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A Politically Exposed Person (PEP) is someone that might be more likely to break the law or be corrupt because of the power their position affords them.
In other words, they might have increased opportunities to be involved in bribery, money laundering, terrorism financing, or other types of corruption. Financial institutions (FIs) and other businesses use PEP screening measures as part of their anti-money laundering (AML) programs.
Although the Bank Secrecy Act (BSA) and AML regulations don't define the term "politically exposed person," it’s usually perceived as a foreign individual that has been "entrusted with a prominent public function.” The definition also covers members of that person's immediate family and close associates.
Foreign PEPs might be members of parliament, government executives, government officials, high-ranking judges, heads of state, central bank governors, high-ranking military officers, as well as executives or board members of international organizations. Federal agencies don’t include U.S. public officials in their definition of politically exposed persons. The exact definition of a PEP varies by country and regulatory agency.
History of the Politically Exposed Person
The term “politically exposed person” emerged in the late 1990s as the result of a money-laundering scandal in Nigeria that spurred global efforts to stop political figures from abusing the financial system.
The USA Patriot Act requires financial institutions to screen these individuals along with their immediate families and close associates to ensure they're not engaging in money laundering or terrorism financing.
What Is the Purpose of the Politically Exposed Person Designation?
Just identifying someone as a politically exposed person doesn’t necessarily mean that they will engage in criminal behavior. But since they could, financial institutions must apply additional anti-money laundering and counter-terrorist financing (CFT) measures before they do business with these individuals.
Institutions must also keep a close watch on the activities of these customers over time to see if they’re any more likely to commit these crimes.
For Financial Institutions: How Does the Politically Exposed Person Screening Work?
U.S. Financial institutions have to conduct screenings of all international politically exposed persons. Domestic PEP screenings aren’t mandatory, but many financial institutions do them anyways to be safe.
Financial institutions can identify PEPs when they apply Customer Due Diligence and Know Your Customer onboarding for their new customers. They might manually check against Pep lists or use automated tools. If a financial institution discovers that a PEP may be involved in money laundering or terrorism financing, it has to submit a suspicious activity report to the Federal Crimes Enforcement Network (FinCEN).
An effective PEP screening process should include:
High-quality data: FIs should take care to use the most comprehensive and recent data when screening customers. The best practice is to screen against a consolidated list that includes all watch lists and sanctions information.
Risk-based approach: Like most AML and anti-fraud measures, PEP screening should be based on each FI’s risk appetite. Using an internal risk assessment can help guide PEP screening practices.
Continuous monitoring: PEP screening is not a set-it-and-forget-it task. FIs should keep taps on PEP lists and be aware of changes to PEP legislation.
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