Susan MeierThere is a great deal of confusion surrounding Politically Exposed Persons (PEPs).
Some people believe you are simply not allowed to serve PEPs as clients. Others assume the term applies exclusively to heads of state and government ministers. Many fail to grasp the specific money laundering and terrorist financing risks associated with these individuals, or they assume that every PEP carries the exact same level of risk.
This article aims to clear up these misconceptions and provide guidance for practitioners who currently deal with PEPs or plan to do so in the future.
Who qualifies as a PEP?
A PEP is a natural person who is or has been entrusted with a prominent public function. This definition generally excludes middle-ranking or junior officials.
Part I of the FIAU Implementing Procedures provides a non-exhaustive list of public functions that classify an individual as a PEP. These include:
- Heads of State, Heads of Government, Ministers, and Deputy or Assistant Ministers;
- Members of Parliament or similar legislative bodies;
- Members of the governing bodies of political parties;
- Members of supreme courts, constitutional courts, or other high-level judicial bodies;
- Ambassadors, chargés d'affaires, and high-ranking officers in the armed forces;
- Members of the administrative, management, or supervisory bodies of state-owned enterprises.
Crucially, family members and close associates of PEPs are also treated as PEPs.
- Family members include spouses, partners, children (and their spouses/partners), and parents.
- Close associates include individuals who share beneficial ownership of a legal entity with a PEP or have any other close business relationship with them.
How do you verify if a client is a PEP?
Once you understand the definition, the next challenge is practical verification. How do you confirm whether a prospective client falls into this category? There are several methods subject persons can use.
1. Publicly Available Information Your first line of defense is public information, including internet searches and media reports. However, you must assess the reliability of these sources before making a decision. A report on a reputable news site carries more weight than an unverified blog post. Never rely on a single source; always cross-reference different sources to ensure accuracy.
2. Direct Client Declaration You can obtain this information directly from the client. For this to work, the client must clearly understand the definition of a PEP, including the rules regarding family members and close associates. Ideally, the client should sign a specific PEP declaration form confirming their status.
3. Commercial Databases You can use commercial databases (such as World-Check or LexisNexis) to screen clients. Access to these databases can be free or require a subscription. It is important to evaluate how effective these databases are at tracking not just the PEPs themselves, but also their family members and associates.
The Best Approach: Ideally, you should use a combination of these three methods rather than relying on just one to verify a client's status.
Why are PEPs considered high risk?
PEPs present a higher risk of Money Laundering (ML) and Terrorist Financing (FT) because they hold positions that could potentially be abused for private gain.
Furthermore, due to their political and social influence, PEPs may use their power and connections to access the financial system and launder the proceeds of corruption or abuse of office. Family members and close associates can also benefit from—or be used to facilitate—the misappropriation of public funds.
However, not all PEPs pose the same level of risk. The risk profile depends on several factors, including:
- Geographic ties: Is the PEP linked to a country with low corruption levels and a strong legal framework?
- The specific role: Does the function involve executive decision-making powers?
- Product usage: How likely is the specific service or product to be used for laundering money?
Indicators of Lower Risk:
- PEPs with no executive decision-making authority.
- PEPs associated with countries known for low corruption and a strong track record of prosecuting political misconduct.
Indicators of Higher Risk:
- Reluctance to provide information regarding Source of Wealth (SoW) and Source of Funds (SoF).
- Use of complex corporate structures to hide identity or funds.
- Authority over state assets, public funds, or the granting of licenses and government contracts.
What measures must be taken when onboarding a PEP?
When onboarding a PEP, their family members, or close associates, subject persons are legally required to apply Enhanced Due Diligence (EDD).
1. Senior Management Approval You must obtain approval from senior management before establishing a business relationship with a PEP. The person approving the relationship must have sufficient knowledge and seniority to assess the ML/FT risks involved.
2. Establish Source of Wealth and Funds You must take adequate measures to establish the source of wealth and source of funds. This is critical. You need sufficient documentation to satisfy yourself that you are not handling proceeds from bribery, corruption, or other criminal activities.
3. Enhanced Ongoing Monitoring Onboarding is not the end of the process. You must conduct enhanced ongoing monitoring. This means reviewing the relationship more frequently—ideally every six to twelve months. Beyond frequency, the depth of monitoring must increase. This involves not just updating due diligence documents, but strictly scrutinizing transactions to ensure they align with the client's profile.
Is there anything else to consider?
Yes. Subject persons must remember that existing clients who were not PEPs initially may become PEPs during the course of the business relationship. Therefore, regular PEP screening of your entire client base is essential.
Additionally, the "12-Month Rule" applies. A PEP must be treated as a PEP for at least 12 months after they cease to hold the prominent public function. This is a minimum requirement. Depending on the risk profile, you may need to continue applying EDD measures even after this period expires, based on the specific risks the individual still poses.
Final Thoughts
The most important aspect of dealing with Politically Exposed Persons is risk identification. You must build a comprehensive client profile based on reliable information. Enhanced Due Diligence is not just a regulatory hurdle; it is your primary control measure against the heightened risks inherent in working with PEPs.
Disclaimer: The above article is based on independent research by Dr. Werner & Partners and does not constitute legal advice. If you would like to meet with one of our representatives for further information, please contact us for an appointment.
