The Financial Action Task Force (FATF) defines a politically exposed person (PEP) as someone who has been be abused. There have been many examples of PEPs being associated with money laundering, corruption, financing terrorism, and other risky behaviors.
Banks and financial institutions need to take a risk-based approach when dealing with PEPs. If a PEP is discovered during customer onboarding, due diligence needs to take place. Since a PEP has an increased risk of performing financial fraud, steps must be taken to ensure that they are not doing so. More stringent monitoring of PEP accounts should be a high priority for all banks and financial institutions.
Foreign vs Domestic PEPs
Foreign PEPs are defined as individuals who have been placed in prominent public positions by a foreign country. Good examples include Heads of State, government officials, senior politicians, judicial members, military officials or executives from state-owned corporations. Domestic PEPs, in contrast, are individuals who have been placed in prominent public functions domestically. The same examples as above apply.
The main difference between foreign and domestic PEPs is what country has entrusted them with power. While determining a person’s country of residence is not required to determine if they are a PEP, figuring this out can be helpful in determining the risk for that individual. A PEP from Canada will be different than a PEP from North Korea.
PEP considerations will also depend on where a financial institution resides. Foreign PEPs are considered high-risk individuals when compared to domestic PEPs. Nevertheless, domestic PEPs should be put through the same PEP requirements and due diligence procedures as foreign officials.
Another thing to note is that laws concerning PEPs differ from country to country. While these regulations vary, banks, governments, and regulators agree that PEPs present heightened money-laundering risks. No matter where financial institutions reside, they should take steps to perform proper due diligence when dealing with a politically exposed person.
After identifying a PEP, financial institutions need procedures in place that outline what actions to take against that individual. Clear policies need to exist that state whether the bank does or does not work with a PEP.
If they do work with PEPs, established procedures will help financial institutions determine the risk associated with the transactions a PEP performs. Financial institutions need a clear understanding of how to react when a PEP does something out of the ordinary. Banks should have a good understanding of types of regular transactions from a PEP account.
Banks should perform enhanced due diligence procedures on PEPs. A profile should be developed for a PEP. Their affiliations, employment, and association should be determined. This information will help create a profile of the PEP’s regular transactions, which should be monitored in accordance with anti-money laundering (AML) laws. By performing PEP transaction monitoring, patterns can be established. These can be used as a baseline.
If any transactions fall outside the norm, this will give financial institutions the opportunity to investigate them promptly. A high political official takes more time to look at and scrutinize over an average customer. It is in financial institutions best interest to conduct a thorough investigation when building relationships with PEPs. This will help determine the risk a bank could encounter.
PEP Transaction Monitoring
Recommended actions financial institutions should take:
Find the PEP within your customer base:
- Perform a PEP check
- Identity verification checks
Isolate which country is associated with the PEP:
- This will help determine the risk associated with the individual
- You can further check country sanctions list (OFAC)
Some key information should be collected to know your customer (KYC):
- Type of businesses associated with the individual
- The industry they work for
- Personal financial situation
- Identify the PEP’s affiliations, employment, associations, and similar pertinent information
Monitor a PEP account according to AML laws:
- Create a profile of the PEPs historical and ongoing transactions
- Compare transactions with what is known about the PEP
- Investigate transactions that are outside the norm, or which are high-risk
- Take appropriate steps to address risky behavior is detected
Banking PEPs raises a lot of problems for financial institutions. For this reason, not a lot of banks do business with them. Some banks tell PEPs that they need to perform more due diligence on them, but sometimes this causes PEPs to bank elsewhere. This does not matter though. Since all banks must follow PEP requirements, they will fall under the same scrutiny if they bank elsewhere. It is imperative for banks or financial institutions to protect themselves from transactional misconduct associated with these high-profile individuals.