What is a Politically Exposed Person (PEP)?
A politically exposed person (PEP) is someone who holds or has held a prominent public function, along with their immediate family members and close associates.
Politically exposed persons include heads of state, senior politicians, senior government officials, judicial officials, senior military officers, and executives of state-owned companies. Because their positions give them influence over public funds and decisions, they face a higher risk of involvement in bribery and corruption.
PEP status reflects the corruption risk that comes with a customer's position. Financial institutions respond by applying enhanced due diligence to understand where the customer's money comes from.
What are the types of politically exposed persons?
Politically exposed persons usually fall into three categories.
- Foreign PEPs, who hold prominent public functions in another country
- Domestic PEPs, who hold prominent public functions in the firm's own country
- International organization PEPs, who hold senior roles in bodies such as the UN or international development banks
Family members and close associates of PEPs are treated as PEPs too. EU rules, for example, expanded PEP requirements to include domestic PEPs alongside foreign ones, and they require enhanced due diligence for PEPs and their family members.
Are all politically exposed persons equally risky?
No, PEP risk varies with the role and the local context. A minor city council member in a stable democracy may warrant medium risk, while a senior cabinet minister in a country with high corruption levels may warrant high risk. In some Latin American countries, local mayors and regional governors often hold strong political connections. In certain Middle Eastern jurisdictions, tribal affiliations and family networks can create a semi-official status that works much like PEP status.
Risk models should reflect these differences. Many firms adjust PEP risk scores based on the seniority of the position, the country's corruption risk, and the customer's products and activity.
How long does someone remain a politically exposed person?
PEP status can continue after a person leaves office. FATF standards take a risk-based view, and EU rules require firms to keep treating a former PEP as higher risk for at least 12 months after they leave their public role, and for longer if the risk remains.
