PEP Classification – What is a PEP?

Corporate Clients, AML, Corporate Tax

Introduction

This is the first of a series of articles diving into the classification of financial services clients as ‘Politically Exposed Persons’ (PEPs). This series of three articles outlines the purpose and consequences of PEP status and how the process of PEP status designation and due diligence can go wrong at various stages. 

This article explains the definition of a PEP, the purpose of the label and the duties of financial service firms (‘firms’) in regard to PEPs.

What is a PEP?

The term ‘Politically Exposed Person’ is defined by the Financial Action Task Force on Money Laundering (FATF) in their 2013 guidance as ‘an individual who is or has been entrusted with a prominent public function’. The UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 provide a non-exhaustive list of professional positions which carry PEP status; this includes senior politicians, senior judges, senior officials of State-owned enterprises and directors and senior officials of international organisations. Close associates and family members of such individuals are also to be treated as PEPs.

PEPs along with their associates and family members are deemed to pose a greater than average risk of committing financial crime. The purpose of the PEP classification is to compel firms to take enhanced anti-money laundering (AML) and counter-terrorist financing (CTF) measures when dealing with politically exposed individuals in order to mitigate the increased risk they carry. Firms are legally obligated to identify PEPs and adjust their service according to the risk level of the individual and the firm’s capacity to manage that risk level. 

The designation of PEP status is informed by the individual’s level of risk of committing a financial crime. The FATF provides firms with several risk factors to consider when identifying a PEP; these include the individual’s conduct towards the firm, their past or present business dealings, their past or present public positions of power, the industry in which they have worked, the country in which they have worked, and adverse media stories among others. If a firm determines that a risk threshold has been reached, they are to label the individual as a PEP. PEP status is a binary classification but, following designation, firms are responsible for completing a fuller risk assessment in order to adapt their treatment of the PEP. This can lead to a range of consequences, from increased due diligence upon on-boarding, to greater monitoring of account activity, or, more rarely, to the refusal to take on a customer or the closure of their bank account.

Conclusion

This series will go on to discuss certain shortcomings in the PEP classification but is here only outlining the regulations and what they mean for firms and their customers. If you would like to know more on similar topics, keep following this series, follow our LinkedIn and subscribe to our newsletters. If you have been affected by PEP classification and need advice, please get in contact to see how we can help.