Politically Exposed Persons (PEPs) and the Four Levels of Risk
Politically exposed persons (PEPs) status is not an indication of any criminality. However, if you’re a financial institution or regulated by the FCA. This is to ensure that you comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) measures. To ensure that your organisation does not miss a change in a PEP’s risk profile, ongoing monitoring is necessary – not just when forging a new business relationship.
What is a Politically Exposed Person (PEP)?
The definition of politically exposed person (PEP) is an individual with a high profile political role, or who has been entrusted with a prominent public function. They present a higher risk for involvement in money laundering and/or terrorist financing because of the position they hold.
Defining Politically Exposed Persons
The origin of the term “politically exposed person” can be found in the aftermath of money-laundering scandals of the late 1990s. In particular, the Abacha Affair in Nigeria spurred international efforts to stop political figures misusing the financial system. The term “Senior Foreign Political Figure” is sometimes used instead.
What are the criteria for a PEP?
With criteria varying from nation to nation, there is no definitive list of politically exposed persons. This is further complicated by the Financial Action Task Force (FATF) updating its guidelines on PEP.
Nonetheless, the general practice is to base PEP definitions on the FATF’s guidance, providing these general categories:
- Government officials
- Officials of political parties
- Senior executives
- Relatives and close associates
This category of politically exposed persons include: current and former officials in domestic or foreign government positions. This could range from individuals working in judicial, military, administrative, legislative or executive roles to heads of state. The position could be elected or unelected.
Officials of Political Parties
This PEP category comprises senior officials of either domestic or foreign political parties.
Board members or directors in international organisations, or government-owned commercial enterprises may be deemed a PEP.
Relatives and Close Associates
The immediate family members of any of the above categories – spouses, siblings, parents and children – can also be considered PEPs.
The Four Levels of Risk
- Heads of state and government
- Members of government (national and regional)
- Heads of military, judiciary, law enforcement and boards of central banks
- Top-ranking officials of political parties
Medium Risk – Level 2 PEPs
- Senior officials of the military, judiciary and law enforcement agencies
- Senior officials of other state agencies and bodies and high ranking civil servants
- Senior members of religious groups
- Ambassadors, consuls, high commissioners
Medium Risk – Level 3 PEPs
- Senior management and the boards of directors of state-owned businesses and organisations
Low Risk – Level 4 PEPs
- Mayors and members of local, country, city and district assemblies
- Senior officials and functionaries of international or supranational organisations
Implications for Organisations
To quote ComplyAdvantage, “Financial regulators require businesses to implement PEP screening measures as part of their AML programs to determine their clients’ PEP status. Businesses must be aware of the PEP regulations applicable in their jurisdiction so they can implement the appropriate AML measures.
PEPs legislation also changes over time, meaning that businesses must monitor these legislation changes and how it affects their business, in addition to having a PEP screening process in place.”