Politically Expos ed Persons (PEP) represent a specific group of individuals. This name is linked to financial compliance and LCB-FT standards. The focus on this group of individuals stems from their significant role in the political, economic and social spheres. As a result, they are exposed to increased risks of financial manipulation and corruption.
Definition of Politically Exposed Persons (PEPs)
Who are the PPEs?
Politically Exposed Persons (PEPs) are individuals who hold or have held important political or public positions. They also include people close to these figures: their families and close business associates. This classification derives from the influence they possess and their access to financial resources. They are therefore exposed to greater risks of financial manipulation, corruption and money laundering.
PEP by law
In designing international guidelines for PEPs, 2 organizations have come together: the Financial Action Task Force (FATF) and theEuropean Union (EU). These organizations provide clear guidance for the identification of PEPs and the basis for measures to be put in place to combat money laundering and the financing of terrorism.
PPE categories
Personalities are generally classified into different EPP categories. Each category specifically defines the situation of the people concerned. This categorization enables a better understanding of the different types of PEP and their influence. Here is a non-exhaustive list of the types of PEP defined by international organizations:
Persons occupying important political positions :
- Heads of state and government
- Ministers and vice-ministers
- Members of parliament
- Members of municipal and regional councils
High-level civil servants in the Public Administration :
- Members of supreme and constitutional courts
- Members of state financial control bodies
- Senior civil servants in ministries and government agencies
Leaders of international organizations :
- Leaders of international organizations such as the UN, UNESCO, etc.
- Ambassadors and diplomats representing countries abroad
Members of the Armed Forces :
- General officers and admirals
- Members of national defense and security committees
Managers of public companies :
- Presidents of Crown corporations
- Members of public company boards of directors
Family and Friends of PPE :
- PPE spouses and children
- Parents and siblings of PPE
Close Business Partners :
- Businessmen and entrepreneurs with close commercial ties to EPPs
- Business partners involved in financial transactions with PEPs
Why do PPEs represent an increased risk?
Politically Exposed Persons (PEPs) represent an increased risk due to several factors.
Influence and access to financial resources
EPPs hold political office or important public positions.
- Their power and influence are considerable, especially in political and economic decision-making.
- Their position often gives them privileged access to financial resources and markets.
Such facilities can be used forpersonal enrichment or financial manipulation.
PPE vulnerability
Because of their position and influence, EPPs are obvious targets. They are particularly vulnerable to bribery attempts by organizations seeking political or economic favors. But also for money laundering for illicit activities.
History of involvement in criminal activities
In the past, some politically exposed persons have been involved in criminal activities such as :
- Corruption
- Money laundering
- Market manipulation
- Financing terrorism
- Organized crime
- Tax evasion / Tax fraud
The introduction of this status will enhance safety for all. This applies not only to the security of the EPPs themselves, whose targeting is declining. But also the economic and geopolitical context in which they operate.
PPE and AML KYC compliance
To address the risks posed by PEP, governments have passed legislation. The LCB-FT (Lutte Contre le Blanchiment et le Financement du Terrorisme - Fight Against Money Laundering and Terrorist Financing) regulations are just some of the government measures in place.
Enhanced due diligence
Banking institutions are required to implement a risk-based approach. For particularly risky PEP customers, they must apply enhanced due diligence processes. This is one of the facets of the current KYC AML regulations. Such methods make it possible to assess the risk associated with the business relationship. This may include:
- A thorough check of the customer's financial history
- Controlling theorigin of funds in your accounts
- Regular reviews to monitor transactions
- Gather additional information on the customer's political activities and affiliations
Thanks to enhanced vigilance, banks and credit companies can mitigate the risks associated with PEPs.
KYC/AML penalties for non-compliance
Non-compliance with regulations concerning PEPs can have serious consequences for financial institutions. Particularly when it comes to anti-money laundering and anti-terrorist financing measures. This can include:
- Significant fines imposed by regulatory authorities
- Restrictions on commercial activities
- Even revocation of banking licenses
Such sanctions can damage an institution's reputation and result in a loss of confidence among customers and investors. In addition, non-compliance with KYC/AML regulations can entail legal risks. This includes legal proceedings and criminal sanctions against the financial institution's managers.
Use of new technologies
Increasingly, finance companies are relying on new technologies. They make it possible to identify and continuously monitor PEPs. This can include:
- Calling on external, specialized databases containing information on PEPs
- ImplementingAI tools to detect suspicious activity
Cutting-edge technologies such asartificial intelligence andmachine learning enhance the security of the financial system. Thanks to these methods, fraudulent (or potentially fraudulent) behavior can be automatically identified and escalated, then analyzed by experts.
Identification and management of PPE
PPE Identification Methods
Whenentering into a relationship, banking and financial institutions must check the identity of their customers. This is the point at which politically exposed persons can be identified.
Information search
Informational research involves cross-referencing information provided by the customer. Employment, political affiliations and government functions can all helpidentify a politically exposed person.
Filtering techniques
Advanced filtering techniques can also be used. Such methods allow you to search for keywords and indicators associated with PPE in the information supplied by customers.
Verification of identity documents
Official documents(biometric passports, identity cards, residence permits, etc.) are collected and analyzed to verify the customer's identity.
Financial analysis
By analyzing the source of funds, identifying beneficiaries and identifying suspicious movements of funds, we can assess the risk of financial crime.
Calling up external databases
Financial institutions can also consult specialized databases. These contain information on PEPs. Governmental and international watch lists are also available. We'll look at these in more detail in the next section.
Several data sources
Government databases
Government databases contain information on individuals holding political or public office. Their political affiliations and professional backgrounds are also listed. Financial institutions use these databases to identify PEPs and assess the risk associated with these business relationships.
Government databases often include a blacklist. These contain the identities of people subject to international sanctions. Checking these blacklists is one of the legal obligations of payment and credit services. The French asset freeze list indicates which individuals and companies are subject to a sanction, and the reasons for this.
Public registers
Public registers, such as land registers and company registers, provide useful information. In particular, on the commercial and financial activities of PEPs. These registers enable financial institutions to cross-reference information provided by customers. This makes it possible to identify any commercial or financial relationships associated with a PEP.
Public databases
Finally, publicly accessible databases. Online directories, social media, etc. They can provide additional information on PEPs. This data can be used to build up a more complete picture of the risk profile of these individuals.
Risk Indicators and Warning Signals
As part of the constant vigilance required of credit institutions, warning signals must be put in place. In particular, they enable suspicious transactions and abnormal movements of funds to be traced.
There are a few risk indicators that should be followed when reviewing the file of a politically exposed person. This enables unusual, suspicious transactions and criminal behavior to be spotted more quickly. These indicators include:
- Unusual fluctuations in cash flows
- Suspicious, complex and undocumented transactions
- Opaque business relationships with entities linked to PEPs
- Use of complex corporate structures (shell companies, trusts)
By identifying these elements, players in the financial sector can strengthen their ability to detect illicit or even criminal activity.
