The politically exposed person (PEP) is real-time to the business world. PEPs refer to the people who have a politically influential background, which they utilize for financial crimes. PEPs are prone to money laundering; therefore, their identification is crucial. All across the globe, there is no foreign PEP list where the business can trace their names. When the PEPs are the identities behind the business, they are vulnerable to terrorist financing, corruption, and other illicit activities. Enterprises, financial institutions, and other organizations must analyze the business person when onboarding companies. In this way, the politically exposed persons are identified, so future risks are reduced.
What is Foreign PEP?
A politically exposed person (PEP) is an individual holding a political position that has the ability to influence the people within that country or region. When PEPs are behind the business, they abuse their powers to engage in illicit activities. PEPs include officials who are the heads of government, senior politicians, and other public figures. Close friends, relatives, or co-travellers can also be regarded as PEPs. PEP’s role is just to give them a chance to misuse their public position for private purposes.
What is a PEP Check?
The term PEP check is a specific type of anti-money laundering AML screening to identify whether an individual is a politically exposed person. As a part of screening, the name of an individual is checked against one or more of the PEP list. A PEP check usually occurs during the onboarding of a new client or company into the organization.
If the screening results are positive, the person is considered high risk and referred to an enhanced due diligence. EDD is required to get a better judgment on whether the person should be allowed to open and maintain an account. Additionally, EDD is effective for the constant monitoring of medium to low-risk accounts for seamless financing.
Types of PEPs
It is essential for businesses to know what types of PEPs are so that PEP screenings are set up properly.
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Public officials
Public officials fall under the PEP because of the control they have over the policies within the public domain. They may be involved in financial crimes, including bribery, corruption, and bankruptcy, with their high potential. The government employees that fall under this category are the heads of state, senior politicians, high-ranking judicial officers, agency heads, and high-ranking military personnel.
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Family Members and Close Associates
family members and other close associates of a PEP are also PEPs. This particular nature of the relationship implies that they might be in a position to exploit the level of the PEP. The close associates would, therefore, be ones with whom the PEP has a personal or business relationship, such as spouses or partners, children and their spouses, parents, in-laws, and close friends, among others.
Foreign PEP Vs. Domestic PEP
In the year 2012, FATF stated new Recommendations and altered the meaning of each of the above groups into domestic and foreign PEP.
- Domestic PEPs: All those who have served, or are currently serving, or have been in a significant position in their country.
- Foreign PEPs: Any person who has held a significant position in or for a foreign state, public corporation, or foreign government department.
In general, foreign PEP a prone to a greater money laundering risk than domestic PEPs. the institution conducting the PEP check may know little or nothing about the political situation in the subject foreign politically exposed person’s country of residence. This unawareness means the institution may not know the PEP’s status and may therefore not recognize it. This is why it is usually easier for the authorities to pay more attention to foreign PEPs when the latter are committing criminal offences.
PEP Risk Levels
Generally, foreign PEP examples are divided into one of four risk groups, as discussed below.
- Low-level risk: Governmental: mayors and members of local, country, city and district assemblies, the senior officials and functionaries of international organizations.
- Medium/low-level risk: Presidents and directors of state-controlled enterprises and members of the boards of directors of large national enterprises.
- Medium/high-level risk: The personnel of the military services and the police; the judicial branch civil servants; the heads of religious organizations; heads of diplomatic missions and consular officers.
- High-level risk: Heads of state and government; members of government (national and regional); members of parliament (national and regional); heads of military, judiciary, and law enforcement; board members of central banks; top-ranking officials of political parties.
PEP Compliance
Organizations, including banks and enterprises, must focus on PEP checks while onboarding. PEP has access to public funds, and influence comes with the higher risk posed to businesses, specifically in the Know Your Business procedures. The organizations must have an in-depth understanding of foreign PEP and domestic PEP for risk management. Organizations must implement enhanced due diligence, background checks, transaction monitoring, and report suspicious activity to keep the financial system safe from potential abuse by those in positions of political power.