A politically exposed person (PEP) is an individual who holds or has held a prominent public position, either domestically or internationally. Due to their potential for involvement in corruption or money laundering, PEPs are subjected to enhanced scrutiny by financial institutions to ensure they are not engaged in illicit financial activities.
Categories of Politically Exposed Persons
PEPs can be grouped into several broad categories based on their roles and affiliations. These include:
Domestic PEPs: Individuals holding prominent public positions within their own country, such as heads of state, government ministers, senior judges, military leaders, or central bank officials.
Foreign PEPs: Persons entrusted with prominent public functions in a foreign country, carrying higher risk due to the cross-border nature of financial transactions and regulatory scrutiny.
International Organization PEPs: Senior executives of international organizations such as the United Nations, World Bank, IMF, or regional development banks.
Family Members and Close Associates: Spouses, children, parents, siblings, or known business partners of a PEP are often subject to the same level of scrutiny due to their potential access to or control of assets.
This broader definition reflects the global recognition that corruption, bribery, and abuse of power can occur not only through the individual in office, but also through their immediate network.
Why PEPs Are Considered High-Risk
PEPs are not inherently involved in criminal activity. However, due to their influence, access to public funds, and decision-making authority, they are considered higher risk for corruption, money laundering, and abuse of power. Criminals may also seek to exploit their status to gain preferential treatment or regulatory leniency.
Financial institutions must treat PEPs with enhanced caution, especially when the source of funds is unclear or when transactions involve offshore accounts, high-value assets, or complex ownership structures.
Compliance Obligations and Regulatory Expectations
Under most global AML/CFT frameworks—including those established by the Financial Action Task Force (FATF)—institutions are expected to apply Enhanced Due Diligence (EDD) when onboarding or managing relationships involving PEPs. Key requirements include:
Determining PEP status at onboarding and periodically throughout the client relationship
Identifying the source of wealth and source of funds for transactions
Ongoing monitoring of account activity to detect anomalies or suspicious behavior
Senior management approval before initiating or maintaining business relationships with PEPs
Timely reporting of suspicious transactions to relevant authorities when red flags are detected
Failure to adhere to these standards can result in regulatory penalties, enforcement action, and reputational damage.
Screening and Monitoring Challenges
Identifying PEPs is complex due to the absence of a universal or exhaustive PEP list. Challenges include:
Incomplete or inconsistent public data about positions or affiliations
Name variations and transliteration issues in global databases
Frequent changes in political office holders and government structures
Limited visibility into close associates or family connections
To address these issues, institutions use PEP screening software, external data providers, and risk-scoring models to enhance identification and monitoring capabilities.
PEP Risk in a Global Context
Increased globalization and cross-border financial activity make the detection of high-risk PEP relationships more challenging. PEPs from high-corruption or sanctioned jurisdictions pose particular concern, especially when they:
Use intermediaries or shell companies to mask ownership
Invest in luxury goods, real estate, or art as a store of value
Engage in politically motivated or state-sponsored investment schemes
Financial institutions are advised to factor in jurisdictional risk and geopolitical context when evaluating the PEP exposure in their customer base.
