Politically exposed person

In financial regulation, 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 and corruption by virtue of their position and the influence they may hold. The terms "politically exposed person" and senior foreign political figure are often used interchangeably, particularly in international forums.

FATF definition

While there is no global definition of a PEP, many countries base their definitions on those from the Financial Action Task Force on Money Laundering (FATF).[1] The FATF is an international body, founded in 1989 on the initiative of the G7 and hosted by the OECD, that sets standards and promotes the implementation of measures against money laundering, terrorism financing and financing of proliferation of weapons of mass destruction to preserve the integrity of the global financial system.[2]: 2 

In February 2012, the FATF's latest definition of PEPs, revised from 2003, is as follows:[2]: 123 

  • 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, members of parliament, 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 or an international organisation refers to members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions.

Requirements for a PEP apply to family members or close associates, any individual publicly known, or known by the financial institution to be a close personal or professional associate.[2]: 18 

A forerunner definition was by the 1997 OECD Anti-Bribery Convention aimed at reducing corruption in developing countries, which came into force February 1999; it used the term 'foreign official'.

Implementation

Most of the 39 FATF member countries treat domestic and foreign PEPs with heightened scrutiny. The FATF guidance implies that if a person is a foreign PEP, it makes them a de facto domestic PEP within their own country.

Australia

Under Australia's Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) Rules,[3] 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 or 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 latest amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (which initially went into effect in 2001), a PEP includes all domestic PEPs and Heads of International Organisations (HIOs).[4]

Within Canada, a domestic PEP is defined as "a person who currently holds, or has held within the last 5 years, a specific office or position in or on behalf of the Canadian federal government, a Canadian provincial (or territorial) government, or a Canadian municipal government."[4] Domestic PEPs in Canada retain their classification until 5 years after they leave office.

When a person is determined to be a foreign PEP, they remain so forever (including deceased foreign PEPs).[4]

Chile
See also: Banco de 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. As of 2015, 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.[5]

Egypt

Egypt is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and has committed to implementing the FATF's AML/CFT recommendations. PEP screening in Egypt is required for foreign and domestic PEPs, while international PEP screening is not required.

European Union

The European Union defined the term politically exposed person in the directive 2006/70/EC,[6] later replaced by the directive 2015/849 (article 3, number 9)[7]

Hong Kong

In the wake of the June 2020 imposition of the Hong Kong national security law by the PRC Standing Committee of the National People's Congress, 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 posts in the recent past." The new law "prohibits what Beijing describes broadly as secession, subversion, terrorism and collusion with foreign forces", with maximum penalties of up to life terms in prison. HSBC, Credit Suisse, Julius Baer and UBS declined to comment to the Daily Telegraph for a 20 July 2020 news article. Pro-democracy lawyer Albert Ho 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." [8]

Singapore

Under Singapore's Monetary Authority of Singapore (MAS) Notice 626 - Prevention of money laundering and countering the financing of terrorism (Banks),[9] 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.

United Kingdom

As of June 2017, 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).[10] A PEP is considered to be 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 and Joint Money Laundering Steering Group both publish comprehensive guidance on both PEPs and other know your customer (KYC) related matters to assist firms in complying with their legal obligations.[11]

The 4th EU AML Directive is expected to 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.[12]

United States

The term foreign official 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 15 U.S.C. § 78dd-1. It is used in all industries, not only by financial institutions. The Treasury's Financial Crimes Enforcement Network (FinCEN) did not use the term PEP in its regulations as of 2010.[13] Suspicious activity requires a financial institution to submit a suspicious activity report to FinCEN. The term 'Senior Foreign Political Figure', as defined by section 312 of the USA PATRIOT Act is to a great extent similar to the definition of a PEP, and also excludes middle-ranking or more junior individuals. The term PEP is recognized (and was defined) by the Wolfsberg Group of 11 global banks.[14]

History

The designation "politically exposed person" dates back to the late 1990s, in what was known as the "Abacha Affair." Sani Abacha was a Nigerian dictator who organized a large scale, systematic theft of assets from the Central Bank of Nigeria 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 and Switzerland.[15] In 2001, the Nigerian Government that succeeded the Abacha regime made an effort to recover the money.[16] It lodged complaints with several European agencies, including the Federal Office of Police of Switzerland which investigated close to 60 Swiss banks.[17] 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 the United Nations Convention against Corruption, entered into force in December 2005, with ongoing annual reviews of implementation and asset recovery.[18] It had become European Union law in 2004.[15]

PEP-specific compliance legislation addresses the link between government corruption, money laundering and terrorism financing.[19] 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 in Washington, D.C.[20]

In spite of regulation, political leaders like Muammar Gaddafi and Hosni Mubarak made news in 2013 for having frozen assets in US banks that did not follow due diligence.[21]

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 or 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 and UN have lists of heads of state, which fall under the PEP definitions of FATF.

Vendors maintain their own particular database of PEPs[22] and other high-risk customers.

There are a number of crowd sourced lists of PEPs being made available utilizing public contributions.

See also

References
  1. "FATF Guidance: Politically Exposed Persons (Recommendations 12 and 22)". www.fatf-gafi.org. Retrieved 2023-06-25.
  2. FATF (15 February 2012). "International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation" (PDF). ATF/OECD. p. 130.
  3. (AUSTRAC), Australian Transaction Reports and Analysis Centre (30 October 2014). "AML/CTF Act".
  4. Government of Canada, Financial Transactions and Reports Analysis Centre of Canada (2021-02-17). "Politically exposed persons and heads of international organizations guidance | FINTRAC – Canada.ca". fintrac-canafe.canada.ca. Retrieved 2023-06-25.
  5. Chilean newspaper La Tercera 22 February 2015, PEP: así opera la vigilancia financiera a la clase política Fernando Vega, retrieved on 22 February 2015
  6. Commission Directive 2006/70/EC
  7. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC
  8. "Global banks scrutinise their Hong Kong clients for pro-democracy ties". Telegraph Media Group Limited. 20 July 2020.
  9. "Notice 626 Prevention of Money Laundering and Countering the Financing of Terrorism – Banks". www.mas.gov.sg. Retrieved 2021-02-15.
  10. "The Money Laundering Regulations 2017".
  11. "FCA Information on Money Laundering & Terrorist Financing".
  12. "The Fourth Anti Money Laundering Directive". LK Shields.
  13. "Archived copy" (PDF). Archived from the original (PDF) on 2010-09-21. Retrieved 2010-09-27.{{cite web}}: CS1 maint: archived copy as title (link)
  14. "Archived copy" (PDF). Archived from the original (PDF) on 2014-10-31. Retrieved 2015-01-24.{{cite web}}: CS1 maint: archived copy as title (link)
  15. French Senate, Justice et affaires intérieures (30 June 2004). "Proposition de directive du Parlement européen et du Conseil relative à la prévention de l'utilisation du système financier aux fins du blanchiment de capitaux, y compris le financement du terrorisme" (in French). French Government.
  16. 'Uzor, Chidi (8 August 2001). "Nigeria: Abacha Loot: Swiss Govt to Dock 60 Bankers, Lawyers" – via AllAfrica.
  17. "Switzerland provides mutual legal assistance in the Abacha case - To date, USD 645 million have been frozen in Switzerland". Federal Office of Justice Switzerland. 21 January 2000.
  18. "United Nations Convention against Corruption". UN office of drugs and crime (UNODC). n.d. Retrieved 12 February 2015.
  19. "FATF Guidance on PEP Legislation" (PDF). FATF. June 2013.
  20. "At Riggs Bank, A Tangled Path Led to Scandal". New York Times. 19 July 2004.
  21. "Frozen Mubarak assets worth around $1bn". Daily News Egypt. 17 April 2013.
  22. Sangit, Vedant (2019-10-17). "Indian Banks sanctioned Rs.48 trillion loans to PEP". RegtechTimes. Retrieved 2020-08-10.
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