Everything you need to know about PEPs
Who are PEPs? Why do we need to worry about them?
A PEP or a politically exposed person is someone who has an important political role and has been assigned with a significant public office. Financial institutions usually conduct a verification and monitoring process for all their customers as per their risk levels. PEPs usually hold a higher risk in financial activities as they are more likely to commit financial crimes and be a part of money laundering practices. Now this does not mean that a PEP is someone who is most likely to be corrupt, but are more exposed to such risky situations due to their influential position and thus, are regarded a high risk client in financial institutions.
Corrupt PEPs often try to use their official positions to misappropriate assets of the State, embezzlement, using the funds allotted for government resources, ‘clean’ money by investing in real estate, precious metal or stones, using shell companies to hide their ownership and identity etc. The Financial Action Task Force (FATF) Recommendation 12 has defined a PEP “as someone who is entrusted with a prominent function” and categorized them as:
- Government Officials: Current or former officials appointed to domestic government positions, or positions in a foreign government. This may include heads of state or individuals working in executive, legislative, administrative, military, or judicial branches, in elected and unelected roles.
- Political Party Officials: Senior officials appointed to roles in major political parties at home or in foreign countries.
- Senior Executives: Individuals serving in senior executive roles, such as directors or board members, in government-owned commercial enterprises or international organisations – that is corporations, businesses, or other entities formed by or for the benefit of any such individuals.
- Family Members: An immediate family member of a government or political official, or senior executive – meaning spouses, parents, siblings, children, and spouses’ parents and siblings.
If a risk-based approach is applied while screening a PEP it will be easier to detect red flags such as use of third parties for transactions, the PEP has a history of bribery, inconsistent information provided by PEPs, using a family member’s name in ownership documents and deeds, use of shell companies, financial transactions with countries the PEP has absolutely no relationship with etc. There needs to be enhanced due diligence to analyse the source of their funds, regular monitoring of the movement of funds and unusual suspicious activities, closely monitoring friends or family members who act as beneficiaries and reviewing the PEPs profile from time to time. Identification and detecting a PEP’s activities can be challenging considering the social influence they have but adopting a risk-based approach and a strict screening process will definitely help tackle corruption and financial crimes to a greater extent.