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All you need to know about Politically Exposed Person(PEP)

All you need to know about Politically Exposed Person(PEP)

What is Political Exposed Person (PEP)

A politically exposed person (PEP) is an individual who is or has been entrusted with a prominent public function. Politically Exposed Persons (PEPs) can be among a bank’s riskiest customers. Their public positions and ability to divert funds make them prime targets for bribery and corruption.

In simple words, a Politically Exposed Person may be broadly classified as someone in a prominent position who can exert influence and is more susceptible to corruption. Additionally, any family member or close associate of such a person is also deemed to be a possible risk and hence is also considered a PEP.

Categories

  1. Level 1 PEPs (High Risk):

The Level 1 PEPs include heads of state and government, members of the national and regional government, members of the national and regional parliament, top-ranking officials of political party and heads of military, judiciary and law enforcement.

  1. Level 2 PEPs (Medium Risk ) :

The Level 2 PEPs include the close associate of a political Figure, a person who is widely and publicly known to maintain an unusually close relationship with the political figure and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the political figure. They also include senior officials of the military, judiciary, and law enforcement agencies, senior officials of other state agencies and bodies, senior members of religious groups, ambassadors, consuls or high commissioners.

  1. Medium Risk-Level 3 PEPs

 In this group senior management and board of directors of state-owned business and organizations.

  1. Low Risk- Level 4 PEPs

 This level includes the mayors, members of local assemblies and senior officials of international or national organizations.

How PEP came into existence

The term “politically exposed person” emerged in the late 1990s after the Abacha affair, a money laundering scandal in Nigeria which stirred global efforts to prevent abuse of the financial system by political figures.  Although there is no universal definition of who is classified as a PEP, most countries base their definitions on the guidelines created by the Financial Action Task Force (FATF).

According to the FATF, PEP is defined as follows:

  • a current or former senior official in the executive, legislative, administrative, military, or judicial branch of a government (elected or not)
  • a senior official of a major political party
  • a senior executive of a government-owned commercial enterprise, is a corporation, business or other entity formed by or for the benefit of any such individual
  • an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse’s parents or siblings
  • any individual publicly known or actually known by the relevant financial institution) to be a close personal or professional associate.

What are the risks of PEPs?

PEPs are a major risk to a company. Most PEPs act lawfully, and it is very common for companies to have dealings with them, but their public positions expose them to a much higher risk of bribery and corruption than the average customer, investor, or third party. The U.S. Financial Crimes Enforcement Network analyzed 1,300 reports of suspicious activity in the securities and future industries, money services businesses, and casinos and card clubs filings in 2009 and 2010. PEPs were involved in more than 90 percent of the reports.

Conclusion

The art of business is a risky job. But with the right precautions, awareness and standard procedures to check against corruption, life could be smoother and business fruitful.

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