Everything you need to know about PEPs a comprehensive guide

Introduction

The term PEP – which stands for Politically Exposed Person – is an acronym that is used a lot within compliance. However, understanding of PEPs - what they are, how they are defined, why they are a concern and the best way for firms to mitigate the risk they pose – is inconsistent, making it difficult for regulated to firms to navigate the PEP landscape.

In this Whitepaper, we will look at PEPs in detail, explaining exactly what PEPs are, how the term came about and why, why PEPs are such a key part of any compliance programme, as well as practical tips on how firms can identify PEPs to mitigate the risk of money laundering to their businesses.

What does PEP stand for?

PEP is a general term for those whose position in public life puts them at high risk, but some PEPs are seen as more high risk than others and have to be dealt with differently when it comes to due diligence and AML procedures. There are three main types of PEPs: 

• International/Overseas PEPs: these are people who hold prominent positions in foreign governments or international organisations.

• Domestic PEPs: these are people who hold significant positions within their own country's government or public sector.
• International Organisation PEPs: those who hold prominent positions within international organisations, for example, the United Nations.
  
  

On 10 January 2024, an amendment was made to the Money Laundering and Terrorist Financing Regulations to the EDD requirements of domestic PEPs. The amendment means that while domestic PEPs must still be subject to EDD, they must be treated as lower risk than overseas PEPs.

The exception to this would be if they have other factors that increase the level of risk. There has been a great deal of criticism surrounding this amendment, with many questioning the view that all UK PEPs should by default be considered lower risk, and whether this notion is actually supported by any data. 

What are RCAs?

Relatives and Close Associates (RCAs) - sometimes referred to as ‘PEPs by association’ are people that are directly related to a PEP – either through family or close personal or professional ties. 

It is important to know about the RCAs of PEPs and the PEPs of RCAs, as they may well have influence over one another’s money, decision making or both.

There is no official definition of what constitutes an RCA, but according to FATF guidance, RCAs are generally classified as people who are a direct family relation, a spouse or civil partner, or a social or professional connection. Some examples include:

• Spouses, partners
• Parents
• Children, grandchildren
• Siblings and their partners
• Uncles, aunts and cousins
• Spouses/partners and parents of children 
• Close friends
• Legal advisers
• Business associates

RCAs can also be individuals who are joint beneficial owners of an entity with a PEP, or in which a PEP has an interest.

How do you check if someone is a PEP?

The first part of this process is to identify PEPs and sanctions in the first place, the second part is to perform enhance due diligence i.e. gather sufficient information about that PEP so that your business can make an informed decision about whether or not to enter a business relationship with that individual. If the decision is yes, the third part of the process is to monitor PEPs closely to ensure there is no change in the risk that they pose to the business.

There are thousands of different PEP and sanctions lists in the world, meaning it is almost impossible to check them all manually. 

At SmartSearch our PEP and sanctions screening is powered by the Dow Jones Watchlist – a comprehensive combination of more than 1,100 different lists sourced globally. Once we have identified and verified a customer, we run screening on that individual for any matches to these lists – which includes details of anyone who has sanctions, as well as PEPs and RCAs. 

Our automated software is incredibly thorough and can even recognise PEPs and sanctioned individuals by nicknames or aliases, enabling businesses to accurately identify PEPs and any individuals subject to sanctions at onboarding. 

Once a PEP has been identified, SmartSearch can investigate further and build up a solid profile of the individual their public role, and the risk they pose – if any – to your business. 
This EDD is performed using a range of different techniques, including adverse media searches, which is where public records - including newspaper archives, public databases and social media – are checked for any mentions of the person that suggest they are high risk. SmartSearch has access to millions of archives and real-time sources to get the most comprehensive results, filtering out any ‘fake news’ for the most accurate picture. 

Is a PEP always a PEP?

Much like the definition of a PEP is open to interpretation, so too is the decision about how long a PEP remains a PEP, even after they have left the position that put them at higher risk. Recommendation 12 of the FATF guidance states that someone who has been (but may no longer be) entrusted with a prominent public function may still be defined as a PEP and that it will depend on the individual circumstances as to how long that definition might last. It states, ‘the handling of a client who is no longer entrusted with a prominent public function should be based on an assessment of risk and not on prescribed time limits.’

In other words, anyone who has been a PEP in the past might still qualify as a PEP years after they leave the high-profile position they occupied. This is because they may maintain a degree of influence and pose a money laundering risk, especially if they were serving as senior public officers or heads of state. 

Why are PEPs considered high risk?

As explained earlier, due to their prominent positions, PEPs present a greater risk of involvement with bribery, corruption and other forms of financial crime. Therefore, your business may well decide not to work with a PEP in which case, PEP screening must be a vital part of your compliance procedures to ensure that any PEPs are not onboarded.

However, a blanket decision not to work with PEPs could be commercially naive because, while all PEPs are considered to be ‘higher risk’ than non PEPs and therefore, should be subject to EDD, there is still a hierarchy within PEPs. That is because there is a huge difference in the risk posed between someone who has significant control over political decisions, resources and assets in any particular country and someone who is in a much lower ranking position.

Ultimately, a risk-based approach should be employed to determine where a particular individual is to be found on a PEP spectrum and the level of risk presented to your firm.

Can you work with PEPs?

The simple answer is yes, you can work with PEPs. If, after carrying out EDD, your firm decides to work with a PEP, you need to ensure you know everything you need to know about the individual concerned by carrying out EDD at onboarding. You must then also  closely monitor that individual, their RCAs and their business and financial dealings throughout the entire business relationship. 

SmartSearch’s comprehensive PEP solution also includes ongoing monitoring, meaning every profile is checked every night against real-time Watchlist information, so that if there is any change in a PEP’s risk level, you are the first to know. Similarly, if any existing customers become a PEP, you will be informed so that EDD can be run on that individual. 

When it comes to sanctions, however, it is different – it is illegal to have dealings with an individual, business or country that is sanctioned so there is no real decision to be made. The consequences of working with a sanctioned individual, entity or country can be financially, legally and reputationally costly. While there are some exemptions (i.e., you can apply for a license to work with an individual or entity that is sanctioned) the risk is high, and doing so is not recommended.

How can I get help with identifying PEPs?

The best way to identify PEPs is to use a digital compliance solution that has access to real time data on PEPs, RCAs and sanctions.

SmartSearch offers a one-stop shop for all your firm’s AML requirements. Unlike other solutions which offer verification, or screening, or monitoring in the UK or abroad, SmartSearch offers identification, verification, full sanction and PEP screening and ongoing monitoring all from one place, as well as a wide range of other services such as EDD, anti-fraud checks and source of funds capabilities.

This means that the SmartSearch platform automatically performs Sanction, PEP and RCA screening on every AML check you run and will automatically trigger EDD on any matches. Our ongoing monitoring service screens all checks against updated Sanctions lists every night and alerts you of any changes.

Furthermore, the platform is automatically updated with any changes in regulation and any advances in technology or functionality, meaning all SmartSearch customers can be confident not only that they are always meeting their AML requirements, but that they are doing so with the most technically advanced solution on the market.

We can even help businesses who have concerns that their PEP and sanctions checks have not always been up to scratch with our batch upload service. It can run retrospective checks to scan existing customer databases for PEPs and sanctions – a hugely useful tool following Russia’s invasion of the Ukraine, which was immediately followed by extensive sanctions against Russian nationals – and the troubles in the Middle East.

Plus, the platform is cost-effective thanks to the highly competitive subscription service, which makes it affordable for all regulated firms, whatever their size, budget or requirements.