What is a Politically Exposed Person (PEP)?

If your company is covered by the UK’s Money Laundering Regulations and is about to enter into a transaction with a customer, you are legally required to first undertake ‘due diligence’. This includes taking measures to determine whether this individual is who they claim to be, i.e., you’ll want to know whether or not they are considered a politically exposed person (PEP). Here, we’ll look at the definition of a politically exposed person (PEP) and what this means for your business. 

Politically exposed person definition

The Law Society defines a PEP as “someone who has been appointed by a community institution, an international body or a state (including the UK) to a high-profile position within the last 12 months.”

However, under the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), what counts as a PEP can be even broader than this definition. 

For instance, under the MLR 2017, the scope of what a PEP person is is a lot broader. The requirement for enhanced due diligence (EDD), therefore, extends to the PEP in question’s closest connections. For example, the MLR 2017 requires firms to apply EDD to the PEP, as well as:

  • Family members: spouse or civil partner, children and the spouses or civil partners of the PEP’s children, or parents. 
  • Known close associates: individuals known to have joint beneficial ownership of a legal entity or a legal arrangement, or an individual who has sole beneficial ownership of a legal entity which has been set up for the benefit of the PEP. 

The reasoning behind this is to ensure that family members or close associates of the PEP do not pose any similar risks as the PEP might.

Prominent public functions of a PEP

According to Regulation 35(14) of the MLR 2017, prominent pubic functions are considered as follows:

  • Heads of state, heads of government, ministers and deputy or assistant ministers.
  • Members of Parliament or similar legislative bodies.
  • Members of the supreme courts, constitutional courts, or judicial bodies whose decisions are not subject to further appeal.
  • Ambassadors and high-ranking officers in the armed forces.
  • Members of the administrative, management or supervisory bodies of state-owned enterprises.
  • Directors, deputy directors, and members of the board of an international organisation.

As a business, you need to tread carefully when considering either accepting a PEP as a customer or striking a corporate partnership with a PEP.  This is because, compared to other potential customers or business partners, a Politically Exposed Person poses a higher risk of laundering money amassed through bribery or corruption.

How has the meaning of a PEP evolved?

The creation of the meaning of what a ‘Politically Exposed Person’ is can be traced back to the late 1990s, following reports of the participation of the former Nigerian dictator Sani Abacha in money laundering. Global initiatives were spurred to combat this illicit activity. 

Of course, if you embark on a business relationship with a client where both parties expect the relationship to be ongoing, the client may not initially be a PEP but become one further down the line. This would increase their risk profile as a result. 

Here are a few potential indicators that an individual is a PEP: 

  • The individual is using an official letterhead in correspondence with you
  • News reports imply that the individual is either a PEP or linked to one 
  • The individual providing you with information suggests that they are a PEP 

In your efforts to confirm or rule out that a current or potential client is a PEP, you should draw upon information reasonably available to your business, such as: 

You can, however, streamline a Politically Exposed Person check by taking advantage of our electronic AML (anti-money laundering) verification system, which would let you verify the client’s identity in an instant.

Why you need to know what a PEP person is

Entering a business relationship with a PEP would call for you to enact enhanced due diligence measures. Here are several steps you would need to take under MLR 2017’s regulation 35: 

  • Ask senior management to approve the relationship 
  • Take adequate measures to ascertain the source of funds that the relationship would involve
  • Carry out enhanced ongoing monitoring of the relationship once it has begun  

You should also carefully consider whether the client should be classed as ‘lower’ or ‘higher’ risk lest to avoid you apply a disproportionate or ineffective level of enhanced due diligence. You may have a lower-risk PEP on your hands if you establish that: 

  • The client sources their funds through conventional means 
  • PEPs will rarely carry out transactions between you and the client  

Conversely, you may need to ask the client more questions if:

  • The PEP was appointed by one of the ‘high-risk’ jurisdictions listed in MLR 2017’s Schedule 3ZA
  • The PEP is looking to transfer a significant amount of money to your business
  • The funding for the transaction is from an unusual source  

So, as you can see, the definition of a politically exposed person is a lot broader than what you may assume. You’ll need to ensure that EDD is also taken on family members and close associates of the PEP. 

All in all, you should ask the PEP as many questions as you deem necessary to judge whether or not the individual should be suspected of money laundering. 

You must remember that failing to conduct a PEP check when legally necessary can see the business hit with a financial penalty and negative publicity, even if no money laundering is known to have taken place. Such circumstances saw UK bank Barclays fined about £72 million in 2015. 

To learn how to speedily complete a Politically Exposed Person check using Creditserve’s electronic AML verification system, please reach out to our team by phoning 01992 414222 or emailing sales@creditserve.co.uk.