Politically exposed persons: what financial institutions need to know

July 19, 2022

Politically exposed persons (PEPs) hold positions of power and influence. This means criminals are more likely to attempt to corrupt or bribe them for the purpose of money laundering or terrorist financing activities.

As a result, financial regulators require businesses to conduct stringent PEPs screening as part of their anti-money laundering (AML) and counter-terrorist financing (CFT) measures to identify and mitigate such threats. Continue reading to learn more about PEPs and the steps financial institutions must take when conducting business with them.

Meaning of a politically exposed person

A politically exposed person (PEP) is someone who has a high-profile political or public-facing role. Because of the positions they hold, they are more exposed to bribery, corruption, and involvement in money laundering or terrorist financing.

Businesses must apply additional due diligence procedures and AML measures when liaising with them. The international Financial Action Task Force (FATF) has set out a list of recommendations for business relationships with PEPs.

Definition of a politically exposed person

Definitions of a politically exposed person can vary slightly depending on the country and individual regulatory bodies. Each regulatory body has its own way of classifying who is a PEP and what steps businesses should take to identify them.

The closest thing to an overarching, international definition comes from the FATF standard. According to the FATF, a PEP is “an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering offenses and related predicate offenses, including corruption and bribery, as well as conducting activity related to terrorist financing.”

Local legislations – such as the USA PATRIOT Act and the European Union Directive – also use similar definitions of a PEP to the FATF.

PEPs and sanctions checks are also closely related. For example, certain PEPs might end up on sanctioned lists and will require additional screening and monitoring. 

Find out more about conducting both PEPs and sanctions checks.

Politically exposed person example

Some examples of PEPs include government officials, ministers or politicians, members of parliament, government executives, heads of state, high-ranking judges, high-ranking military officers, central bank governors, and board members or executives of international organizations. 

People who hold these roles often have influence and power over spending and budgets, grants, and procurement processes, which is why they are subject to higher levels of customer due diligence (CDD). 

PEPs can also include those people close to someone who holds an official or high-ranking role, such as their family members or business partners.

Types of politically exposed persons

Most countries use a combination of the following four categories to identify PEPs.

Government officials

Government officials include domestic or foreign government roles. They include heads of state (such as presidents of prime ministers), or people working in executive, legislative, and administrative branches in both elective and unelected roles.

These roles include members of parliament, ministers, ambassadors, those working for judiciary bodies, and senior executives working for state-owned enterprises.

Political party officials

Political party officials include people who hold senior positions in major political parties, both at home or in foreign countries.

Senior executives

Senior executives include directors, board members, or other senior roles at a government-owned enterprise or international organization.

These organizations include central financial institutions (such as central banks), armed forces, and international sports committees.

Relatives and close associates

PEPs can also include anyone with a close business or personal relationship with someone who holds one of the positions outlined above. In this situation, they mostly include immediate family members (spouses, parents, siblings, children) or close social and professional contacts.

Why are politically exposed persons considered high risk?

PEPs are considered ‘high risk’ because they hold positions of power, influence and autonomy. This makes them targets for bribery and corruption, which in turn can lead to money laundering and terrorist financing. 

Just because someone holds PEP status doesn’t mean that they’re going to carry out criminal behavior. However, they are considered higher risk than an average customer. As a result, financial institutions that engage in business with PEPs must apply additional AML and CFT measures when establishing relationships, and continue to conduct ongoing monitoring throughout that business relationship.

Some PEPs pose a greater risk than others. 

  • High-risk PEPs include heads of state and government, members of government, and heads of the military. 

  • Medium-risk PEPs include senior officials within government, military, judiciary, and law enforcement roles, as well as ambassadors and senior management at state-owned enterprises. 

  • Low-risk PEPs include mayors and members of local government and senior officials at certain organizations.

Politically exposed persons and AML regulations

AML regulations aim to ensure that financial institutions conduct additional scrutiny on PEPs to mitigate the risks associated with bribery and corruption. Financial regulators require businesses to implement PEP screening processes as part of their wider AML programs. This process must take place both when entering into that business relationship, and regularly throughout that relationship. 

Financial institutions should conduct screening with a risk-based approach. This depends on factors like geography, the individual’s role, and what type of business relationship they’re undertaking with the individual. Some PEPs might require enhanced due diligence

Find out more about the difference between CDD and EDD.

The FATF’s 40 Recommendations on Money Laundering outlines  the following steps that financial institutions should take when assessing foreign and domestic PEPs: 

  • Have risk-management systems in place to identify PEPs

  • Obtain senior management approval when creating business relationships with such customers

  • Take reasonable measures to identify that individual's source of wealth and source of funds

  • Conduct ongoing monitoring of the business-customer relationship

The Onfido Real Identity Platform offers a Verification Suite of checks, including ID record, watchlist monitoring, proof of address and AAMVA checks. 

Learn more about our data verification checks and how we could help you with your PEPs screening.

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