What is a politically exposed person?
A politically exposed person (PEP) is “an individual who is entrusted with prominent public function, other than as a middle-ranking or more junior official”.
This includes all UK ministers, MPs, ambassadors, and supreme court judges.
Foreign and international officials also qualify as politically exposed people (sometimes called a foreign pep, rather than a domestic pep).
Beyond these guidelines, precisely determining who and who is not a PEP can be a tricky business, and the intergovernmental Financial Action Task Force (FATF) regularly issues fresh guidance.
The Financial Action Task Force also highlights the role of close family members and associates.
UK rules define close family members as those closely related to a politically exposed person, such as by marriage (or similar forms of civil union), or being their parent or child. However, this is not a complete list and the Foreign Office guidance says siblings should be included as close family and wider family such as aunts and uncles for more high-risk PEPs.
Close associates are people connected to a politically exposed person professionally or socially, or through a business relationship.
What is special about a politically exposed person?
The UK and other legal systems recognise the potential of politically exposed people to use their positions for private gain, this also includes the use of the financial system to launder the profits of such abuses.
The regime is designed to combat the risk of financial crime and corruption. It is also an anti money laundering measure, for people who are regarded as higher risk.
Money Laundering Regulations in the United Kingdom oblige regulated firms, such as financial institutions, to observe enhanced customer due diligence checks when offering services to PEPs, along with services to a family member or a known close associate. It is a screening measure that amongst other things looks to understand who is the beneficial owner of a particular legal entity.
Once a PEP, always a PEP?
There’s no set universal time frame defining how long a person remains a politically exposed person and the most high-risk individuals can keep the status for life. Most countries specify that politically exposed status should generally expire 12 to 18 months after the person leaves office.
In the UK the politically exposed person status expiration period is currently 12 months.
How do you check for politically exposed people (PEP)
Regulated firms, such as banks and solicitors, must put in place the “appropriate risk-management systems and procedures” to identify a politically exposed person. This includes situations in which an agent (e.g. a solicitor) is acting on their behalf.
A financial institution must perform enhanced due diligence checks on PEPs and their close family and associates before they can offer them their services.
They must have procedures in place to identify these individuals and the risk they pose.
How the regime is enforced
Firms that do not follow reasonable measures to make these checks are subject to criminal and regulatory sanctions.
If firms suspect a money laundering offence is taking place they must disclose it to the member of their staff responsible for reporting it (normally a senior executive, or senior management), or they must report it directly to the National Crime Agency themselves.
In 2019 Barclays received a record £72 million fine for failing to conduct the appropriate checks on a politically exposed person.
For the most extreme breaches of due diligence requirements, people can face up to two years in prison. There are also offences for prejudicing probes and declaring false or misleading information.
In the United States, this financial crime regime is overseen by the financial crimes enforcement network.
Criticisms of the PEP regime
The Commons Treasury Select Committee has criticised the current system for not being centralised or defined enough in its approach.
In March 2019, it said that the PEP regime: “is an important part of the system for preventing money laundering. We have heard that defining PEPs remains difficult for institutions, both large and small. While commercial solutions are available, they may be beyond the resources of very small companies”.
The Committee recommended that the government or Financial Conduct Authority creates a centralised pep list of politically exposed persons.
Many politically exposed persons themselves have complained about the current system, arguing that it requires excessive checks being done on themselves and those associated with them.
The Financial Ombudsman Service considers complaints from politically exposed persons, their family members or close associates, and may issue compensation if they are found to have been unfairly treated.
