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 people who hold or have held important public office.

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 abroad.

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

Be on the alert: Doing Due Diligence on PEPsPEPs 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.

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.

Lexis 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.