All You Need to Know About Politically Exposed Persons

Though politically exposed persons comprise less than 1% of the general population, these individuals pose serious risks to financial and government institutions. 

PEPs are significantly more likely than the rest of the general public to commit financial and white-collar crimes estimated to cost the U.S. Government over $300 billion annually.  

Key Points

1. A PEP is a politically exposed person and their family members. The term refers to those in high-ranking public positions, legislators, ambassadors, and even high-net-worth individuals. 
2. PEPs pose significantly more risk to banks than most. They’re more likely to commit bribery, money laundering, and other white-collar crimes.  
3. Thorough PEP due diligence involves examining behavior patterns, which can help compliance teams uncover red flags and shady dealings.  

What Is a PEP? 

Commonly used in banking, the term ‘PEP’ refers to a ‘politically exposed person.’ The term dates back to the 1990s, when General Abacha, a former Nigerian military dictator, and his family embezzled over $20 million in government assets.   

General Abacha’s actions raised international concern for the risks politically exposed persons pose to domestic and foreign governments. In the aftermath, the Financial Action Task Force (FATF) enacted stronger regulation and monitoring measures on PEPs, whose ties often cause conflicts of interest in the financial and public sectors.  

While the term’s roots are less than savory, PEP doesn’t necessarily imply foul play or illegality. Today, politically exposed persons (PEPs) refer to those occupying high-ranking public positions, such as legislators, government officials, diplomats, and members of judiciary bodies. Likewise, high-net-worth individuals and private executives are considered PEPs.  

A PEP’s family members are in a precarious position, as they’re in close proximity to the public and are more likely to engage in high-risk behaviors. 

For example, Sonia Sotomayor, Li Qiang, and Kevin McCarthy would be culturally relevant examples of PEPs.  

Other examples include:  

• Generals  
• Senior judges 
• High-ranking military officers (domestically and internationally) 
• Ambassadors 
• Foreign diplomats  
• Executives & board members 

Why Is It Hard to Identify PEPs? 

Due to general inconsistencies, identifying PEPs can be complicated. Additionally, PEPs are more likely to hide their status in other ways, often through third-party holdings and shell companies, further confusing vetting bodies.  

According to FATF and UNCAC guidelines, the families of PEPs are, by proxy, considered PEPs themselves. 

The term PEP is relatively malleable, meaning that qualification guidelines vary. Per other guidelines, a PEP’s extended family would not qualify as a PEP.   

Furthermore, country PEP definitions vary significantly, particularly in South America and Asia. Generally, 24% of countries haven’t adopted strong PEP guidelines per the FATF’s standard, including the U.S., which does not require domestic PEP screening.  

Why Are PEPs So Risky? 

Though the term doesn’t specify any explicit risk, late Nigerian General Abacha wasn’t the only PEP engaged in nefarious activities. More recently, former President Donald Trump was convicted of crimes related to PEP risk, and Senator Robert Menendez’s bribery trial remains ongoing.  

Because of their vast access to resources, financial and otherwise, PEPs have influence that reaches beyond the confines of their post. According to studies conducted by the FATF, PEPs are significantly more likely to engage in bribery, money laundering, and other types of white-collar financial crimes.  

These crimes are serious: The United Nations Office on Drugs and Crime (UNODC) estimates that laundered money comprises 2-5% of global GDP, and the World Bank purports that $1 billion in bribes exchange hands annually.  

Financial crimes aren’t the only type of reputational risk posed by PEPs. Politically exposed persons’ political affiliations are subject to public scrutiny. If a PEP’s political party supports controversial topics, scrutiny will likely backfire on those affiliated with the person themselves.  

Furthermore, suppose a PEP is associated with a party supporting controversial topics. In that case, the public might see this as a reflection of their character, causing reputational risk to the PEP’s affiliated business and political links. PEPs also face issues donating financial contributions to political campaigns, which could be deemed nefarious.  

Unfortunately, the risk doesn’t dissolve when a PEP leaves office. With public offices comes stronger media scrutiny and public attention, which can last years, if not decades. Due to prolonged public interest, PEPs are particularly prone to unsavory parts of their past bobbing up to the surface. Generally, organizations should pay attention to a PEP’s public perception and media presence to determine their status.  

What Should Organizations Look For? 

PEPs pose severe reputational and financial risks to their associates. While not all PEPs are involved in corrupt activities, some certainly are. The following risk factors warrant more information or clarification on a background check.  

• Allegation history: Has the PEP encountered any allegations, investigations, or sanctions related to white-collar crime in the past? What were the findings?  
• Geography: Generally, PEPs from countries with high levels of corruption are at higher risk for corrupt activities.  
• Position: The more senior a PEP, the more risk they pose to a government or organization. Those with specific, risky oversight areas, like accounting or finance, also pose a high risk. For example, banking executives and high-ranking political officials pose more danger than mayors or local office members.  
• Third-Party Occlusion: PEPs attempting to shield or occlude assets through corporate bodies, family members, and professional connections should be addressed.  
• Wealth source: Are a PEP’s assets easily searchable? Odd transfers and unclear wealth origins are PEP red flags. Furthermore, those involved in high-risk industries like mining or finance should be vetted carefully.  

Other risky trends include odd transaction patterns and a refusal to provide information. Together, these comprise the risky behaviors PEPs may engage in, and each should be considered a separate red flag.    

How to Mitigate Risk Posed by PEPs

Per AML and KYC compliance regulations, organizations in business with PEPs should exercise caution to prevent financial and reputational risk. 

Legally, banking institutions are required to implement enhanced due diligence when working with PEPs. The cost of foregoing such diligence is great: In the early 2010s, the FCA fined Barclay’s over 72 million pounds for neglecting thorough PEP due diligence.  

Other financial firms should learn from Barclay’s lesson and implement enhanced KYC diligence and ongoing monitoring to mitigate the risk posed by PEPs.  

At a minimum, PEP due diligence should include answering the questions posed above and the following:  

• Country of political exposure 
• Type of roles and exposure timeframe 
• Risk assessments  
• Finding patterns through reputational due diligence 

Pattern recognition is the most critical component of PEP due diligence, essential for detecting red flags. Typically, examining patterns in a PEP’s past is a component of a reputational background check, and it includes looking for similar names, holding companies, and even behaviors.  

Because of misinformation and poor record keeping, Vcheck’s analysts recommend a reputational background check and source inquiries for PEPs living in high-risk jurisdictions. Check out our Vcheck public records and human intelligence for this use.  

Conclusion

The unique risk factors posed by PEPs necessitate thorough due diligence and ongoing monitoring. While not all PEPs engage in financial crime, those that do find themselves and their third parties in hot water.  

Beyond adhering to regulatory frameworks in place, financial institutions must work through the contextual layers of a PEP’s past is necessary to evaluate the reputational risk they pose. Furthermore, ongoing monitoring is advantageous for financial institutions to eliminate economic and legal risks.