What is a Politically Exposed Person (PEP)

There is no static definition of a PEP (politically exposed person). Essentially, the term describes someone who holds a prominent public function. They are therefore perceived to present a higher risk for bribery and corruption due to the power and influence they hold.

The Wolfsberg Group (a group of international financial institutions) defines a PEP as a natural person of public functions (domestic or international) including:

  • Heads of state, heads of government and ministers
  • Senior judicial officials
  • Heads and other high-ranking officers holding senior positions in the armed forces
  • Members of ruling royal families with governance responsibilities
  • Senior executives of state owned enterprises
  • Senior officials of major political parties

The Wolfsberg Group also states that the following positions may also be considered to fall within the definition of a PEP:

  • Heads of supranational bodies – for example, UN, IMF, WB
  • Members of parliament or national legislatures, senior members of the diplomatic corps – for example, ambassadors, charges d’affaires or members of boards of central banks

However, the Group notes that these may be excluded in areas where the risk of corruption or abuse is considered to be relatively low as they do not have the same ability to control or divert funds.

The definition of a PEP can also include family members and close associates of these individuals. This is because of the possibility that the holders of prominent public functions may use family members or close associates to conceal funds which have been obtained as a result of the abuse of the PEP’s position(s).

The Financial Action Task Force (FATF) offers the following definitions in respect of PEPs:

  • Foreign PEPs: individuals who are or have been entrusted with prominent public functions by a foreign country, for example heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
  • Domestic PEPs: individuals who are or have been entrusted domestically with prominent public functions, for example heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
  • International organisation PEPs: persons who are or have been entrusted with a prominent function by an international organisation, refers to members of senior management or individuals who have been entrusted with equivalent functions, i.e. directors, deputy directors and members of the board or equivalent functions.
  • Family members are individuals who are related to a PEP either directly (consanguinity) or through marriage or similar (civil) forms of partnership.
  • Close associates are individuals who are closely connected to a PEP, either socially or professionally.

Origins

The term PEP can trace its roots back to the infamous Nigerian dictator Sani Abacha and his alleged organised looting of the Nigerian Central bank in the late 1990s. The concept of the PEP is said to have come out of investigations into this case.

Proximal Consulting published a white paper on the topic back in 2003:

The facts of the matter are simple, the ongoing repercussions are far reaching. The late Sani Abacha, one biography of whom reads (in total) “A brutal Nigerian dictator accused of numerous human rights violations” is alleged by the Nigerian government to have looted £3 billion from the country. This massive amount was the product of corrupt payments – or transfers directly from the Nigerian Central Bank – during his reign between 1993 and his death in June 1998. Whilst he was alive, his opponents and critics were either executed or imprisoned.

The money he and his accomplices looted from the already fragile Nigerian economy found its way to Switzerland, France, Luxembourg, Liechtenstein and London. Bearing in mind Abacha’s military training in England it is hardly a great surprise that London was a favoured destination. Late last month the Financial Services Authority [note: this is now the Financial Conduct Authority] announced that they were investigating the role played by London banks in the alleged laundering of funds by Abacha. The FSA commented that “We are taking these matters extremely seriously. Working with the criminal authorities, we are conducting a comprehensive investigation to identify any banks with possible links to these funds”. This comment sounds eminently reasonable until one realizes that a request for assistance in this matter was received from the Nigerian government four months earlier, and on 13 October 1999 – over a year previously – Swiss authorities had frozen an initial set of five bank accounts in the country. In fact by the time the FSA announced it was investigating, the Swiss authorities had frozen accounts, carried out an investigation and published a full report into the accepting and handling of funds by 19 Swiss banks. By comparison as far as we are aware, the FSA will not be making their findings available in such a public report. The Swiss report admonished three major banking groups in the country, but somewhat tellingly concluded that “It was not just Swiss banks that accepted funds from the Abacha entourage…(but) Switzerland is so far the only country which has tried to deal with this issue”.

The Cost of Getting It Wrong

There is potential for major and long-lasting impact – both regulatory censure and reputational damage – if financial institutions deal with corrupt individuals and their illegally obtained funds:

“Accepting and managing funds from corrupt PEPs will severely damage the bank’s own reputation and can undermine public confidence in the ethical standards of an entire financial centre, since such cases usually receive extensive media attention and strong political reaction.”

-The Basel Committee

There are numerous examples whereby financial institutions have not fully complied with their KYC obligations in respect of PEPs. In March 2012, the UK’s Financial Conduct Authority (at the time, operating as the Financial Services Authority) announced that it had fined Coutts £8.75 million for the bank’s failings in relation to taking reasonable steps to establish and maintain AML systems relating to PEPs and other high risk clients. The Financial Conduct Authority’s (FCA) investigation into banks’ management of high money-laundering risk situations concluded that the Coutts AML team had failed to take a number of steps to gather relevant information to confirm the PEP’s source of wealth and funds; failed to record up to date records; and failed to monitor and scrutinise transactions.

Change of PEP Status

Existing clients pose the risk that they might become a PEP after commencing their relationship with you. Therefore, as part of a risk based approach, we recommend that you monitor for change in PEP status and enlist our help to carry out enhanced due diligence checks on all PEPs, whether they are existing or new clients.

Further Reading

Proximal Consulting PEP fact sheet    

The Wolfsberg Frequently Asked Questions on Politically Exposed Persons (“PEPS”)

FATF Guidance: Politically Exposed Persons (Recommendations 12 & 22)

Proximal Consulting Archived White Paper 12: The Abacha Case & Its Repercussions

FATF Report: Specific Risk Factors in Laundering the Proceeds of Corruption

How Proximal Consulting Can Help

For more information, visit our dedicated page on the services we offer in respect of KYC and EDD checks when establishing or maintaining a business relationship with a PEP: https://www.proximalconsulting.com/peps/

Using years of experience of dealing with PEP and high net worth individuals, we produce tailor-made enhanced due diligence reports in which we seek to confirm the following in respect of PEPs:

  • Confirmation of identity
  • Current and/or previous residential addresses
  • Identity documents issued to the subject
  • Information regarding the subject’s close family members and civil status
  • The subject’s career history and professional background, including corporate positions and shareholdings
  • Any real estate and vehicles owned by the subject
  • Any negative or detrimental material regarding the subject and the subject’s business interests
  • Whether the subject should be viewed as a PEP and/or a close family member or associate of a PEP
  • Any links between the subject and organised crime, money laundering, corruption, business crime and/or another type of criminal activity
  • Sanctions risks

We can also carry out investigations into the corporate entities with which PEPs are involved.

We are also adept at unravelling complex business structures and helping to identify the beneficial owners of corporate entities. Over the years, we have identified numerous examples of PEPs circumventing AML safeguards by setting up complex business structures using intermediaries and offshore jurisdictions in order to conceal their involvement in certain transactions and related business dealings.

See our main website : www.proximalconsulting.com for further information.

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