Politically Exposed Persons (PEP)

Politically exposed persons, i.e. PEP are included in the customer due diligence stages. A PEP consists of individuals who hold an important public office or political role. Their position can be misused to launder illicit funds or for predicate offenses such as corruption and bribery. It is true that having PEPs as clients or entering into business arrangements with PEP may pose a high money laundering risk for organizations. Examples abound of politicians or their associates abusing their position for money laundering purposes. Take the Panama Papers as an example; it is a very open source for such examples. More than 140 politicians from 50 countries were implicated in the Panama Papers.  

Characterizing a person as a PEP is one of the important procedures for a client to require enhanced due diligence. These customers are automatically considered high-risk customers. The fact that organizations such as banks and financial institutions have to perform enhanced due diligence on PEPs means that they put more effort into acquiring PEPs as customers.

For some banks, a person's KEP status does not expire at any point in time. For example, one of their clients was a member of parliament of a country 20 years ago. Some banks recognize these people as PEPs permanently and therefore need to apply customer due diligence.

Some countries extend the regulatory scope of PEPs to close associates and immediate family members. Based on the assessments made, anyone who has a close business relationship with the PEP is also a PEP. Depending on the expectations of regulators and may differ from bank to bank. 

For others, the person is the sole beneficial owner of a legal entity that is de facto established for the benefit of the PEP. The definition of PEP may also include close family members who are also considered PePs. This includes parents and children of PePs, spouses or partners, siblings and other persons.

Once a PEP has been identified, enhanced due diligence measures need to be implemented. The steps to follow are to obtain senior management approval to establish or maintain such business relationships, take reasonable measures to identify the source of wealth and funds, and ensure enhanced monitoring of the business relationship on an ongoing basis.

The AML/CTF Act classifies PEPs under three headings;

Domestic PEP - A person who holds a significant public position or role in the governmental body of the current country.
Foreign PEP - A person who holds a significant public position or role in a government body in a country outside Australia, including foreign PEPs working or living in the current country.
International PEP - A person with a significant public position or role in an international organization such as the United Nations (UN), the World Trade Organization (WTO) or the North Atlantic Treaty Organization (NATO).