When working with PEPs you need to be particularly careful. Detect cover-ups in order to identify links.
Identifying cover-ups: What are PEPs?
Politically exposed persons (PEPs) pose a particularly high risk if you are involved in a business relationship with them. PEPs are Individuals who hold or have held important public office in the past. Before entering into a business relationship with prominent PEP individuals or through organizations as customers or suppliers, running them through a PEP list and doing thorough due diligence on them would reveal any financial crimes they may be associated to avoid issues in the future.
Click here for a summary of the various categories.
The 4th EU Money Laundering Directive defines a PEP as any holder of a public office at home or in a foreign country. According to the EU 3rd Anti-Money Laundering Directive, natural persons are those who have been assigned with prominent political functions and immediate family members are known to be close associates of such persons.
PEPs natural person may include:
Political institution which holds the legislative power in a state, and often controls the executive power.
A part of the government with authority and responsibility that enforces the law for the daily administration of the state.
These are statutory organisations with an internal security commission tasked with the provision of public security.
Any public organization or branch of government that enforces the law and responsible for the administration of justice.
A bureaucrat within an institution of government can compose the administration of any organization of any size.
Parents, children, siblings, in-laws, etc are considered as relatives of politicians.
Why are PEPs particularly risky?
Because of their influential position, politically exposed persons are assumed to be at greater risk of corruption and money laundering. PEPs are not infrequently found to be involved in the payment of bribes to influence decisions on the awarding of contracts, finance terrorism, evade tax or launder illegally obtained money.
For example, the Panama Papers published in 2016 revealed details of 140 PEPs who had used letterbox companies to launder money or disguise their ownership of dirty money.
Be on the alert: Doing Due Diligence on PEPs
PEPs call for enhanced due diligence checks under Section 6 of the German Money Laundering Act (GWG). Among other things, the checks must clarify the origin of assets in order to prevent money laundering. In a risk-based approach, PEPs are automatically classed as high risk. A robust PEP check uses PEP lists of politically exposed persons. The regulatory authority established by the government is responsible for providing guidance, assessing and enforcing compliance with PEP standards to banks. Banks may oversee enhanced due diligence measures or legal actions based on the risk assessment. This may require intensive due diligence for higher-risk customers, especially those for whom the sources of funds are not clear.
In many organizations there is a widespread but mistaken idea that because you have worked with your business partners for many years, you know them sufficiently well and therefore do not need to perform a thorough check. This insight is usually lacking if you go further along the supply chain. This means that it is essential to check suppliers and also their suppliers against PEP lists.
With regard to holders of public office at sub-national level, PEP checks are usually regarded as unnecessary unless the person’s political importance is similar to that of a person in a similar position at national level. In addition, KYC PEP checks are not necessary for business relationships that involve only occasional or very small financial transactions.
Nexis Diligence® is a solution for reliable checks of politically exposed persons. One of the functions of the web-based tool is to check people against PEP lists.
A Constant Call API enables continuous monitoring of specific records, such as PEP and watch lists, for proactive risk management in in-house systems.
What risks do organizations face if their PEP due diligence is insufficiently thorough?
Organizations that fail to check their business partners sufficiently thoroughly can expect not only reputational damage but also fines of an unlimited amount. For example, in 2015 Barclays was fined 72 million pounds sterling because the required PEP checks had not been performed.
Guidelines on managing PEP risks
Our guidelines summarize the most important information on politically exposed persons. Read about issues including the risks of working with PEPs, where the PEP risk is greatest and how organizations can avoid PEP risks.
Frequently Asked Questions
Answers to some popular questions
Politically exposed persons are assumed to be at greater risk of corruption and money laundering because of their influential position. Read more
PEPs are people who hold or have held important public office. It is high risk if you are involved in a business relationship with them. Read More
People who hold position in domestic public offices, like Heads of State Government, judicial or military officials, senior officials of state owned corporations, important political party officials.
It would depend on who is the observer. Mayor of California is a domestic PEP for an American bank but a foreign PEP for its European counterpart.
A Politically exposed person is continued to be considered a PEP for a period of one year from the day he/she leaves the public office position.
Politically Exposed Persons and Sanctions screening allows for companies to avoid regulatory and reputational risks by identifying sanctioned companies and the risks involved allowing to mitigate them.