What To Consider Before Working With Politically Exposed Persons (PEP's)
Politically Exposed Persons (PEP's) are individuals who have previously exercised a prominent public function, meaning that they have access to vital information and funds. PEP's can offer organisations lots of benefits, and therefore they should still be used as clients. However, organisations should use a risk-based approach when dealing with PEP's because they represent a higher-risk for involvement in bribery and corruption, due to the known political influence which they hold. Through achieving compliance with the Financial Action Task Force (FATF) guidelines and the Money Laundering Regulations 2007, an organisation will be able to deal with PEP's fairly and lawfully.
How can organisations mitigate the risks that PEPS pose?
To define a PEP, the FATF standard is most commonly used, as it was referred to by the Swiss Financial Market Regulator as the "international standard" for defining PEP's. FATF updated their definition of PEP's in 2012:
Domestic PEP's- An individual which has held a prominent public function within their own country. These positions may include: Head of State, a military official, a political party official, a senior politician.
Foreign PEP's-An individual which has held a prominent public function within a foreign country.
International PEPs- Individuals which have held a prominent function within an international organisation or a state-owned enterprise.
The Money Laundering Regulations 2007 establishes the regulation that a firm must implement enhanced due diligence if they are going to conduct business with PEPs outside of the UK. The Money Laundering Regulations also stipulate that enhanced due diligence must be continually regulated and monitored. PEPs are vulnerable to bribery and corruption because of their position as public figures, and this means that organisations dealing with PEPs need to consider the position of their associated family and friends.
Initially, an organisation needs to identify a PEP correctly. Therefore, for an organisation to identify whether a client or associate is a PEP, they can screen the individual against a PEP database. The status of PEPs can change, therefore for an organisation to remain compliant they should conduct periodical PEP investigations. This should naturally be a part of an organisation's Know Your Customer (KYC) programme.
Should an organisation deal with international PEPs differently?
A PEP should be dealt with using a risk-based approach and assessment, therefore each PEP should be dealt with in relation to their own specific circumstances. According to the Financial Action Task Force (FATF) the country of domicile or nationality of a PEP, is not considered to be vital. However, naturally international PEPs are always considered to pose a higher risk to an organisation. FATF state that an international PEP is automatically a domestic PEP within their own country, this is decided to make the dealing of crime easier.
There have been rumours that certain countries have PEPs which pose a significantly higher risk than PEPs in other countries, this doesn't tend to be the case. Some of the most stable and trustworthy countries still retain high risk PEPs. For example, at the end of 2008 the Governor of Illinois, Rod. R. Blagojevich was exposed for putting up for sale his appointment of President Obama's successor in the US Senate. Blagojevich, a prominent Democrat, was placed under arrest for charges of conspiracy and soliciting bribes. The US is placed near the top of the Transparency International's Corruption Perceptions Index and on the FATF High-Risk and Non-Cooperative Jurisdiction List, yet the US is still exposed to high-risk PEPs.
Consequently, regardless of their nation, PEPs can pose a high risk from any part of the world. Therefore, organisations need to be wise and ensure they implement an enhanced due diligence programme to ensure each PEP is considered and investigated with a risk-based approach.