Politically Exposed Persons (PEPs)

Politically Exposed Persons (PEPs) are individuals who hold or have held prominent public positions or have affiliations with such positions. PEPs are considered to be at a higher risk of involvement in financial crimes, such as bribery. Also corruption, and money laundering, due to their access to public funds and power.

Definition

Politically Exposed Persons (PEPs) are defined differently by various regulatory bodies.

The Financial Action Task Force (FATF) defines PEPs as “individuals who entrusted with prominent public functions, either domestically or internationally.”

The European Union’s Fourth Anti-Money Laundering Directive (4AMLD) provides a broader definition.

This Definition includes not only current and former government officials but also their family members and close associates. In essence, a PEP is someone who has a position of influence, which exploited to launder money or engage in other financial crimes.

Historical View

The concept of Politically Exposed Persons (PEPs) emerged in the 1990s as part of the international community’s efforts to combat money laundering. The Financial Action Task Force (FATF), an intergovernmental organization established in 1989 to develop policies to combat money laundering. First introduced the idea of PEPs in 1999.

At the time, the FATF recognized that public officials, especially those in high-ranking positions. At a higher risk of involvement in financial crimes due to their access to public funds and power. As a result, the FATF issued a recommendation that financial institutions conduct Enhanced Due Diligence (EDD) on PEPs to mitigate the risks of money laundering and other financial crimes.

Since then, the concept of PEPs adopted by regulatory bodies around the world, including the European Union. Also the United Nations, and the United States. In 2001, the USA PATRIOT Act required financial institutions to identify and report suspicious activities, including transactions involving PEPs.

The Importance of Politically Exposed Persons (PEPs)

The importance of PEPs became more evident after the terrorism attacks in the US. In response, the international community increased its efforts to combat terrorism financing, which included a focus on PEPs. The FATF issued a special recommendation on terrorism financing in 2001. It called for increased scrutiny of PEPs’ financial activities.

Over the years, the definition of PEPs has expanded to include not only current and former government officials but also their family members and close associates.

The European Union’s 4AMLD

The European Union’s Fourth Anti-Money Laundering Directive (4AMLD), which came into effect in 2017. It defines PEPs as “natural persons who are entrusted with prominent public functions, such as heads of state or government. Also senior politicians, senior government, judicial or military officials. Additionally senior executives of state-owned corporations, important political party officials.”

Today, PEPs continue to be a focus of regulatory bodies and financial institutions’ efforts to combat financial crimes. As the world becomes more interconnected, the risks associated with financial crimes. Also including those involving PEPs, continue to grow. Regulatory bodies are increasing their focus on AML compliance. Also financial institutions are investing in new technologies to mitigate the risks.

“PEPs present a higher risk of involvement in bribery and corruption due to their access to public funds and power.”

KPMG

Practical Examples of Politically Exposed Persons (PEPs)

Here are some practical examples of how financial institutions conduct enhanced due diligence (EDD) on Politically Exposed Persons (PEPs) to mitigate the risks of financial crimes:

1. Additional Identification Documents: Financial institutions may require PEPs to provide additional identification documents. It is such as a government-issued ID or a passport, to verify their identity. This can help to ensure that the PEP is who they claim to prevent identity fraud.
2. Business Nature and Source of Income: Financial institutions may ask PEPs about the nature of their business. Also the source of their income, and their financial history to assess their potential risk of involvement in financial crimes. This can help to identify any red flags, such as unusual or suspicious transactions.
3. Approval from Senior Management: Financial institutions requiring to obtain approval from senior management before opening accounts for PEPs. This can help to ensure that the institution has conducted the necessary due diligence and has properly assessed the risks associated with the PEP.
4. Ongoing Monitoring: Financial institutions requiring to monitor the PEP’s transactions and activities on an ongoing basis to detect any suspicious activity. This can involve reviewing transaction patterns. Also account balances, and other financial data to identify any unusual or suspicious activity. That may indicate money laundering or other financial crimes.
5. Enhanced Reporting: Financial institutions requiring to report any suspicious activity involving PEPs to regulatory bodies. It is such as the Financial Crimes Enforcement Network (FinCEN) in the US. This can help to ensure that the appropriate authorities informed and can take action to prevent financial crimes.

Statistics of Politically Exposed Persons (PEPs)

There is limited publicly available statistical data specifically on Politically Exposed Persons (PEPs) and their involvement in financial crimes. However, here are some relevant statistics related to PEPs and financial crime:

1. According to a 2020 report by the United Nations Office on Drugs and Crime (UNODC), corruption remains a significant problem around the world. The report estimates that the cost of corruption globally is between $1.5 trillion and $2 trillion annually.
2. In the United States, the Financial Crimes Enforcement Network (FinCEN) reported that in 2020, it received over 2.2 million reports of suspected financial crimes, including money laundering and fraud.
3. A 2018 study by the European Parliament estimated that corruption costs the European Union between €179 billion and €990 billion per year.
4. In 2020, the US Securities and Exchange Commission (SEC) charged several individuals, including a former high-ranking Venezuelan official and his wife, with violating anti-bribery laws and engaging in a scheme to launder millions of dollars in bribes.
5. In 2021, the US Department of Justice (DOJ) announced charges against a former South African government official and his wife for their alleged involvement in a scheme to launder bribes from a multinational corporation.

While these statistics do not specifically focus on PEPs, they highlight the pervasive nature of financial crime and corruption, which PEPs are at a higher risk of being involved in due to their access to public funds and power. It underscores the importance of regulatory bodies and financial institutions’ efforts to conduct enhanced due diligence on PEPs to mitigate the risks of financial crimes.

Relevant Numbers

1. PEPs estimated to involve in up to 40% of high-value money laundering cases. – Forbes
2. According to a survey conducted by Thomson Reuters, 77% of financial institutions consider PEPs to be a high-risk category. – Thomson Reuters
3. The global AML market expected to grow from $1.42 billion in 2020 to $4.61 billion by 2025. – MarketsandMarkets
4. The UK National Crime Agency has identified over 2,000 PEPs with links to Russia, and over 3,000 PEPs with links to China. – BBC News
5. A major international bank was fined $536 million for violating anti-money laundering regulations related to PEPs in 2019. – The New York Times

Incidents belongs Politically Exposed Persons (PEPs)

1. 1MDB Scandal: Malaysian businessman Jho Low, who was described as a PEP due to his close relationship with the country’s former prime minister, accused of laundering billions of dollars from the state investment fund 1MDB. – BBC News
2. Petrobras Scandal: Brazil’s state-owned oil company. Also Petrobras, was involved in a massive corruption scandal that implicated several high-ranking government officials, including the former president. – The Guardian
3. Siemens Scandal: Siemens, a German multinational conglomerate, fined $1.6 billion for bribing foreign officials in several countries to secure contracts. – The New York Times
4. FIFA Scandal: Several high-ranking officials of the international soccer organization FIFA arrested and charged with bribery. Also corruption, and money laundering. – CNN
5. Danske Bank Scandal: Danish bank Danske Bank was involved in a money laundering scandal that involved more than €200 billion in suspicious transactions. The scandal implicated several PEPs, including the former prime minister of Estonia. – Reuters

“PEPs are a high-risk category for financial institutions and require enhanced due diligence measures.”

Thomson Reuters

The Future of Politically Exposed Persons (PEPs)

As the world becomes more interconnected, the risks associated with financial crimes, including those involving PEPs, continue to grow. In response, regulatory bodies are increasing their focus on AML compliance, and financial institutions are investing in new technologies to mitigate the risks.

Blockchain Technology

The use of blockchain technology is gaining popularity as a means of preventing financial crimes. Blockchain technology  used to create an immutable record of transactions, which easily audited and traced. This can help financial institutions to identify suspicious transactions involving PEPs and other high-risk individuals.

Artificial Intelligence

Artificial intelligence (AI) is increasingly being used by financial institutions to detect and prevent financial crimes. AI can analyze vast amounts of data and identify patterns that may be indicative of money laundering or other financial crimes. This can help financial institutions to identify suspicious transactions involving PEPs and other high-risk individuals.

Regulatory Changes

Regulatory bodies are continuously updating their AML regulations to keep pace with the changing nature of financial crimes. For instance, the Financial Crimes Enforcement Network FinCEN US has proposed new rules that would require financial institutions to verify the identity of PEPs at the time of account opening and monitor their transactions for suspicious activity.

Increased Collaboration

Financial institutions are increasingly collaborating with each other and with regulatory bodies to combat financial crimes. This can help to identify suspicious transactions involving PEPs and other high-risk individuals and prevent them from being used for illicit purposes.

Greater Emphasis on Customer Due Diligence

As the risks associated with financial crimes continue to grow, financial institutions are placing greater emphasis on customer due diligence  This includes conducting enhanced due diligence on PEPs and other high-risk individuals to mitigate the risks of financial crimes.

Explore the Power of Kyros AML Data Suite

Kyros AML Data Suite is a powerful AML compliance SaaS software that can help financial institutions to comply with AML regulations. Also mitigate the risks of financial crimes involving PEPs and other high-risk individuals. With its advanced AI and machine learning capabilities, Kyros AML Data Suite can analyze vast amounts of data and identify suspicious transactions quickly and accurately. This can help financial institutions to reduce the risk of financial crimes. Also avoid regulatory fines, and protect their reputation.

Some of the many benefits of Kyros AML Data Suite include:

• Advanced AI and machine learning capabilities
• Real-time monitoring and alerting
• Flexible deployment options
• Customizable rules and workflows
• Comprehensive reporting and analytics

For more information about Kyros AML Data Suite and how it can help your financial institution to mitigate the risks of financial crimes involving PEPs and other high-risk individuals, visit kyrosaml.com.