Opinion

PEPs, what they are and why they matter in AML

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We have previously discussed the prevention of money laundering (AML/PBC), as well as KYC (Know Your Customer) due diligence processes. Today we would like to explain what are the so-called PEPs (Politically Exposed Persons) and why they affect due diligence processes. 

What is a PEP? 

Firstly, according to the Financial Action Task Force (FATF), an international body set up to prevent money laundering from crimes such as drug trafficking, arms, child prostitution or tax crimes, PEPs are defined as "Individuals who are or have held important public functions such as: heads of state or government; politicians, government ministers, military officers or judges, executives of state-owned enterprises, or officers or officials of important political parties".

They are those individuals who, because of their position or role in society, are more publicly exposed. Because of the position of power that their position gives them, they are also more likely to be subject to illicit behaviour, be it corruption or money laundering. 

It should be noted that not only the people who hold the position itself are considered PEPs, but also people who have a degree of relationship with them, such as family members or partners. This is explained by the fact that not only they personally may be the beneficiaries of fraudulent funds, but it is a very common practice to use front men who are usually persons closely connected to the person trying to launder. Business relationships with family members or close associates of PEPs carry similar reputational risks to those that exist with PEPs themselves.

In some cases PEPs may continue to be considered PEPs even after they leave office. There is no universal rule, different jurisdictions have different criteria for deciding when a person ceases to be politically exposed, in some cases it is a temporary criterion (2 years) and in others simply when the circumstances that made him/her a politically exposed person are no longer considered to exist. 
 
How does it affect being a PEP? 

All obliged entities have a legal obligation to know whether they are dealing with a politically exposed person. This occurs mainly in the financial sector during customer due diligence (CDD), and results in increased scrutiny and monitoring of the activity of accounts linked to these individuals.

The identification of a PEP during the course of due diligence requires the application of so-called 'Enhanced due diligence' which is a type of process applied to customers who pose a high risk to the financial sector. This is more rigorous than CDD and is based on a risk-based model. It builds a more comprehensive profile of who our customer is and their reputation to help us decide whether it is within the institution's risk appetite to link with the individual in question. 

Basic criteria for determining who can be a PEP 

PEPs by government roles: 

  • Members of legislative bodies
  • Members of the Executive (Government)
  • Diplomatic roles: 
  • Judiciary
  • Senior positions in state-owned enterprises

PEPs in Organisations and institutions: 

  • Central financial institutions, such as the Bank of Spain.
  • Senior Armed Forces officers 
  • National/international sports committees 

PEPs by association: 

 

  • Anyone who has a business relationship or partnership together with a PEP. 
  • Immediate family who may be considered: 
  • o Parents 
  • o Spouse
  • o Siblings 
  • o Aunts, uncles and cousins 
  • o And even indirect family members such as in-laws.

In short, PEPs and their identification are a fundamental pillar in the development of a good Customer Due Diligence as they can have a great effect on the risk that a client presents to the regulated entity. Therefore, it is necessary for these entities to carry out a sufficiently exhaustive investigation and screening of all potential clients in order to be able to detect these risk situations. 

Borja Ferrer, collaborator of Sec2Crime's Economic Crime Area. 


 Bibliography 


● FATF-GAFI.ORG - Financial Action Task Force (FATF). (2021). Financial Task Action Force. https://www.fatf-gafi.org
● What is Enhanced Due Diligence? (2021). Sanction Scanner. https://sanctionscanner.com/knowledge-base/enhanced-due-diligence-edd-123
What is a Politically Exposed Person (PEP)? (2016, 21 September). Accuity. https://accuity.com/resources/what-is-a-politically-exposed-person-pep/