A Politically Exposed Person (PEP) is defined as an induvial who has been trusted with a prominent public function, which generally means that they present a higher risk for corruption. The Financial Action Task Force (FATF) produced guidelines to help define a PEP. They describe a PEP as:
- A current or former senior official in the executive, legislative, administrative, military or judicial branch of a government
- A senior official of a major political party
- A senior executive of a government-owned commercial enterprise
- An immediate family member or close personal/professional associate of such individual
The level of risk associated with a PEP varies depending on the type of individual. It's important to note that if an individual is considered a PEP, they are not automatically a criminal, nor are they necessarily linked to abuse of the financial system. As with most legislation, PEP requirements vary in different countries. It's crucial that you comply with not only the local requirements for PEP due diligence but also with any international regulations to which your business may be exposed.
What is a PEP list?
The PEP list includes customers with known links to high-risk countries and business sectors and customers with complex beneficial ownership structures. Building a business relationship with a PEP is considered a high-risk situation. For anti-money laundering (AML) and terrorist financing purposes, you should perform enhanced due diligence (EDD) against anyone on the PEP list. These situations are considered high-risk because they present a higher money-laundering risk or threat of financing terrorism.
How is this linked to the financial sanctions list?
The Office of Financial Services Implementation publishes a consolidated financial sanctions list, which includes information to help firms to screen and identify designated persons subject to UK, EU and UN financial sanctions. These sanctions are essentially restrictive measures imposed on financial resources and services for individuals, entities and bodies that engage in criminal activities. They're also applicable to PEPs.
It's important to note that PEPs are not automatically included in the consolidated financial sanctions list. Therefore, compliance breaches can occur if senior management misunderstands the difference between 'designated persons' on the financial sanctions list and PEPs. If this happens, any efforts put into enhanced due diligence will not be focussed on the correct targets. AML customer due diligence doesn't usually include screening against the financial sanctions list. Therefore, to avoid the risk of breaching the UK financial sanctions, screening against HMT's consolidated list must be carried out in addition to AML checks.
In 2015, the Financial Conduct Authority (FCA) fined Barclays Bank after the firm failed to minimise the risk of their bank being used to facilitate financial crime. The misconduct related to a £1 billion transaction that Barclays arranged and executed in 2011 and 2012 for a number of high-net-worth clients. These clients were PEPs, revealing that Barclays failed to perform enhanced levels of due diligence and monitoring. After investigating, the FCA found that the firm had actually applied a notably low level of due diligence. Specifically, senior management failed to oversee and monitor Barclays' handling of financial crime risks. It would seem that the bank did not follow its own standard policies due to their sales-driven culture as they prioritised fast transactions over safety procedures. As a result, the FCA fined the firm £72 million.