but not limited to geographic location, industry or sector, position, and level of influence or authority of the PEP.

Once an individual is identified as a PEP, financial institutions should ideally strengthen their Anti-money laundering and Counter Terrorist Financing measures against these individuals. Also, an enhanced due diligence must be done to safeguard one’s institutional interests. These steps are only preventive in nature, because being a PEP in itself does not mark an individual as a criminal.

Riskpro Technology, a company which specialise in building the regtech tools have build their database of the politicians on the basis of the study Business Politico Study conducted by Indiaforensic, which links the politicians with businesses and their businesses with the bank loans.