PEP

What is PEP – A Politically Exposed Person?

PEPs (or politically exposed persons) are those who have prominent positions in the government, a company, or a foundation. They could also be those with intimate ties to the powerful.

What is PEP in banking/financial institutions?

You might also inquire as to why PEP is a high-risk customer for banking institutions.

A PEP has more opportunity to acquire unlawful assets than the average person because of their network and influence. Consequently, a ‘Politically Exposed Person’ or PEP at a bank is a high-risk client who might possibly acquire assets by illicit means including bribery, terrorism funding, corruption, and money laundering. A PEP is a high-risk consumer that financial institutions must treat with extra care rather than a fraudster.

What are the types of PEPs? 

You could be labelled as a PEP if you fall into one of these categories. There are five different PEP account types:

Domestic PEP

They perform important public roles or duties on a local level. Heads of State or government, prominent executives, financial regulators, etc. are some examples.

International PEP

They perform important public roles or duties on a global scale. Board members and those in top management roles are a few examples.

Foreign PEP

People holding notable public positions or functions in a foreign nation. Examples include international financial regulators, prominent executives, and leaders of State or governments

PEP family members

A person is designated as a PEP if they are related to one.

Close associates

PEPs are those who are in intimate social or professional interactions with a PEP.

Financial Action Task Force and Politically Exposed Person

The FATF requests that financial institutions conduct further due diligence on a person after they identify themselves as a PEP. The type of additional due diligence depends on what “risk category” the PEP belongs to. These risk categories were created based on the recommendations of the Financial Action Task Force, or FATF.

What does FATF mean?

The FATF is a global organisation that develops policies and establishes international standards for fighting money laundering and countering terrorism funding.

PEP risk categories based on FATF guidelines

An intergovernmental organisation that controls financial crime is the FATF. According to the degree of risk involved, PEP accounts have been classed. As follows:

Low-risk PEP

• Multinational or supranational business representatives
• Members of municipal, state, district, and urban assemblies as well as senior officials and mayors

Medium/Low-risk PEP

• Government board and senior leaders of state-owned companies and organisations

Medium risk PEP

• Heads of judicial systems, banks, the military, law enforcement, top executives in state departments, senior civil workers, and representatives of religious groups
• Ambassadors, commissioners, and consuls

High-risk PEP

• Government leaders and lawmakers, as well as the leaders of the judiciary, banking, military, law enforcement, and religious institutions
• Prominent member of a political party

What are the red flags for PEPs?

Below is a list of warning signs for PEP fraud risks that was published by the Financial Action Task Force to assist firms.

Identity Shielding

A PEP could attempt to conceal their identity and stay out of the spotlight by, among other things, transferring legal ownership to someone else, engaging strangely or often with intermediaries, mistaking related ownership or industries, etc. to escape being arrested for unlawful activities.

Suspicious behavior

A string of dubious PEP actions might spark suspicion and aid organisations in reducing crime. These include:

• Keeping the source of money and prosperity secret
• Fake, incomplete, or incorrect data
• The PEP’s data and publicly available data don’t line up.
• Refusal to grant entrance visa
• A consistent stream of wire transfers or cash outs from one country to another
• There are certain commercial ties and transactions that have no plausible justifications or specifics.

Position in the Company

A powerful position at an organisation grants access to things like authority and control over the company’s finances, operations, and policies; the ability to influence government or corporate accounts; control or ownership of DNFBP for financial institutions; and informal or formal ability to control mechanisms against TF/ML.

Such accessibility may be used by a dishonest PEP for their own gain. Sometimes, these objectives may entail criminal activity. Financial firms must thus regularly check PEPs who come from influential positions before enrolling them.

The Industry

PEP from several high-risk sectors has to be thoroughly monitored, including those in the public goods sector, mining and extraction, construction, banking and finance, military and defence, and enterprises that engage with government and state agencies.

Transactions

Businesses must routinely monitor PEP transactions since it is a vital task. Suspicious activity like the ones outlined below can assist avoid unlawful financial operations.

• After a lengthy time of inactivity, the account displays continued activity.
• Personal banking
• Wire transfers that lack recipient information or an economic justification
• Receiving transactions or payments anonymously from an unidentified third party
• Without a sound business reason, money is continually transferred between accounts and financial institutions.
• Consistent financial flows, significant international money transfers, or wire transfers
• Using several bank accounts without a justification

Services and Products

PEP connection with certain high-risk goods and services has also been highlighted by FATF.

• Businesses that serve customers from abroad
• Service providers you can rely on
• Correspondent accounts and concentration
• Dealers of high-end transportation equipment, such as yachts, sports cars, aeroplanes, and helicopters
• Dealers of priceless stones, precious metals, and opulent things

Local Significance

Foreign or domestic high-risk nations

• A nation where there is a high probability of corruption
• Nations with monopolistic economies
• A nation that has not ratified an important anti-corruption treaty, such as the UNCAC or the OECD Anti-Bribery Convention

PEP Screening | PEP KYC | PEP AML

Each customer completing a KYC process is required to disclose if they fall within the PEP category. Yet occasionally, a consumer could inadvertently choose the PEP option or purposefully withhold their PEP status.

To verify that PEP clients are appropriately recognised, IDcentral verifies the customer’s name against a PEP database. If the consumer is politically exposed, banks/financial institutions undertake further due diligence on them after onboarding them.

The AML screening includes a PEP database check. Additional elements of the same are:

• Check the AML database to see whether the person has any AML cases pending against them.
• Look for negative press about the client.

Know more about IDcentral’s AML Screening solution

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