In India, a Politically Exposed Person is broadly classified as someone in a prominent public function who can exercise influence and is 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.
India is a signatory to the Financial Action Task Force (FATF), which issues updated recommendations regarding the scope of PEPs. There is no universal definition of a PEP, and the criteria vary across countries.
In order to ensure an organization’s accurate compliance with the latest financial regulations related to Politically Exposed Persons (PEPs), it is imperative for financial institutions and banks to fathom the complex structure and meaning of a PEP. In 2023, India amended its PMLA. The new law now widens its scope and defines the term 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 Financial Action Task Force (FATF) frequently issues updated recommendations regarding the scope of PEPs.
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 regulating the PEP.
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 are high 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.
Different 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. But 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 offers PEP matching solutions in India, utilizing unique identifiers to match with over 100,000 curated records of politicians, relatives, aides, high-risk companies, and government officials. Riskpro has defined the politicians in businesses extensively. They have been maintaining the database of Politically Exposed Persons since 2013.
This is the only India-specific solution available for Indian banks to identify PEPs. 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. Banks and financial institutions can do business with politicians. But they should update senior executives with information about their relationship with PEPs. Top bank executives must know of the banking relationships with Heads of State, foreign government officials, or any other senior foreign political figure.
Categories of PEP in India
Three broad categories of PEPs include political figures, the immediate family of political figures, and close associates of political figures.
- 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.