Politically exposed person
In financial regulation, "politically exposed person" (PEP) is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. The terms politically exposed person and Senior Foreign Political Figure are often used interchangeably, particularly in international fora.
Definition by the Financial Action Task Force on Money Laundering
- current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not)
- a senior official of a major foreign political party
- a senior executive of a foreign government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual
- an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse's parents or siblings
- any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate.
The FATF definition is not intended to include middle-ranking or more junior individuals.
As of February 2012, the FATF definition of a PEP was revised to include domestic PEPs, bringing the number of PEP types to three – a foreign PEP, a domestic PEP and a person who is a senior member of an international organization. Most FATF member countries treat domestic and foreign PEPs with heightened scrutiny. The distinction between a foreign and domestic PEP is problematic, because a person can be a foreign PEP everywhere in the world except in their own country. For example, China's President and General Secretary of the Communist Party, is a PEP everywhere except in China. The same is true for Canada's Prime Minister. In order to address this artificial distinction, the FATF Guidance says that if a person is a foreign PEP, that de facto makes them a domestic PEP in their own country. Logically, this makes sense for crime prevention purposes because in order to export proceeds of crime, the PEP must first use their own domestic financial system and thus, more importance should be placed on domestic, and non-foreign PEPs.
The designation “Politically Exposed Person” dates back to the late 1990s, in what was known as the “Abacha Affair.” Sani Abacha was a Nigerian dictator who organized (with his family members and associates) a network of massive theft of assets from the government of Nigeria. It is believed that several billion dollars were stolen, and that the funds were transferred to bank accounts in the United Kingdom and Switzerland.
In 2001, the Nigerian Government that succeeded the Abacha Regime made an effort to recover the money. It lodged complaints with several European agencies, including the Federal Office of Police of Switzerland which investigated close to sixty Swiss banks.  In this investigation, the concept of “Politically Exposed Person” emerged, which was later included in the 2003 United Nations Convention against Corruption and European Union law in 2004.
PEP-specific compliance legislation addresses the link between corrupt politicians, money laundering and the financing of terrorism.Since September 11, 2001, more than 100 countries have changed their laws related to financial services regulation, combatting political corruption. Heavy fines have been imposed on financial institutions for conducting business with PEPs without following adequate procedures, as in the case of Riggs Bank. Despite attempts at regulation, political leaders like Muammar Gaddafi and Hosni Mubarak made news for having frozen assets in US banks that did not follow due diligence.
Most financial institutions view a PEP as a potential compliance risk and perform enhanced monitoring of accounts that fall within this category. Screening for PEPs is usually performed at the beginning of account opening, called initial due diligence or Know Your Customer. Screening of accounts periodically is performed as part of ongoing due diligence. The process of due diligence to uncover PEPs can be time consuming and requires screening against a reputable database of known PEPs, usually close to 1 million profiles, against the names, dates of birth, national identification numbers and photos of clients.
Politically exposed foreign person or PEFP (Canada)
Canada only considers foreign PEPs to pose a money laundering and terrorist financing risk.Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, a politically exposed person is a foreign national who holds, or has held, one of the following offices or positions in or for a foreign country:
- Head of state
- Head of government
- Member of the executive council of government
- Member of a legislature
- Deputy minister or equivalent
- Ambassador or attaché
- Counsellor of an ambassador
- Military officer with a rank of general or above
- President of a state-owned company or a state-owned bank
- Head of a government agency
- Judge (any level), leader or president of a political party represented in a legislature
With respect to any of the above positions or offices, the list includes the person’s spouse, Common Law partner, children, parents, in-laws, and siblings.
In Canada, financial entities, life insurance companies, life insurance brokers and agents, securities dealers and money services businesses are required to treat foreign PEP clients with heightened scrutiny, and for certain transactions, to establish source of funds when a PEP is involved.
Politically exposed foreign person or PEP (UK)
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The UK definition of a PEP is found in the Money Laundering Regulations 2007 Section 14(5)
(This is one text, which is ultimately[editorializing] used by the 'Joint Money Laundering Steering Group' when issuing their Guidance Notes.) They define a PEP only as foreign, as follows:
“a politically exposed person” means a person who is —
(a) an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function by —
i. a state other than the United Kingdom;
ii. a Community institution; or
iii. an international body, including a person who falls in any of the categories listed in paragraph 4(1)(a) of Schedule 2;
(b) an immediate family member of a person referred to in sub-paragraph (a), including a person who falls in any of the categories listed in paragraph 4(1)(c) of Schedule 2; or
(c) a known close associate of a person referred to in sub-paragraph (a), including a person who falls in either of the categories listed in paragraph 4(1)(d) of Schedule 2.
Where Schedule 2 provides the following clarification: Politically exposed persons
(1) for the purposes of regulation 14(5) are:
(a) individuals who are or have been entrusted with prominent public functions include the following—
i. heads of state, heads of government, ministers and deputy or assistant ministers;
ii. members of parliaments;
iii. members of supreme courts, of constitutional courts or of other high-level judicial bodies whose decisions are not generally subject to further appeal, other than in exceptional circumstances;
iv. members of courts of auditors or of the boards of central banks;
v. ambassadors, chargés d’affaires and high-ranking officers in the armed forces; and
vi. members of the administrative, management or supervisory bodies of state-owned enterprises;
(b) the categories set out in paragraphs (i) to (vi) of sub-paragraph (a) do not include middle-ranking or more junior officials;
(c) immediate family members include the following—
i. a spouse;
ii. a partner;
iii. children and their spouses or partners; and
(d) persons known to be close associates include the following—
i. any individual who is known to have joint beneficial ownership of a legal entity or legal arrangement, or any other close business relations, with a person referred to in regulation
ii. any individual who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit of a person referred to in regulation
(2) In paragraph (1)(c), “partner” means a person who is considered by his national law as equivalent to a spouse.
Foreign official or Senior Foreign Political Figure (USA)
The term foreign official has been used by US enforcement agencies relating to persons who have similar characteristics as PEPs, as referenced in the US Foreign Corrupt Practices Act. It is used in all industries, not only by financial institutions. The Treasury's Financial Crimes Enforcement Network (FinCEN) did not use the term PEP in its regulations as of 2010. Suspicious activity requires a financial institution to fill out a suspicious activity report to FinCEN. The term 'Senior Foreign Political Figure', as defined by section 312 of the USA PATRIOT Act is to a great extent similar to the definition of PEP, but excludes middle-ranking or more junior individuals. The term is recognized (and defined) by the 'Wolfsberg Group' of eleven global banks.
- Duhaime, Christine (28 February 28 2014). "The $70 Billion Missing From the Ukraine: Does it Demonstrate a Whopping Failure of Global Anti-Money Laundering and Corruption Laws? Duhaime's Financial Guide and Anti-Money Laundering Law.". Duhaime Law.
- Duhaime, Christine (undated). "Politically Exposed Persons, Duhaime's Financial Guide and Anti-Money Laundering Law.". Duhaime Law.
- "The Money Laundering Regulations 2007". No. 2157 PART 2 Enhanced customer due diligence and ongoing monitoring, Regulation 14. legislation.gov.uk. 2007. Retrieved 14 May 2014.
- http://www.wolfsberg-principles.com/faq-persons.html[dead link]
- http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html[dead link]
- http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=52ad7316-f7ca-4031-bf49-75fb5b6bdf88[dead link]
- www.worldcompliance.com service by LexisNexis[better source needed]
- Quantum PEPS service by Quantum AML Program & Miuracorp