In financial regulation, a politically exposed person (PEP) is one who has been entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. The terms 'politically exposed person' and senior foreign political figure are often used interchangeably, particularly in international forums. Foreign official is a term for individuals deemed as government persons under the Foreign Corrupt Practices Act, or FCPA, and although definitions are similar to PEP, there are quite a few differences, and they should not be used interchangeably. The term 'PEP' is typically used to refer to customers in the financial services industry, while 'foreign official' refers to the risks of third-party relationships in all industries.

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Definition by the Financial Action Task Force on Money Laundering[edit]

2.Politically Exposed Persons 1-3 2.1. Who are politically Exposed Persons (PEPs)? 2 2.2 Chief or similar High-ranking positions in an international organization. 2 2.3 Who should be considered as family members? 2 2.4 Close associates of a PEP 3 3. Various scenario related with PEPs/IPs 3 4. PEPs versus Risk 4-6. A “politically exposed person” or “PEP” is an individual that holds a prominent public position or function. Due to their role, they may be more susceptible to bribery, corruption or other money laundering offences, as a result of this they are of high risk to financial institutions and Designated Non-Financial Businesses.

While there is no global definition of a PEP, most countries have based their definition on the 2003 Financial Action Task Force on Money Laundering (FATF) standard, as for example the Swiss financial market regulator in 2011, which quoted it as 'the international standard'^[1] or the Australian government in 2015.^[2] FATF is an international inter-governmental body, founded in 1989 on the initiative of the G7 and hosted by the OECD, to set standards and promote implementing measures against money laundering, financing of terrorism and financing of proliferation of weapons of mass destruction to preserve the integrity of the global financial system.^[3]^:2

In February 2012, the FATF's latest definition of politically exposed persons (PEP), revised from 2003, is as follows:^[3]^:123

Foreign PEPs: individuals who are or have been entrusted with prominent public functions by a foreign country, for example Heads of state or Heads of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
Domestic PEPs: individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials. (Not all countries subscribe to the concept of domestic PEPs with respect to regulatory requirements/application of due diligence. For example, US law, specifically Section 312 of the USA Patriot Act and its implementing regulations provide for enhanced due diligence for SFPFs (Senior Foreign Political Figure) only, defined as: 'a current or former senior official in the executive, legislative, administrative, military, or judicial branches of a 'foreign' government...a senior official of a major 'foreign' political party; and a senior executive of a 'foreign' government-owned commercial enterprise.)
Persons who are or have been entrusted with a prominent function by a state owned enterprise or an international organisation refers to members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions.

Requirements for a PEP apply to family members or close associates, any individual publicly known, or known by the financial institution to be a close personal or professional associate.^[3]^:18'The FATF definition is not intended to include middle-ranking or more junior individuals.'^[3]^:121

A forerunner definition was by the 1997 OECD Anti-Bribery Convention aimed at reducing corruption in developing countries, which came into force February 1999; it used the term 'foreign official'.

Implementation[edit]

Most of the 37 FATF member countries treat domestic and foreign PEPs with heightened scrutiny. The FATF guidance implies that if a person is a foreign PEP, it de facto makes them a domestic PEP in their own country. This makes sense for crime prevention, because to export proceeds of crime, the PEP must first use their own domestic financial system and thus, importance is placed on domestic, and non-foreign PEPs.

Australia[edit]

Under Australia's Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) Rules,^[4] Politically exposed persons (PEPs) are individuals who occupy a prominent public position or functions in a government body or international organisation, both within and outside Australia. This definition also extends to their immediate family members and close associates.

The AML/CTF Rules define three categories of PEPs:

Domestic PEPs are individuals who hold a prominent public position or function in an Australian government body
Foreign PEPs are individuals who hold a prominent public position or function in a government body of a foreign country.
International organisation PEPs are individuals who hold a prominent public position or function in an international organisation.

A reporting entity must have procedures to identify whether any individual customer or beneficial owner is a PEP, or an associate of a PEP. The reporting entity must undertake this identification process before it provides the customer with a designated service, or as soon as practicable afterwards. A reporting entity must implement additional due diligence measures and risk management systems where the PEP is high Money Laundering / Terrorism Financing risk or is a foreign PEP.

Canada[edit]

Canada considers all foreign PEPs to pose a money laundering and terrorist financing risk. Under the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act that came into effect in 2016, a politically exposed person now also includes all domestic PEPs and Heads of International Organisations (HIOs). Domestic PEPs in Canada retain their classification until 5 years after they leave office. This rule applies even if the PEP is not considered high risk.

Egypt[edit]

Egypt is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and has committed to implementing the FATF’s AML/CFT recommendations. PEP screening in Egypt is required for foreign and domestic PEPs, while international PEP screening is not required.

Chile[edit]

In Chile, financial institutions are mandated to report any transaction suspicious for potential involvement in bribery by virtue of a PEP's position and the influence that they may hold. As of 2015, 2,200 to 3,000 individuals are considered PEPs, 150 of them foreign, and also their second grade relatives are under financial observation by the institutions.^[5]

European Union[edit]

The European Union has defined the term politically exposed person in the directive 2006/70/EC.^[6]

South Africa[edit]

In South Africa, the Financial Intelligence Centre amended the Financial Intelligence Centre Act to refer to Politically Influential Persons (PIP) instead of PEP. This was done in order to include private sector officials who have business dealings with public sector officials and elected officials in the public services procurement deals.

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