Politically Exposed Persons and AML: PEPs Defined by Country

October 8, 2020

Politically exposed persons are officials who have a prominent public function, such as a political office or senior appointment. The financial community places a higher risk on PEPs because they may be a greater risk of exposure to corruption or bribery and money laundering by virtue of their position and their influence.

The terms politically exposed person and senior foreign political figure are often used interchangeably, particularly in international forums.  But there is no official global definition of a politically exposed person.

The term PEP is typically used referring to customers in the financial services industry, while ‘foreign official’ refers to the risks of third-party relationships in all industries. They are not necessarily the same thing.

 

Definition based on FATF standard

The closest thing to an international definition comes from the updated 2013 Financial Action Task Force on Money Laundering (FATF) standard. The (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction.

They wrote that PEPs are “an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognized that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing (TF). This has been confirmed by analysis and case studies.”

The FATF first issued mandatory requirements covering foreign PEPs, their family members and close associates in June 2003. However, they have since expanded the mandatory requirements to domestic PEPs and PEPs of international organizations, in line with Article 52 of the United Nations Convention Against Corruption (UNCAC).

 

PEPs are foreign and domestic

Article 52 of the UNCAC defines PEPs as “individuals who are, or have been, entrusted with prominent public functions and their family members and close associates”, and includes both domestic and foreign PEPs.

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 or heads 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.
  • Persons who are or have been entrusted with a prominent function by a state-owned enterprise. This can include members of senior management.
 

Canada’s FINTRAC sets PEP definition

Canada goes into a bit more depth when defining a PEP.

A politically exposed person (PEP) or the head of an international organization (HIO) is a person entrusted with a prominent position that typically comes with the opportunity to influence decisions and the ability to control resources. The influence and control a PEP or HIO has put them in a position to impact policy decisions, institutions and rules of procedure in the allocation of resources and finances, which can make them vulnerable to corruption.

You can read the full definition and explanation in the FINTRAC guidance and directive here.

 

UK’s FCA takes extra measures

The Financial Conduct Authority (FCA) adds that the Money Laundering Regulations requires firms to apply extra measures, called “enhanced due diligence” when dealing with those who are PEPs in a state other than the UK, as well as family members or close associates of those PEPs.

Read the full UK instructions here.

 

EU has long history with PEPs

In the European Union, the definition of PEPs was established many years ago with Directive 2005/60/EC to require institutions and persons covered to apply, on a risk-sensitive basis, enhanced customer due diligence measures surrounding transactions or business relationships with politically exposed persons residing in another member state or in a third country.

In the context of this risk analysis, institutions need to focus their resources on products and transactions where there is a high risk of money laundering.

When determining the groups of persons covered, it is essential to take into consideration the social, political and economic differences between countries concerned, the EU stated.

AMLD5 again addresses the issue of PEPs, requiring each member state and accredited international organizations to keep an up-to-date list of exact functions which qualify as prominent public functions. A single list of all prominent public functions will be assembled by the Commission and will be made public.

Firms will remain under their existing obligations to identify whether their customers (or beneficial owners of their customers) are PEPs, and to apply EDD measures. Firms also need to ensure the PEP lists they maintain are up to date.

 

United Nations Convention Against Corruption on PEPs

The United Nations Convention Against Corruption (UNCAC) expanded the definition of PEPs with its  declaration that a “Public official” shall mean:

  1. any person holding a legislative, executive, administrative or judicial office of a State Party, whether appointed or elected, whether permanent or temporary, whether paid or unpaid, irrespective of that person’s seniority;
  2. any other person who performs a public function, including for a public agency or public enterprise, or provides a public service, as defined in the domestic law of the State Party and as applied in the pertinent area of law of that State Party;
  3. any other person defined as a “public official” in the domestic law of a State Party. (Article 2)

The UN points to the World Bank’s 2009 report on PEPs called Stolen Asset Recovery as a major a policy paper to help entities strengthen preventative measures.

This four-part paper includes a number of practical tools to help guide banks, regulators, and other public authorities and includes:

  • Main observations and trends in PEPs compliance and an analysis of the principle reasons for poor compliance and overall ineffectiveness of systems to detect and monitor PEPs.
  • Implementation of PEPs measures by regulatory authorities and banks.
  • The roles of the regulatory authority, which is responsible for providing guidance to banks and enforcing compliance, as well as the FIU, which has a role in the context of suspicious transaction reports (STRs) on PEPs.

Issues such as national cooperation, training and resources, that must be addressed by all stakeholders.

Banks may use a Summary of Good Practices in the document to improve the quality and effectiveness of their PEPs measures while regulatory authorities may use them to enhance their review and enforcement processes on PEPs. Regulatory authorities, financial intelligence units and other public authorities may use them to develop or improve guidance.

 

Singapore offers detailed breakdown

Singapore’s Accounting and Corporate Regulatory Authority (ACRA) defines PEPs as an individual who is or has been entrusted with any prominent public function in Singapore (domestic PEPs) or in a country or an outside territory (foreign PEPs).

In this context, “prominent public function” includes the role held by a head of state, head of government, government minister, senior civil or public servant, senior judicial or military official, senior executive of a state-owned corporation, senior political party official, or a member of the legislature but excludes the role held by middle ranking or more junior officials.

It also includes anyone who has been entrusted with any prominent public function by an international organization (PEPs of international organizations).

Prominent public function includes the role held by a director, deputy director, member of the board and member of the senior management of an international organization, but excludes the role held by middle-ranking or more junior officials;

A “close associate” of a Politically Exposed Persons means a natural person who is closely connected to a Politically Exposed Persons, either socially or professionally.

This includes an immediate family member (spouse, child, adopted child, stepchild, sibling or parent) of a politically exposed person or a citizen of Singapore that the Politically Exposed Persons may have significant influence over due to the level of exposure to the PEP.

 

Australia suggests PEP risk analysis

Australia’s AUSTRAC defines a PEP as an individual who holds a prominent public position or role in a government body or international organization, either in Australia or overseas. Immediate family members and/or close associates of these individuals are also considered PEPs.

PEPs often have power over government spending and budgets, procurement processes, development approvals and grants. Some examples of PEPs include government ministers or equivalent politicians, senior government executives, high-ranking judges, high-ranking military officers, or board members or executives of an international organization.

Because PEPs hold positions of power and influence they can be a target for corruption and bribery attempts, and ultimately for money laundering or terrorism financing activities. This is why it’s important to use AML/CTF measures to identify and manage any such potential risks. However, you should remember that being a PEP does not automatically mean someone is involved in criminal activities.

As part of your AML/CTF program, you must outline how you identify PEPs and what steps you take when dealing with them.

Austrac points out that in Australia, a person is not considered a PEP once they leave their high-profile position, but they may still be high risk. Former PEPs can pose a money laundering or terrorism financing risk to your business or organization, especially if they were high-risk PEPs.

When you consider a former PEP a high-risk customer, AUSTRAC suggests you may choose to implement your enhanced customer due diligence program (ECDD).

ECDD involves verifying or re-verifying a customer’s identification, collecting additional information, performing more detailed analysis, performing more monitoring of transactions and getting approval from senior management.

 

United States takes different stance

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) provides for enhanced due diligence for Senior Foreign Political Figures) only. They are 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.

The U.S. government’s FinCEN agency points out the FATF issued Recommendation 12, which requires countries to ensure that financial institutions implement measures to prevent the misuse of the financial system by PEPs and to detect such potential abuse. The FATF recommends that family members and close associates of PEPs should be considered PEPs because of the potential for abuse of the relationship for the purpose of moving the proceeds of crime, facilitating placement and disguise of the proceeds, as well as for terrorist financing purposes.

FinCEN’s regulations similarly include family members and known close associates within the definition of senior foreign political figure.

In the United States, Recommendation 12 is implemented through FinCEN rules and guidance and by supervisory expectations outlined in the Federal Financial Institutions Examination Council (FFIEC) BSA Examination Manual.

With regard to foreign PEPs, it says banks should exercise reasonable judgment in designing and implementing policies, procedures, and processes regarding foreign PEPs as a part of their anti-money laundering (AML) program. This could include obtaining risk-based due diligence information on PEPs, such as countries of residence of the accountholder and beneficial owner and the level of corruption and money laundering risk associated with those countries, source of wealth and funds, and information on immediate family members and close associates.

 

Agencies coordinate PEP response

In August 2020 a number of US agencies, including FinCEN, issued a joint statement to clarify the Bank Secrecy Act (BSA) due diligence requirements for customers who may be considered “politically exposed persons” (PEPs) should be commensurate with the risks posed by the PEP relationship.

The statement points out the term PEP is commonly used to refer to foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates.

“By virtue of this public position or relationship, these individuals may present a higher risk that their funds may be the proceeds of corruption or other illicit activity,” the joint statement concludes. “Addressing the money-laundering threat posed by corruption of foreign officials continues to be a national security priority for the United States. “

The statement recognizes that PEP relationships present varying levels of money-laundering risk, which depends on facts and circumstances specific to the customer relationship.  For example, PEPs with a limited transaction volume, a low dollar deposit account with the bank, known legitimate sources of funds, or access only to products or services that are subject to specific terms and payment schedules could reasonably be characterized as having lower customer risk profiles.

The statement clarifies that, while banks must adopt appropriate risk-based procedures for conducting customer due diligence (CDD), the CDD rule does not create a regulatory requirement, and there is no supervisory expectation for banks to have unique, additional due diligence steps for customers who are considered PEPs

You can read the full statement here.

 

FinCEN Red Flags: Corrupt Foreign PEPs and their Facilitators

The red flags noted below may help financial institutions identify suspected schemes that corrupt foreign PEPs and their facilitators may use. In applying the red flags, financial institutions are advised that no single transactional red flag necessarily indicates suspicious activity. Financial institutions should consider additional indicators and the surrounding facts and circumstances, such as a customer’s historical financial activity and whether the customer exhibits multiple red flags, before determining that a transaction is suspicious. Financial institutions should also perform additional inquiries and investigations where appropriate. Here are some common red flags:

  • Use of third parties when it is not normal business practice
  • Use of third parties when it appears to shield the identity of a PEP
  • Use of family members or close associates as legal owners
  • Use of corporate vehicles to obscure ownership, involved industries or countries
  • Declarations of information from PEPs that are inconsistent with other information, such as publicly available declarations and published official salaries
  • The PEP of facilitator seeks to make use of the services of a financial institution of a non-financial business or profession that would not normally cater to foreign of high-value clients

Read more about FATF Advisories and Guidance here.

 

Screening PEPs

When screening PEPs, there are some best practices to consider:

  • Take a risk-based approach – Once a client has been identified as a foreign or domestic PEP, a pre-established risk-scoring model can help determine the appropriate level of enhanced due diligence.
  • Gather information from various sources – It is necessary to pull information from various sources to help with this determination. These sources include but are not limited to: up-to-date customer due diligence information, internet and media searches, commercial and in-house databases and additional sources of information like government-issued PEP lists, asset disclosure systems, customer self-declaration statements, and general information that may be shared by competent authorities.
  • Conduct enhanced due diligence – FATF recommends obtaining senior management approval; taking reasonable measures to establish the source of wealth or funds; and completing enhanced ongoing monitoring of the business relationship.

When looking to determine whether someone is a PEP, here are some tips:

  • Where possible, use native character searching. Searching for names in their native language greatly reduces false positives by limiting transliteration issues. How you handle a local PEP may be different then how you handle a national PEP – their risk rating will be different.
  • Use geography to help determine risks – not all countries pose the same risk. Lower risk countries present the opportunity to reduce the amount of time spent reviewing close associates and relatives.
  • Reduce the number of hits you receive by using date of birth and age to refine your search.
  • Utilizing a defined set of risk factors, build a PEP risk-scoring model that works for your organization. For each risk category, weight the risk factors and then build a defensible risk-scoring process.
  • For low-risk PEPs, consider screening and monitoring for sanctions only; for medium-risk, PEPs, screening and monitoring for sanctions and regulatory actions only; and for high-risk PEPs, screening and monitoring against an entire database.

Alessa offers the ability to identify whether someone is a PEP by using internal and external lists (like those provided by risk intelligence data providers) to screen individuals. Screening can be done in native characters and compliance professionals can build their own risk models, depending on the risk appetite of the organization.

All these features allow compliance professionals to quickly and correctly identify whether an individual is a PEP and to take a risk-based approach to the relationship. To learn more about how Alessa can help with your PEPs screening, contact us.

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