In the dynamic world of financial services, a term that often raises eyebrows is “politically exposed person” (PEP). These individuals hold prominent public positions, having been entrusted with high-ranking roles by community institutions, international bodies, or states within the last 12 months.
But are all PEPs as high-risk as they are made out to be? This article examines the reality behind that perception and outlines how to manage the associated risks.
Who is a Politically Exposed Person or PEP?
A PEP is an individual who holds, or has recently held, a prominent public function. This includes roles such as:
- Heads of state, heads of government, ministers, and deputy or assistant ministers
- Members of Parliament
- Members of courts of auditors or central bank boards
- Ambassadors and senior military officials
- Senior figures in state-owned enterprises
- Judges in supreme or constitutional courts
PEPs also extend to:
- Immediate family members
- Close business associates
- Beneficial owners linked to the individual
Additionally, Politically Exposed Persons include connected individuals and entities. A full breakdown is available in UK legislation.
Why are PEPs considered higher risk?
PEPs are considered higher risk due to the nature of their roles and the opportunities those roles create for financial crime.
1. Influence and power
PEPs can influence decisions, allocate resources, and shape policy. This makes them potential targets for bribery or undue influence.
2. Access to public funds
Access to government budgets and resources increases the risk of misuse, including embezzlement or diversion of funds.
3. Bribery and corruption exposure
Their positions can make them susceptible to corruption, particularly where financial incentives are used to influence decisions.
4. Concealing illicit wealth
PEPs may be in a position to disguise the origins of illicit funds through complex financial arrangements.
5. Reputational risk
Associating with individuals linked to corruption can expose firms to reputational damage and regulatory scrutiny.
6. Regulatory expectations
Global standards, including those set by the Financial Action Task Force (FATF), require enhanced due diligence for PEPs.
Being classified as a PEP does not imply wrongdoing. It indicates elevated risk that requires additional scrutiny and monitoring.
Should you avoid working with PEPs?
No. Many PEPs are legitimate. However, they require enhanced due diligence and monitoring.
Regulated firms are expected to use reasonably available information to identify PEPs, including:
- Public sources such as government or parliamentary websites
- Registers such as Companies House
- Commercial databases covering PEPs and associated individuals
Firms must understand the individual’s role and apply appropriate controls to manage risk.
Standard KYC checks still apply, but PEP relationships require additional scrutiny to manage legal, reputational, and financial exposure.
How can you manage Politically Exposed Persons?
Under the Money Laundering Regulations 2017, firms must:
- Obtain senior management approval before establishing or continuing a relationship
- Establish source of wealth and source of funds
- Carry out enhanced and ongoing monitoring
A risk-based approach should be applied, assessing both the individual and the nature of the relationship to determine the appropriate level of due diligence.
Ongoing monitoring is critical. A PEP’s status may change over time, or an existing client may become a PEP. Regular reviews ensure risk remains accurately assessed. Ongoing monitoring helps maintain compliance but can be resource-intensive without automation.
Would you work with a PEP?
Working with PEPs is not inherently problematic. The key requirement is effective risk management through enhanced due diligence, monitoring, and appropriate controls.
Firms that implement structured processes and use supporting technology can manage PEP risk while remaining compliant and protecting their reputation.
