A politically exposed person (PEP) typically serves in a position of influence and power or a public role. Due to the nature of their jobs, these individuals are often associated with a higher risk of being involved with corruption, money laundering, or financing criminal activity.
In this article we will cover the basics of what is a PEP, emphasizing the role they play in due diligence and what are the potential risks involved when dealing with PEPs. We will answer:
- Who is considered a PEP?
- Types of PEPs: Domestic, Foreign and International
- How long is an individual considered a PEP?
- Why are PEPs high risk?
- Risks and benefits of doing business with a PEP
- Challenges of identifying PEPs
- Intelligo’s coverage of PEPs and due diligence practices
Who is considered to be a PEP?
Generally, a PEP is an individual who serves in a high-ranking governmental or public role. However, a PEP can also be an individual in a prominent position in a private organization or institution.
Common examples can include:
- Members of the legislative and executive branches of the Government
- Diplomatic positions
- Members of judiciary bodies
- Senior executives of state-owned enterprises
- High-ranking members of the armed forces
- Top-level positions in major financial institutions
- Members of international sports committees
A PEP can extend to close associates and relatives of PEPs as well. For example, an individual who jointly owns a legal entity with a PEP or works in a close business relationship with a PEP is also considered a PEP. Similarly, an individual who owns a legal entity that solely benefits a PEP is regarded as a PEP. First-tier family members, such as parents, children, siblings, aunts, uncles, and spouses or partners of a PEP, are also considered PEPs.
Types of PEPs: Domestic, Foreign and International
Three main categories have been recognized by the Financial Action Task Force (FATF) for classifying different types of PEPs.
1. A domestic PEP describes an individual serving in a prominent position domestically. For instance, an individual who holds a political, governmental, or another public role in the U.S. is considered to be a domestic PEP in the U.S.
2. A foreign PEP describes an individual entrusted with a prominent role by a foreign country. For example, an individual who serves as CEO of a state-owned company in Canada is considered a foreign PEP in the U.S.
3. An international PEP describes an individual with a prominent role in an international organization. It includes board members and senior management. For instance, an individual who works in the United Nations is considered an international PEP in the U.S.
How long is an individual considered to be a PEP?
Countries vary in their standards of how long an individual is considered a PEP after leaving their prominent position. For instance, in Canada, an individual (and relatives) is deemed a PEP for five years after leaving their position. In Australia, on the other hand, once a PEP leaves their job, they are no longer considered a PEP, which also extends to their first-degree relatives.
In any case, if an individual is presently a PEP or has been one in the past, a background check should reveal this pertinent information for your consideration.
Why are politically exposed persons high risk?
Due to the concealed nature of criminal financial activity, there is limited data on financial crimes involving PEPs. However, the World Bank has estimated that over $1 trillion is paid in bribes yearly. The Stolen Asset Recovery (StAR) Initiative has estimated that public officials in transition and developing countries receive $20-$40 billion of corrupt money annually. These estimates and the myriad of media stories of public figures and financial crimes indicate that this is a global phenomenon, even in developed countries such as the U.S.
Consequently, PEPs require due diligence procedures beyond those of the broader population, as well as ongoing monitoring during their tenure in these positions. Regulatory agencies such as the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the Financial Conduct Authority (FCA) of the UK, the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Financial Crimes Enforcement Network (FinCEN) of the U.S., require companies and businesses to provide additional screening and more stringent due diligence procedures for PEPs.
Risks and benefits of doing business with a PEP
Due to the nature of their position, politically exposed persons are unique in their influence and power as well as in their access to certain resources. Studies conducted by the Financial Action Task Force (FATF) and other organizations have found that PEPs are more likely to be targeted by corrupt individuals, or even terrorists, for financing or enabling criminal activity. Furthermore, PEPs have increased exposure to illegally obtaining assets through bribery or money laundering.
Being a politically exposed person does not connote criminal involvement or illegal activities. However, it indicates that an individual is potentially more vulnerable to certain financial crimes than an average person.
Additionally, PEP screening can provide investors with insight into an individual’s political affiliations. Although this may be seemingly insignificant to an investor, a PEP’s political outlook can have impactful repercussions. For example, if a PEP is associated with a party that supports contended viewpoints—not only can that be reflective of their character, but the reputational damage that might ensue from going into business with them could lead to devastating financial losses. Furthermore, financial contributions made by PEPs to specific political campaigns can be construed in a way that could also cause potentially adverse effects as the matter immediately becomes publicly significant.
At the same time, PEP screening can bring to light the political power or sway that a particular individual holds, which could be advantageous to a company. You can read our report on political contributions and it’s relevance in due diligence where we analyze data from the last 20 years:
Challenges of identifying PEPs
Various authoritative bodies who have outlined regulations and guidelines regarding PEPs provide different definitions that constitute a PEP.
For instance, the FATF and UNCAC consider both immediate and extended family members of a PEP to be PEPs as well. However, the Wolfsberg Group, an international entity of numerous financial institutions, only considers first-degree family members, such as spouses, parents, children, and siblings, to be PEPs. These inconsistencies cause complications when it comes to identifying who exactly is a PEP.
Additionally, while the FATF has set out over 40 recommendations for countries to adopt in their policies on PEPs, countries differ in their level of compliance with these recommendations. 24% of countries haven´t satisfactorily implemented the FATF’s 40 Recommendations according to the last 2022 report. These results are a significant improvement from 64% of non-compliant or partially compliant jurisdictions in 2012, demonstrating the positive impact of the FATF Mutual Evaluation and Follow-up processes.
However, many countries still face substantial challenges in taking effective action commensurate to the risks they face.
24% of countries haven´t satisfactorily implemented the FATF’s
PEP regulations in the European Union are broadly similar and required for all the various types of PEPs. The same goes for North America, though; while Canada and Mexico require foreign, domestic, and international PEP screening as part of their AML/CFT frameworks, the United States diverges by not requiring domestic PEP screening.
Other countries and regions, such as Latin America or Asia, vary notably in their requirements, especially when it comes to domestic PEPs. These differences in regulations between countries create further inconsistencies when it comes to identifying PEPs and require a thorough understanding of each national legislation.
Intelligo’s coverage of PEPs
Intelligo’s AI-powered background intelligence platform, Clarity, provides reliable coverage on PEPs, allowing you to make informed decisions and mitigate potential risks.
Clarity leverages artificial intelligence to perform an exhaustive search on various databases, including known PEPs. Its sophisticated algorithms extract relevant information, match the data to the subject’s background, and flag adverse or sensitive results.
Additionally, seasoned research analysts extensively research an individual’s history to determine whether that person has significant political exposure. The analyst review is particularly beneficial in cases when individuals are not listed in a database, yet circumstances from their personal or professional history could imply higher risk.
Improving your due diligence practices
Identifying and monitoring PEPs is essential to ensure you have a clear and complete picture of an individual and their potential associated risks. Identifying this unique status in a potential partner, investor, or investee will give you the awareness and the ability to monitor and mitigate the potential risks involved, allowing for sound decisions regarding your investments.