PEPs Spotlight: Risks and Mitigation

High-risk client by nature, politically exposed person is not the easiest category to work with for everybody. Including those who build KYC/AML products.

However, with the proper risk prevention policy, we can work with the majority of them. And why shouldn’t we? After investing in multiple marketing strategies, it is a bit silly to let the potential client go just because they fall under a certain profile. With this in mind, let’s get to the bottom of who PEPs are and how to treat them in business.

What is the meaning of politically exposed person? As accepted by the majority of countries, a PEP is considered an individual who is currently or had been in a public position of great control. Highly influential and powerful, such people are more likely or have a greater chance of being involved in aiding or abetting money laundering, racketeering and financial fraud.

Considering all the above, working with politically exposed persons entails certain risks for financial institutions and certain Designated Non-Financial Businesses and Professions.

PEP as a term dates back to the 1990s and is a consequence of the political fraud in Nigeria. This huge money laundering uproar prompted global action towards preventing fraudulent behavior and financial system abuse by politicians and high-rank officials.

Although politically exposed persons require closer attention, the fact of being one does not provide a direct link to criminal activity.

FATF definition of a Politically Exposed Person

Lacking an officially accepted universal PEP definition the majority of countries refer to the one provided by Financial Action Task Force:

• a present or past senior government official;
• prominent politicians belonging to a certain party;
• an executive of a governmental commercial enterprise formed for their benefit;
• close family members;
• a publicly known associate of a financial institution.

Discovering different types of PEPs 
Domestic PEP: an individual currently or previously domestically entrusted with a prominent public function. The profile fits officials of a local political party, heads of state corporations, senior politicians or top military officials.

Foreign PEP: an individual who is or was formerly holding an important public position on behalf of a different state.

International organization PEP: a high-rank individual who is currently or previously have been appointed to a prominent position or functions within an international organization in question.

Putting PEPs into risk categories

Roughly there are three categories based on the level of risk manifested by different politically exposed persons:

High

• Heads and members of government
• Members of Parliament
• Head officials of banks/judiciary/military/religious groups/law enforcement
• Prominent political party members

Medium 

• Head officials of banks/judiciary/military/religious groups/law enforcement
• Senior members of state agencies, high-rank civil servants
• Commissioners, ambassadors, consuls
• Heads and top ranking-officials of state-owned organizations

Low 

• International or supranational business officials
• Mayors and members of local, district and city assemblies

How does one work with PEPs?

You have just unraveled that a potential client is a politically exposed person—what is next? The most sensible will be to bring AML/CFT measures into action. Remember that the nature of this procedure is preventive and PEP check is a part of the ongoing customer risk assessment routine. There is no “politically exposed person = criminal” policy, and one doesn’t imply another.

To detect a PEP in your client there is a bunch of indicators that can help you out. Those are heavily dependent on the context and are not made condemn a lawful PEP if matching some of there red flags. However, some of them can raise genuine suspicion and awareness that an individual might be involved in some sort of criminal activity. One must be cautious if PEPs :

• Attempt to shield his identity and obscure ownership by using corporate vehicles, intermediaries or introduces family members/associates as legal owners;
• Have bizarre behavior, uncomfortable to communicate, provide incomplete/inaccurate information;
• Involved in a high-risk industry/sector like banking, finance, mining, privatization, arms trade, etc.;
• Conduct suspicious transactions and financial activity;
• Have a position or involvement in a business that causes greater concern.

When onboarding a client that corresponds to one or more of these or other red flags treat him with caution. And although sometimes a PEP is just a famous client with pure business intentions and no hidden agenda, it is a good idea to assume measures against the ones who are less honest.

Make client screening a part of your risk prevention policy. Sumsub KYC/AML solution knows that data security is paramount. We check customer’s credibility across the vast array of databases, news sources, and keep your business safe from trouble!