Politically Exposed Person
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financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...
, a politically exposed person (PEP) is one who has been entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in
bribery Bribery is the Offer and acceptance, offering, Gift, giving, Offer and acceptance, receiving, or Solicitation, soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With reg ...
and
corruption Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...
by virtue of their position and the influence that they may hold. The terms "politically exposed person" and senior foreign political figure are often used interchangeably, particularly in international forums.


Definition by the Financial Action Task Force on Money Laundering

While there is no global definition of a PEP, most countries have based their definition on the 2003
Financial Action Task Force on Money Laundering The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, ''Groupe d'action financière'' (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat m ...
(FATF) standard, as for example the Swiss financial market regulator in 2011, which quoted it as "the international standard" or the Australian government in 2015. FATF is an international inter-governmental body, founded in 1989 on the initiative of the G7 and hosted by the
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
, to set standards and promote implementing measures against
money laundering Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictions ...
,
financing of terrorism Terrorism financing is the provision of funds or providing financial support to individual terrorists or non-state actors. Most countries have implemented measures to counter terrorism financing (CTF) often as part of their money laundering l ...
and financing of proliferation of
weapons of mass destruction A weapon of mass destruction (WMD) is a chemical, biological, radiological, nuclear, or any other weapon that can kill and bring significant harm to numerous individuals or cause great damage to artificial structures (e.g., buildings), natura ...
to preserve the integrity of the
global financial system The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financ ...
. In February 2012, the FATF's latest definition of politically exposed persons (PEP), revised from 2003, is as follows: *''Foreign PEPs'': individuals who are or have been entrusted with prominent public functions by a foreign country, for example
Heads of state A head of state (or chief of state) is the public persona who officially embodies a state Foakes, pp. 110–11 "he head of statebeing an embodiment of the State itself or representatitve of its international persona." in its unity and le ...
or
Heads of government The head of government is the highest or the second-highest official in the executive branch of a sovereign state, a federated state, or a self-governing colony, autonomous region, or other government who often presides over a cabinet, a gro ...
, 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, members of parliament, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials. (Not all countries subscribe to the concept of domestic PEPs with respect to regulatory requirements/application of due diligence. For example, US law, specifically Section 312 of the USA Patriot Act and its implementing regulations provide for enhanced due diligence for SFPFs (Senior Foreign Political Figure) only, defined as: "a current or former senior official in the executive, legislative, administrative, military, or judicial branches of a 'foreign' government...a senior official of a major 'foreign' political party; and a senior executive of a 'foreign' government-owned commercial enterprise.) *Persons who are or have been entrusted with a prominent function by a
state owned enterprise A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the government ...
or an
international organisation An international organization or international organisation (see spelling differences), also known as an intergovernmental organization or an international institution, is a stable set of norms and rules meant to govern the behavior of states an ...
refers to members of
senior management Senior management, executive management, upper management, or a management is generally individuals at the highest level of management of an organization who have the day-to-day tasks of managing that organization—sometimes a company or a corpor ...
, i.e. directors, deputy directors and members of the board or equivalent functions. Requirements for a PEP apply to
family member Family (from la, familia) is a group of people related either by consanguinity (by recognized birth) or affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its members and of society. Ideall ...
s or close associates, any individual publicly known, or known by the financial institution to be a close personal or professional associate. "The FATF definition is not intended to include middle-ranking or more junior individuals." A forerunner definition was by the 1997
OECD Anti-Bribery Convention The OECD Anti-Bribery Convention (officially Convention on Combating Bribery of Foreign Public Officials in International Business Transactions) is an anti-corruption convention of the OECD that requires signatory countries to criminalize brib ...
aimed at reducing corruption in developing countries, which came into force February 1999; it used the term 'foreign official'.


Implementation

Most of the 37 FATF member countries treat domestic and foreign PEPs with heightened
scrutiny Scrutiny (French: ''scrutin''; Late Latin: ''scrutinium''; from ''scrutari'', meaning "those who search through piles of rubbish in the hope of finding something of value" and originally from the Latin "scruta," meaning "broken things, rags, or ...
. The FATF guidance implies that if a person is a foreign PEP, it ''de facto'' makes them a domestic PEP in their own country. This makes sense for crime prevention, because to export proceeds of crime, the PEP must first use their own domestic financial system and thus, importance is placed on domestic, and non-foreign PEPs.


Australia

Under Australia's Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) Rules, Politically exposed persons (PEPs) are individuals who occupy a prominent public position or functions in a government body or international organisation, both within and outside Australia. This definition also extends to their immediate family members and close associates. The AML/CTF Rules define three categories of PEPs: * Domestic PEPs are individuals who hold a prominent public position or function in an Australian government body * Foreign PEPs are individuals who hold a prominent public position or function in a government body of a foreign country. * International organisation PEPs are individuals who hold a prominent public position or function in an international organisation. A reporting entity must have procedures to identify whether any individual customer or beneficial owner is a PEP, or an associate of a PEP. The reporting entity must undertake this identification process before it provides the customer with a designated service, or as soon as practicable afterwards. A reporting entity must implement additional due diligence measures and risk management systems where the PEP is high Money Laundering / Terrorism Financing risk or is a foreign PEP.


Canada

Canada considers all foreign PEPs to pose a money laundering and terrorist financing risk. Under the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act that came into effect in 2016, a politically exposed person now also includes all domestic PEPs and Heads of International Organisations (HIOs). Domestic PEPs in Canada retain their classification until 5 years after they leave office. This rule applies even if the PEP is not considered high risk.


Egypt

Egypt is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and has committed to implementing the
FATF The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, ''Groupe d'action financière'' (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat m ...
’s AML/CFT recommendations. PEP screening in Egypt is required for foreign and domestic PEPs, while international PEP screening is not required.


Chile

In Chile, financial institutions are mandated to report any transaction suspicious for potential involvement in bribery by virtue of a PEP's position and the influence that they may hold. , 2,200 to 3,000 individuals are considered PEPs, 150 of them foreign, and also their second grade relatives are under financial observation by the institutions.


European Union

The European Union has defined the term ''politically exposed person'' in the directive 2006/70/EC., then replaced by the directive 2015/849 (article 3, number 9)


Singapore

Under Singapore's
Monetary Authority of Singapore The Monetary Authority of Singapore (MAS) is the central bank and financial regulatory authority of Singapore. It administers the various statutes pertaining to money, banking, insurance, securities and the financial sector in general, as well ...
(MAS) Notice 626 - Prevention of money laundering and countering the financing of terrorism (Banks), PEPs are persons, either domestic or foreign, who are entrusted with prominent public functions. Prominent public functions includes the roles held by a head of state, a head of government, government ministers, senior civil or public servants, senior judicial or military officials, senior executives of state owned corporations, senior political party officials, members of the legislature and senior management of international organisations. Relatives or close associates ("RCAs") to PEPs are also categorised as PEPs. MAS requires financial institutions to apply enhanced customer due diligence on customers that are identified to be PEPs.


South Africa

In South Africa, the Financial Intelligence Centre amended the Financial Intelligence Centre Act to refer to Politically Influential Persons (PIP) instead of PEP. This was done in order to include private sector officials who have business dealings with public sector officials and elected officials in the public services procurement deals.


UK

likewise the UK's PEP definition is identical to the 2012 FATF definition, i.e. including reference to domestic PEPs; It is found in the Money Laundering Regulations 2017 Section 35(12). A politically exposed person is considered any individual who fits any of the criteria listed below: * A foreign person who has held any time in the preceding year a prominent public function outside the United Kingdom, in a state or international institution * Members of courts of auditors or of the boards of central banks * Ambassadors, chargés d’affaires and high-ranking officers in the armed forces * Members of the administrative, management or supervisory bodies of state-owned enterprises * Heads of state, heads of government, ministers and deputy or assistant ministers * Members of parliaments * Members of supreme courts, constitutional courts or of other high-level judicial bodies The definition explicitly excludes middle-ranking or more junior officials. PEP status also extends to relatives and close associates. Relatives and close associates include a spouse, a partner, children and their spouses or partners and parents. While other family members may not qualify under this definition, it may be appropriate to consider that other family members can also be used as a front for corrupt activities. Therefore, it may be appropriate to apply the definition to other extended family members that may have increased risk factors present and apply the requirements of the regulation (e.g. a PEP with material negative information may use their brother as a front for processing their proceeds of corruption). Close associates include any individual who is known to have joint beneficial ownership of a legal entity or legal arrangement, or any other close business relations. It also includes any individual who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit of a person referred to in regulation. The
Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
and Joint Money Laundering Steering Group both publish comprehensive guidance on both PEPs and other KYC related matters to assist firms in complying with their legal obligations. The 4th EU AML Directive is expected update the definition to include domestic PEPs, and limit relatives-status to spouse and partner only, and no longer the children and parents of PEPs.


United States

The term
foreign official Foreign official or foreign public official refers to a person who acts in an official capacity for a foreign government. The term is chiefly used in connection with international conventions and national laws against corruption in international tra ...
has been used by US enforcement agencies relating to persons who have similar characteristics as PEPs, as referenced in the US
Foreign Corrupt Practices Act The Foreign Corrupt Practices Act of 1977 (FCPA) (, ''et seq.'') is a United States federal law that prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests. The FCPA is applicable world ...
. It is used in all industries, not only by financial institutions. The
Treasury A treasury is either *A government department related to finance and taxation, a finance ministry. *A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or in p ...
's
Financial Crimes Enforcement Network The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terr ...
(FinCEN) did not use the term PEP in its regulations as of 2010. Suspicious activity requires a financial institution to submit a
suspicious activity report In financial regulation, a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) is a report made by a financial institution about suspicious or potentially suspicious activity. The criteria to decide when a report must be ma ...
to FinCEN. The term 'Senior Foreign Political Figure', as defined by section 312 of the
USA PATRIOT Act The USA PATRIOT Act (commonly known as the Patriot Act) was a landmark Act of Congress, Act of the United States Congress, signed into law by President of the United States, President George W. Bush. The formal name of the statute is the Uniti ...
is to a great extent similar to the definition of PEP, and also excludes middle-ranking or more junior individuals. The term PEP is recognized (and was defined) by the 'Wolfsberg Group' of eleven global banks.


Hong Kong

In the wake of the June 2020 imposition of the
Hong Kong national security law The Hong Kong national security law, officially the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, is a piece of national security legislation concerning Hong Kong. It ...
by the
PRC China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
Standing Committee of the National People's Congress The Standing Committee of the National People's Congress of the People's Republic of China (NPCSC) is the permanent body of the National People's Congress (NPC) of the People's Republic of China (PRC), which is the highest organ of state po ...
, the scrutiny of PEPs at some banks "involved combing through comments made by clients and their associates in public and in media, and
social media Social media are interactive media technologies that facilitate the creation and sharing of information, ideas, interests, and other forms of expression through virtual communities and networks. While challenges to the definition of ''social medi ...
posts in the recent past." The new law "prohibits what Beijing describes broadly as
secession Secession is the withdrawal of a group from a larger entity, especially a political entity, but also from any organization, union or military alliance. Some of the most famous and significant secessions have been: the former Soviet republics le ...
,
subversion Subversion () refers to a process by which the values and principles of a system in place are contradicted or reversed in an attempt to transform the established social order and its structures of power, authority, hierarchy, and social norms. Sub ...
,
terrorism Terrorism, in its broadest sense, is the use of criminal violence to provoke a state of terror or fear, mostly with the intention to achieve political or religious aims. The term is used in this regard primarily to refer to intentional violen ...
and collusion with foreign forces", with maximum penalties of up to life terms in
prison A prison, also known as a jail, gaol (dated, standard English, Australian, and historically in Canada), penitentiary (American English and Canadian English), detention center (or detention centre outside the US), correction center, correc ...
.
HSBC HSBC Holdings plc is a British multinational universal bank and financial services holding company. It is the largest bank in Europe by total assets ahead of BNP Paribas, with US$2.953 trillion as of December 2021. In 2021, HSBC had $10.8 tri ...
,
Credit Suisse Credit Suisse Group AG is a global investment bank and financial services firm founded and based in Switzerland. Headquartered in Zürich, it maintains offices in all major financial centers around the world and is one of the nine global " ...
, Julius Baer and
UBS UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...
declined to comment to the ''
Daily Telegraph Daily or The Daily may refer to: Journalism * Daily newspaper, newspaper issued on five to seven day of most weeks * ''The Daily'' (podcast), a podcast by ''The New York Times'' * ''The Daily'' (News Corporation), a defunct US-based iPad new ...
'' for a 20 July news article. Pro-democracy lawyer
Albert Ho Albert Ho Chun-yan (; born 1 December 1951) is a solicitor and politician in Hong Kong. He is the former chairman (2014–2019) and vice-chair (2019–2021) of the Hong Kong Alliance in Support of Patriotic Democratic Movements of China, and f ...
said that he feared that "people like him" may face "difficulties in the times to come... There’s not much you can do, actually, unless you cease all your financial and banking activities in Hong Kong."


History

The designation "politically exposed person" dates back to the late 1990s, in what was known as the "Abacha Affair."
Sani Abacha Sani Abacha (20 September 1943 – 8 June 1998) was a Nigerian military officer and politician who ruled as the military head of state of Nigeria from 1993 until his death in 1998. He seized power on 17 November 1993 in the last successful c ...
was a
Nigerian Nigerians or the Nigerian people are citizens of Nigeria or people with ancestry from Nigeria. The name Nigeria was taken from the Niger River running through the country. This name was allegedly coined in the late 19th century by British jour ...
dictator who organized a large scale, systematic theft of assets from the Nigerian central bank for some years with his family members and associates. It is believed that several billion dollars were stolen, and that the funds were transferred to bank accounts in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
and
Switzerland ). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
. In 2001, the Nigerian Government that succeeded the Abacha Regime made an effort to recover the money. It lodged complaints with several European agencies, including the
Federal Office of Police The Federal Office of Police (Fedpol, german: Bundesamt für Polizei, french: Office fédéral de la police, it, Ufficio federale di polizia, rm, Uffizi federal da polizia) of Switzerland is subject to the Federal Department of Justice and P ...
of
Switzerland ). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
which investigated close to sixty Swiss banks. In this investigation, the concept of "politically exposed person" emerged, around which the UN organised a committee in December 2000, that eventually led to the October 2003 resolution of United Nations Convention against Corruption, entered into force in December 2005, with ongoing annual reviews of implementation and asset recovery. It had become
European Union law European Union law is a system of rules operating within the member states of the European Union (EU). Since the founding of the European Coal and Steel Community following World War II, the EU has developed the aim to "promote peace, its valu ...
in 2004. PEP-specific compliance legislation addresses the link between
government corruption Political corruption is the use of powers by government officials or their network contacts for illegitimate private gain. Forms of corruption vary, but can include bribery, lobbying, extortion, cronyism, nepotism, parochialism, patronage, inf ...
,
money laundering Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictions ...
and
terrorism financing Terrorism financing is the provision of funds or providing financial support to individual terrorists or non-state actors. Most countries have implemented measures to counter terrorism financing (CTF) often as part of their money laundering la ...
. Since September 11, 2001, more than 100 countries have changed their laws related to financial services regulation, combating political corruption. Heavy fines have been imposed on financial institutions for conducting business with PEPs without following adequate procedures, as in the case of
Riggs Bank Riggs Bank was a bank headquartered in Washington, D.C. For most of its history, it was the largest bank headquartered in that city. On May 13, 2005, after the exposure of several money laundering scandals, the bank was acquired by PNC Financ ...
. In spite of regulation, political leaders like
Muammar Gaddafi Muammar Muhammad Abu Minyar al-Gaddafi, . Due to the lack of standardization of transcribing written and regionally pronounced Arabic, Gaddafi's name has been romanized in various ways. A 1986 column by ''The Straight Dope'' lists 32 spellin ...
and
Hosni Mubarak Muhammad Hosni El Sayed Mubarak, (; 4 May 1928 – 25 February 2020) was an Egyptian politician and military officer who served as the fourth president of Egypt from 1981 to 2011. Before he entered politics, Mubarak was a career officer in t ...
have made news in 2013 for having frozen assets in US banks that did not follow
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. It can be a l ...
.


Risk screening and PEP datasets

Most financial institutions view a PEP as a potential compliance risk, and perform enhanced monitoring of accounts that fall within this category. Screening for PEPs is usually performed at the beginning of account opening, called standard
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. It can be a l ...
or
know your customer Know Your Customer (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a ...
(KYC). Screening of accounts periodically is performed as part of ongoing due diligence. There are a number of companies advertising for regulatory, financial and reputational risk screening. Due diligence to uncover PEPs can be time-consuming and requires the checking of names, dates of birth, national identification numbers and photos of clients against a reputable database of known PEPs, which usually contains over one million profiles. No 'official' PEP list exist. The
CIA The Central Intelligence Agency (CIA ), known informally as the Agency and historically as the Company, is a civilian intelligence agency, foreign intelligence service of the federal government of the United States, officially tasked with gat ...
and UN have lists of
heads of state A head of state (or chief of state) is the public persona who officially embodies a state Foakes, pp. 110–11 "he head of statebeing an embodiment of the State itself or representatitve of its international persona." in its unity and le ...
, which fall below the PEP definitions of FATF. Vendors maintain their own particular database of PEPs and other high-risk customers. There are a number of crowd sourced lists of Politically Exposed Persons being made available utilizing public contributions.


See also

*
Bribery Act 2010 The Bribery Act 2010 (c.23) is an Act of the Parliament of the United Kingdom that covers the criminal law relating to bribery. Introduced to Parliament in the Queen's Speech in 2009 after several decades of reports and draft bills, the Act rec ...
(UKBA) *
Foreign Corrupt Practices Act The Foreign Corrupt Practices Act of 1977 (FCPA) (, ''et seq.'') is a United States federal law that prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests. The FCPA is applicable world ...
(FCPA) *
Foreign official Foreign official or foreign public official refers to a person who acts in an official capacity for a foreign government. The term is chiefly used in connection with international conventions and national laws against corruption in international tra ...
*
Know your customer Know Your Customer (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a ...
(KYC) *
Money laundering Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictions ...
*
Suspicious activity report In financial regulation, a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) is a report made by a financial institution about suspicious or potentially suspicious activity. The criteria to decide when a report must be ma ...
* US PATRIOT Act *
Wolfsberg Group The Wolfsberg Group is a non-governmental association of thirteen global banks. Its goal has been to develop financial industry standards for anti-money laundering (AML), know your customer (KYC) and counter terrorist financing (CTF) policies. Its ...


References

{{Reflist, 30em


External links


FATF Guidance on PEPSUS Senate Report on Foreign Corruption
Politics Bank regulation Government officials Corruption