Politically exposed person

PEP is an abbreviation for Politically Exposed Person, a term that describes a person who has been entrusted with a prominent public function, or an individual who is closely related to such a person. The terms PEP, Politically Exposed Person and Senior Foreign Political Figure are often used interchangeably, particularly in international fora. Although the term PEP is not used in FinCEN’s regulations , it is to a great extent similar to the definition of Senior Foreign Political Figure, as defined by section 312 of the USA PATRIOT Act and it is a term recognised (and defined) by the Wolfsberg Group of eleven global banks . Neither the Financial Action Task Force on Money Laundering (FATF) definition nor the USA PATRIOT Act definition of this term are intended to include middle ranking or more junior individuals in the categories listed in the below definition or officials of local governments.

The term Foreign Official is used by enforcement agencies relating to persons who have similar characteristics as PEPs, but this term is used in all industries, not just by financial institutions, and is referenced in the Foreign Corrupt Practices Act in the United States.

By virtue of their position and the influence that they may hold, a PEP generally presents a higher risk for potential involvement in bribery and corruption. Most financial institutions view such clients as potential compliance risks and perform enhanced monitoring of accounts that fall within this category.

The process of screening for PEPs is usually performed at the beginning of account opening, called initial due diligence, and screening of accounts periodically is performed as part of ongoing due diligence. The process of due diligence to uncover PEPs can be time consuming and requires screening against a reputable database of known PEPs, usually close to 1 million profiles, against the names, dates of birth, national identification numbers and photos of clients.

Heavy fines have been imposed on financial institutions such as Riggs Bank for conducting business with PEPs without following adequate Know Your Customer procedures and enhanced due diligence processes. PEP-specific compliance legislation underlines the link between corrupt politicians, money laundering and the financing of terrorism. Since September 11, 2001, more than 100 countries have changed their laws related to financial services regulation, with the fight against political corruption playing a fundamental role. Despite attempts at regulation, certain political leaders like Muammar Gaddafi and Hosni Mubarak have made news for having frozen assets located in US banks that did not follow these processes for these individuals.

The designation “Politically Exposed Person” dates back to the late 1990s in what was known as the “Abacha Affair.” Sani Abacha was a Nigerian dictator who organized (with his family members and associates) a network of massive theft of assets from the government of Nigeria. It is believed that the amount stolen was in excess of several billion dollars and that the funds were transferred to bank accounts in the United Kingdom and Switzerland.

In 2001, in an effort to recover the money, the Nigerian Government that succeeded the Abacha Regime lodged complaints with several European agencies, including the Federal Office of Police (FOP) of Switzerland which, in turn, investigated close to sixty Swiss banks. In this investigation, the concept of “Politically Exposed Person” emerged, which was later included in the 2003 United Nations Convention against Corruption.

Definition

Although there is no global definition of a PEP, most countries have based their definition on the FATF definition:

• current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not)
• a senior official of a major foreign political party
• a senior executive of a foreign government-owned commercial enterprise, being 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.

Politically exposed foreign person or PEFP (Canada)

Canadian anti-money laundering legislation requires financial institutions to determine if clients are Politically Exposed Foreign Persons (PEFPs). This Canadian term shows a large degree of overlap with the politically exposed person (PEP) definition used in most other countries in the world, and is also comparable to the "senior foreign political figure" as outlined in the USA PATRIOT Act.

The Canadian PEFP definition is:

"Politically exposed foreign person - means a person who holds or has ever held one of the following offices or positions in or on behalf of a foreign state:
(a) head of state or head of government;
(b) member of the executive council of government or member of a legislature;
(c) deputy minister or equivalent rank;
(d) ambassador or attaché or counsellor of an ambassador;
(e) military officer with a rank of general or above;
(f) president of a state-owned company or a state-owned bank;
(g) head of a government agency;
(h) judge;
(i) leader or president of a political party represented in a legislature; or
(j) holder of any prescribed office or position."

The definition includes any prescribed family member of such a person.

Politically exposed foreign person or PEP (UK)

The UK definition of a PEP, as found in the Money Laundering Regulations 2007 are as follows: (This is one text, which is ultimately used by the Joint Money Laundering Steering Group when issuing their Guidance Notes.)

Section 14(5) of the ML Regulations define a PEP as:
“a politically exposed person” means a person who is —
 (a) an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function by —
      i. a state other than the United Kingdom;
      ii. a Community institution; or
      iii. an international body,including a person who falls in any of the categories listed in paragraph 4(1)(a) of Schedule 2;
 (b) an immediate family member of a person referred to in sub-paragraph (a), including a person who falls in any of the categories listed in paragraph 4(1)(c) of Schedule 2; or
 (c) a known close associate of a person referred to in sub-paragraph (a), including a person who falls in either of the categories listed in paragraph 4(1)(d) of Schedule 2.

Where Schedule 2 provides the following clarification: Politically exposed persons
(1) for the purposes of regulation 14(5) are:
   (a) individuals who are or have been entrusted with prominent public functions include the following—
      i. heads of state, heads of government, ministers and deputy or assistant ministers;
      ii. members of parliaments;
      iii. members of supreme courts, of constitutional courts or of other high-level judicial bodies whose decisions are not generally subject to further appeal, other than in exceptional      circumstances;
      iv. members of courts of auditors or of the boards of central banks;
      v. ambassadors, chargés d’affaires and high-ranking officers in the armed forces; and
      vi. members of the administrative, management or supervisory bodies of state-owned enterprises;
   (b) the categories set out in paragraphs (i) to (vi) of sub-paragraph (a) do not include middle-ranking or more junior officials;
   (c) immediate family members include the following—
     i. a spouse;
     ii. a partner;
     iii. children and their spouses or partners; and
     iv. parents;
   (d) persons known to be close associates include the following—
     i. any individual who is known to have joint beneficial ownership of a legal entity or legal arrangement, or any other close business relations, with a person referred to in regulation
     14(5)(a); and
     ii. any individual who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit of a person referred to in regulation
     14(5)(a).
(2) In paragraph (1)(c), “partner” means a person who is considered by his national law as equivalent to a spouse.

Sources

• http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html
• http://www.wolfsberg-principles.com/faq-persons.html
• http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=52ad7316-f7ca-4031-bf49-75fb5b6bdf88