explainer: politically exposed persons (PEPs)

What is a PEP?

PEP stands for Politically Exposed Person. A PEP is someone who has political power or influence, and may therefore be more susceptible to bribery or corruption. Close family and business associates can sometimes also be considered to be a PEP because they can also influence a person in a position of power.

Keep in mind, there is not one definition of who is or isn’t a PEP, as the criteria is broad and who fits the bill can change from country to country and even company to company.

Generally speaking, there may be nothing wrong with doing business with a PEP, but it can depend on things like your company’s risk appetite, the industry they operate in, the country they are from, the rule of law and guardrails in place to prevent corruption in that country, as well as who exactly the PEP. In other words, what’s there background, what exactly is their proximity to power and so forth. 

As you can see, it’s complicated. Which is why it’s so important to know if your potential client is a PEP to begin wit so that you can then go ahead with doing additional due diligence if needed and making an assessment about how to proceed in a more informed way.

Why it’s important to know if someone is a PEP

Because PEPs carry an additional risk of bribery or corruption, it may be riskier for your business to have a business relationship with them.

The key issue for your business is the reputation risk associated with doing business with a shady individual who is linked to corruption or bribery.

Depending on where your business operates and the compliance and regulatory environment that you are in. In some cases, you may face fines for failing to identify a PEP, especially if it contributes to a financial crime being committed. Your company may also have its own guidelines on whether a PEP status increases someone’s level of risk and therefore whether you should proceed with them.

PEPs require this special designation because they 

• may be able to influence government contracts
• may try to impact government oversight
• may try to obscure their source of wealth
• may be involved in organised crime
• relatives or business associates of PEPs may do business on behalf of a PEP to conceal the origin of money, gain access to a legitimate financial service provider, evade authorities and so forth

Who might be classified as a PEP?

Answering this question is rather difficult as who classifies as PEP can vary from country to country, can change based on the context, and may even change based on your company’s own risk appetite.

Keep in mind, a PEP can spread risk levels like a spider’s web. This is because close associates or family members of a PEP may become a higher risk by association.

Government

• Legislative branch like Members of Parliament
• Executive branch like Heads of State (like a President, Monarch, Governor General etc), Ministers, Heads of Departments, Mayors, Governors etc
• Judicial branch, including judges (keep in mind, members of the judiciary are not always considered PEPs)
• Diplomatic positions like ambassadors
• Current or former senior executives of state-owned companies

Organisations and institutions

• Board members or senior leadership of a national bank or other national financial institution
• High-ranking military officials
• Board members or senior official of sporting committees responsible for choosing the location of major sporting events or signing off on big sporting events or contracts.

Close relatives

• Parents and children
• Spouse or partner
• Siblings
• Other close relatives like grandparents or uncles/aunts
• Extended family members, like cousins or in-laws could be considered a PEP

Business associates

• Has a close business relationship or joint beneficial ownership of an entity
• Has joint legal arrangements with a PEP
• Has beneficial ownership of an entity that was established to benefit the PEP
• Conducts transactions on behalf of someone who holds public office or has a position of public trust

Do all PEPs pose a risk?

No. In fact, you may have to make a judgement based on what area you operate in, your company’s risk appetite and so forth. While for some companies, anyone with political exposure is a no-no, for others they would be more than happy to take “lower level” PEPs on as a client. For example, for them, small town mayors and district judges would not be considered a PEP.

Also, remember that being a PEP does not mean you have done something wrong. Naturally, the majority of PEPs are not corrupt or bribed. The PEP designation is simply a label that someone with power is at a greater risk of corruption or being a target for bribery.

How can you find out if someone is a PEP?

Your company may ask potential clients to make a statement about whether they are a PEP or not. Your analysts can also do manual research by doing a Google search and reading up on the history of that individual. You can also use an automated tool like Complytron, which has a database of global and European PEPs.

Simply type your target’s name into our search field and we’ll reveal whether that name is a likely PEP.

One watchout is to be careful about false positives. For example, if your target has a common name, the PEP match may actually be in reference to someone else. In this case, it’s worth doing a bit of additional research like checking the date of birth and other identifying information.

Complytron’s database also includes Relatives and Close Associates, casting your net wider so that you don’t miss someone who actually has political exposure.

PEP check checklist

• Create a PEP policy. The only thing worse than not having a PEP policy, is having a bad one because it can give you a false sense of security. A good policy includes an assessment of your particular operating environment, the types of clients you have, who would typically be a PEP risk for your business, how you will flag potential PEPs, what steps will be taken to confirm their PEP status, and how a decision will be made about how to proceed. This policy should be revisited and retain some flexibility because the definition of a PEP and who may pose a PEP risk is constantly in flux.
• Get a third-party software, like Complytron, which has PEP databases you can search, or do your own PEP research (keep in mind, doing your own research risks missing important information)
• Check your client at customer onboarding. Before deciding to enter a business relation
• Keep checking the status of your clients, as their PEP status may change between searches. People can get appointed to new roles or run for office at any time, changing their status, and this can also mean that the people within the circles of PEPs are also constantly changing. Using an automated software that is constantly evolving to keep pace with the changing landscape can help you stay on top of who is currently a PEP in real time.
• Have a process in place. Making a PEP check an automatic and consistent part of your client onboarding process is important so that no one slips through the cracks. Each company’s in-house processes look different, so it’s worth considering at which point in the process this check makes sense.
• Have a plan for who decides how to proceed with a PEP. So, you’ve found that a potential client is a PEP, what now? It may that your customer relationship manager can make the decision based on certain factors, or it could be that the decision is pushed up to more senior management. Not all PEPs are the same, so how you proceed can depend on your industry, risk appetite, or even on a case by case basis. It’s safest to ensure that you have more than one person who is responsible for final decisions relating to PEPs, and that these individuals also have someone else cross-checking their assessments to ensure that the people within your company don’t fall prey to bribes etc.
• Conduct enhanced due diligence. In some cases, additional due diligence may be required before the decision maker can make a decision on how to proceed. An EDD may also be required if the connection between your target and a confirmed PEP has not yet been established, for example, in the case of a close associate. An EDD may include things like looking at media reports and doing a Google search to see what else you can uncover.
• Consider the details as well as the big picture. While looking at the individuals proximity to power is one thing. Consider the bigger picture of the country they operate in. For example, a person who is “exposed” to a politician may still pose a risk even if they are not in office themselves, because they could be acting as a front for the transactions of someone else.
• Regularly revisit your customer database. It’s not just important to keep an eye on any PEPs in your customer pool, but to scan the entire database regularly as you may find people among your existing customer who have since become a PEP.
• Take a look at trusts, charities, foundations etc. Sometimes these structures can obscure that a PEP is a beneficiary.

The Bottom Line

It’s important for your business to know if a potential client is a PEP. There’s no official list of PEPs, but there are guidelines on what constitutes this classification. Solutions like Complytron give you an ever growing, up-to-date database of PEPs to search so that you can perform more thorough due diligence.

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