Defining the Politically Exposed Persons

Politically Exposed Persons pose a bigger risk before the financial institutions in India.

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CA Mayur Joshi
CA Mayur Joshi
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.

In India, a Politically Exposed Person is broadly classified as someone entrusted with a prominent public function. They exercise influence and are more susceptible to corruption. Any family member or close associate of such a person is also a possible risk. Hence is also classified as a PEP. The full form of PEP in this article means Politically Exposed Person.

India is a signatory to the Financial Action Task Force (FATF), which issues updated recommendations regarding the scope of PEPs. There is no universal PEP definition, and the politically exposed person meaning varies across countries.

To make sure a company follows the latest financial rules about Politically Exposed Persons (PEPs), banks and financial institutions need to understand what a PEP is. In 2023, India changed its law (PMLA) to include a broader definition of a Politically Exposed Person.

There is no concrete universal definition of who can be classified as a PEP, as the criteria vary across countries. Also, the FATF recommendations act as the guideline for most of the regulators.

While conducting business with a particular jurisdiction, it is important to understand and follow the different local regulations that define the PEP status in each country.

Politically Exposed Persons and Indian Laws

In India, Politically Exposed Persons (PEPs) are subject to various financial regulations to prevent money laundering and terrorist financing. Before PMLA was amended in 2023, RBI and SEBI were defining politically exposed persons in India.

Financial institutions such as banks and brokerages adhere to regulatory guidelines issued by the SEBI and the RBI.

SEBI rules require financial intermediaries to obtain senior management approval before establishing financial relationships with Politically Exposed Persons. Banks must verify the identity of such individuals and gather all necessary details before enrolling them as PEPs.

The RBI mandates that banks perform additional due diligence on the identity of PEPs. Any significant change in transaction amount or pattern could trigger further investigation by regulatory authorities. The PEP KYC process is more rigorous and requires additional documentation.

Legal entities such as companies and trusts pose a higher risk. They could potentially be fronts for terror financing, narcotics smuggling, or other criminal activities. As per the PMLA-2023 amendments, financial institutions require proper due diligence on beneficial ownership. In the year 2024, RBI revised the definition of Foreign PEPs.

In the amended KYC master direction, the central bank defines PEPs as “individuals who are or have been entrusted with prominent public functions by a foreign country, including the heads of states or governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned.

Different types of PEPs pose varying levels of risk, depending on factors such as geographic location, industry or sector, position, and level of influence or authority. Financial institutions must strengthen their anti-money laundering and counter-terrorist financing measures against PEPs once identified. Enhanced due diligence must be performed to safeguard institutional interests.

PEP Lists in India

Using commercial PEP lists such as Riskpro in India is a useful starting point. This company compiles a Domestic PEPs list. However financial institutions can also use internal databases and shared accounts to identify a PEP’s network. Banks and financial institutions subject to anti-money laundering regulations should undertake PEP screening during the client onboarding process as part of their Know Your Customer (KYC) program.

Riskpro provides a service in India that helps identify Politically Exposed Persons (PEPs). These are individuals who hold important political positions or have close ties to them. Riskpro uses special identifiers to compare against a database of over 100,000 records, including politicians, their relatives, associates, high-risk businesses, and government officials. They have been keeping track of these individuals since 2013 to help businesses understand the risks associated with dealing with them.

This is the only India-specific solution to identify PEP in banking companies in India. The API for this service is also available from the company.

It is important to note that being a politician is not an indication of criminality. Bank can enter into business relationship with politician. However, they should update senior executives with information about their relationship with PEPs. Top bank executives must know of the banking relationships with the Head of State, foreign government officials, or any other senior foreign political figure.

Categories of PEP in India

There are three main types of politically exposed persons (PEPs): politicians themselves, their family members, and their close friends or associates. This includes the financial action task force (FATF) typologies.

  • Political figures include senior officials in the executive, legislative, administrative, military, or judicial branches of government.
  • Immediate family members typically include parents, siblings, spouses, children, and in-laws of political figures.
  • Close associates are those who maintain an unusually close relationship with politicians. They are in a position to conduct substantial domestic and international financial transactions for politicians. Riskpro defines this category as Politically Exposed Directors. While conducting business in any jurisdiction, it is crucial to understand the local regulations. In India, financial institutions must comply with the guidelines issued by SEBI and the RBI.

In conclusion, PEPs are considered high-risk customers for financial institutions. As their position of prominence makes them more susceptible to financial crimes associated with money laundering. It is advisable to check the customer databases against the PEP lists regularly.

Learning about PEP

Regulators require businesses to check if their customers are Politically Exposed Persons (PEPs) as part of their Anti-Money Laundering (AML) programs. This is done to prevent money laundering and other illegal activities.

Businesses need to assess the risk level of each customer based on their role. Checks for PEP status should be done when starting a new business relationship, as part of the Know Your Customer (KYC) and Know Your Business (KYB) procedures.

It’s also important to keep checking regularly to make sure that a customer’s risk level hasn’t changed. This helps businesses stay compliant with regulations and reduce the risk of being involved in illegal activities.

The Certified Anti Money Laundering Expert program is unique because it’s the only program worldwide that covers everything you need to know about politically exposed persons (PEPs) and the screening process related to them. You can register for this course by visiting the CAME Cohort page.

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