A Guide to Identifying A Politically Exposed Person (PEP)

Fulfilling due diligence is essential for ensuring businesses stay financial crime compliant. Identifying Politically Exposed Persons (PEPs) is crucial to this process.

Screening for PEPs is vital to ensuring financial crime compliance. Financial institutions can take appropriate action on individuals who may rank as high-risk customers, meet regulatory requirements, and ultimately prevent money laundering.

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What is a Politically Exposed Person?

A Politically Exposed Person is an individual who is recognized as a public official in a high position. The PEP status can extend to those connected to high-ranking individuals, including family members and close colleagues.

There are different types of PEPs, and depending on their power and influence, they could be ranked at a higher risk for exposure or involvement in corruption, bribery, or money laundering. While those identified as a Politically Exposed Person may have no interest in abusing the financial and political system for personal gain, it's important to acknowledge that they have the opportunity and resources to conduct it or play a part in it.

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Indicators of a Politically Exposed Person

Globally, PEP regulations can vary, however most financial institutions refer to standards from the Financial Action Task Force (FATF), which stipulates the need for Enhanced Due Diligence (EDD) procedures once an individual is flagged as a Politically Exposed Person.

PEP screening can signal whether a more detailed risk assessment is required through EDD processes. Considering the differences in the definitions of PEPs in different countries, no single database lists all PEPs.

Aside from businesses staying abreast of applicable PEP definitions, signs shared by the FATF help you identify if an individual is a PEP engaged in financial crime. This includes the following:

• Attempting to shield their identity with intermediaries
• Suspicious behavior that raises questions about the source of funds or discrepancies in financial statements from public records
• Obscuring their high-ranking positions in a business
• Nature of transactions that may withdraw large amounts or repeatedly initiate transactions
• Individuals who come from countries with high risk for money laundering

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Risk levels of PEPs

The risk level can vary significantly depending on the specific role, the nature of the transactions, and the political environment. Each type of PEP requires tailored due diligence processes. Financial institutions often use advanced monitoring systems and thorough background checks to effectively assess and manage these risks.

• High-level risk PEPs have the most power and influence, often governing a large body of people
• Medium-level risk PEPs include those in senior management in public office and private institutions
• Low-level risk PEPs are those who govern a smaller group

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Types of Politically Exposed Persons

The next most important question you might have is how to identify who are Politically Exposed Persons. Financial institutions can encounter many people from different backgrounds. Understanding the different types of PEPs can enhance your PEP screenings.

These are some of the most common types of PEPs you may encounter.e

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Public officials

As the name suggests, public officials or individuals with high-ranking positions that can influence the public are considered PEPs. They pose as high-risk customers considering the sheer amount of power they have to orchestrate and engage in financial crimes. They can also be considered as domestic PEPs.

This category should count government officials, members of legislative and executive bodies, ambassadors, and senior executives of state-owned enterprises.

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Foreign PEPs

Foreign PEPs are individuals who hold a significant public position or role in a different state or foreign country. They may take advantage of evading regulations from their own country to conduct suspicious or illegal activities. Foregin PEPs can fall under the category of public official in their residence and can be flagged with a high-risk PEP status.

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PEPs in organizations and institutions

Organizations and institutions also have powerful leaders. Persons who are or have been entrusted with prominent public functions by an organization or business should be flagged as PEPs. This includes members of senior management, such as directors, deputy directors, and members of the board or those with equivalent functions.

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Family members of PEPs

Given their close relationship, immediate family members of the above PEPs can also be classified as PEPs. Individuals who may be flagged under this category are the PEP's spouses, children, and parents.

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Close associates

Individuals with close business relations with a PEP can also be tagged as a PEP. This can also include people who have joint beneficial ownership of legal entities or arrangements with a PEP or those who have sole beneficial ownership of a legal entity or arrangement known to exist for the benefit of a PEP.

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How to ensure compliance with a PEP

It's important for a financial institution to take a risk-based approach to effectively meet compliance on global and national regulations and combat financial crime. This means taking the necessary measures to identify compliance risks for your business and set the right processes and controls for risk management.

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Consult PEP Lists and public databases

There are two sources you can use to check or confirm a Politically Exposed Person: subscription-based services and publicly available databases. Each has its benefits.

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Subscription-based services

A practical and worthwhile investment that financial institutions opt for are subscribing to databases that list known PEPs. These databases have a wealth of information on international and domestic politicians, high-ranking military officials, senior figures in state-owned companies, and more.

Publicly available databases

For a more manual approach, open-source searches, including media, government websites, and other public records, allow you to identify and determine who of your customers are PEPs. This includes checking election results, government press releases, and other reputable sources where PEPs might be listed.

There are also organizations who publish free lists like the CIA World Leaders List and Rulers.org. It is worth noting that they may not have complete information like the subscription-based services.

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Conduct Customer Due Diligence (CDD)

CDD is an essential part of PEP compliance as it helps create an accurate customer profile. As customers open accounts, document verification allows you to check the legitimacy of data provided. Individuals should be able to provide valid identification documents that can also confirm their status. For instance, passports can have codes that indicate their government positions.

Customers can be required to self-declare their PEP status when opening new accounts with financial institutions. Effectively, this gives organizations insight on the legitimacy of their sources of funds, the nature of their business activities, and financial behavior.

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Follow up with Enhanced Due Diligence (EDD)

Once an individual is categorized as a Politically Exposed Person, the need to conduct EDD often arises. Following up with EDD means thoroughly examining financial transactions and professional activities.

It can verify provided information through multiple reliable sources, assess and categorize their risk level, and verify the purpose of their transactions. This is especially significant for foreign PEPs whose information in a different country may not be readily accessible.

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Utilize screening and monitoring tools

A more rigorous process is required for PEPs. For instance, ongoing monitoring and screening is crucial to catch any suspicious activities as they happen. This makes investing in the right tools crucial.

A good PEP screening tool should be able to automate your screening processes. The best ones will be able to comb several PEP databases and sanctions lists for high-risk individuals and flag them fast.

With ongoing monitoring, your tool should be able to conduct real-time monitoring to detect changes in existing accounts that might affect risk assessments.

When choosing a tool for your team, considering its capability to filter adverse media screening can help confirm whether identified PEPs pose as a risk for financial crime.

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Screening PEPs for your business

Politically Exposed Persons may not always have ill intentions, however, in this day and age taking precaution can save your business the trouble on top of ensuring you stay compliant. A PEP, after all, can have the finances and means to conduct financial crime.

By integrating a risk-based approach with the right compliance measures and advanced tools, you can stay vigilant and effectively protect your business from crime and non-compliance.

Vespia understands the need for a tool that captures the most important features financial institutions need to screen customers. This is why Vespia's PEP & Sanctions Screening Solution offers everything you need to accurately check for PEPs, screen against sanctions list, and monitor businesses for vital updates.

Schedule a demo today and discover how to integrate Vespia into your workflow. 

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