Who Are Politically Exposed Persons (PEPs)? A Complete Guide

In an increasingly globalised financial system, the risk of corruption, money laundering, and illicit financial flows is ever-present. Among the various mechanisms employed to mitigate these risks, identifying and managing Politically Exposed Persons (PEPs) plays a central role. But who exactly qualifies as a PEP, and why are they subject to increased scrutiny? This guide provides a detailed exploration of PEPs - what they are, why they matter, how financial institutions assess and manage PEP-related risks, and the legal frameworks that govern their treatment.

{{snippets-guide}}

1. What Is a Politically Exposed Person (PEP)?

A Politically Exposed Person (PEP) is an individual who holds (or has held) a prominent public position or function. These positions are typically associated with a heightened risk of exposure to bribery, corruption, or other forms of financial misconduct.

In the UK, the definition is based on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended. According to the regulations, a PEP is someone who is:

“...entrusted with prominent public functions by a state other than the United Kingdom, a Community institution or an international body.”

This definition is intentionally broad and encompasses not just the individual in question, but often their immediate family members and close associates.

2. Categories of PEPs

2.1 Domestic vs. Foreign PEPs

• Foreign PEPs: Individuals holding high-profile positions in foreign governments or organisations (e.g., heads of state, ministers, senior judges).
  
  
• Domestic PEPs: In the UK, domestic PEPs were historically not subject to the same level of scrutiny, but post-Brexit regulations now include them under enhanced due diligence in certain circumstances.
  
  

2.2 Types of PEPs

According to regulatory guidance, the following roles are typically considered PEPs:

• Heads of State or Government
  
  
• Ministers and deputy or assistant ministers
  
  
• Members of Parliament or similar legislative bodies
  
  
• Members of governing bodies of political parties
  
  
• Judges of supreme, constitutional, or other high-level courts
  
  
• Senior military officers
  
  
• Senior executives of state-owned enterprises
  
  
• Members of boards or audit committees of central banks
  
  

3. Family Members and Close Associates

PEP status is not limited to the individual alone. Under UK regulations, the following are also considered for PEP risk assessment:

3.1 Family Members

These include:

• Spouse or partner
  
  
• Children and their spouses or partners
  
  
• Parents
  
  

3.2 Close Associates

Defined more broadly, these are:

• Individuals known to have joint beneficial ownership of legal entities or arrangements with a PEP
  
  
• Persons with close business relationships with a PEP
  
  
• Individuals who are the sole beneficial owner of a legal entity set up for the benefit of a PEP
  
  

4. Why Are PEPs High-Risk?

PEPs, by virtue of their roles, have access to public funds, decision-making authority, and the ability to award contracts or licences. This makes them more vulnerable to:

• Bribery and corruption
  
  
• Abuse of power for private gain
  
  
• Money laundering
  
  
• Financing terrorism
  
  

Even if a PEP is not personally engaged in illicit behaviour, their proximity to power increases the potential for risk. Financial institutions and regulated entities are therefore required to treat PEPs as higher risk clients.

5. Regulatory Framework in the UK

5.1 Money Laundering Regulations

The UK Money Laundering Regulations 2017 (as amended) require businesses subject to anti-money laundering (AML) obligations to:

• Identify whether a customer (or beneficial owner) is a PEP
  
  
• Apply Enhanced Due Diligence (EDD) to PEPs
  
  
• Conduct senior management approval before establishing a business relationship
  
  
• Take reasonable measures to establish the source of wealth and source of funds
  
  
• Conduct ongoing monitoring of the business relationship
  
  

5.2 FCA Guidance

The Financial Conduct Authority (FCA) has provided guidance to help firms comply with their obligations. This includes:

• Risk-based approach to identifying PEPs
  
  
• Customer screening procedures
  
  
• Proportionality—assessing the level of risk rather than applying blanket treatment to all PEPs
  
  

5.3 Post-Brexit Developments

Following Brexit, the UK has implemented its own framework while continuing to align with international standards, particularly those set by the Financial Action Task Force (FATF). UK-specific nuances now include broader treatment of domestic PEPs, which were previously excluded from certain scrutiny under the EU framework.

6. Enhanced Due Diligence (EDD) for PEPs

Financial institutions and other regulated entities are required by law to conduct Enhanced Due Diligence (EDD) when establishing a business relationship with a Politically Exposed Person (PEP). The rationale is that PEPs, due to their position and influence, are inherently exposed to higher risks of involvement in corruption, bribery, and money laundering. EDD goes beyond standard customer due diligence (CDD) procedures, requiring a deeper and more frequent assessment of risk.

6.1 What Is EDD?

Enhanced Due Diligence is a risk-based approach designed to gather additional information and perform closer scrutiny on customers classified as high-risk. When applied to PEPs, EDD involves several key actions:

• Gathering More In-Depth Information: This includes not only verifying the individual’s identity but also collecting comprehensive data on their public role, responsibilities, geographical exposure, and political influence. Institutions may also request information on the individual’s known associates and immediate family members.
  
  
• Understanding the Nature of the Relationship: It’s essential to determine the intended purpose of the business relationship. For example, is the PEP opening a high-value investment account, purchasing luxury real estate, or engaging in frequent international transfers? The answers will influence the perceived level of risk.
  
  
• Assessing and Documenting the Risk: Each PEP must be individually risk-assessed and documented accordingly. Factors such as the country of origin, the stability of the local political system, and known incidents of corruption within that jurisdiction should be considered.
  
  
• Reassessing the Relationship Periodically: EDD is not a one-time task. Firms are obligated to conduct ongoing reviews of their relationships with PEPs. If the individual assumes a more senior political role, becomes the subject of a public scandal, or exits public office, the risk profile may change significantly and must be reassessed.
  
  

6.2 Components of EDD for PEPs

Effective EDD typically includes the following actions:

1. Verification of Identity Using Reliable, Independent Sources

While standard due diligence may accept self-reported documents, EDD demands that identities be verified using robust, independent, and reputable sources. This often involves cross-checking against government databases, PEP lists, electoral registers, and other official documentation.

2. Collection of Information on the Source of Funds and Wealth

One of the cornerstones of EDD is understanding the origin of the funds being used. This helps determine whether the assets could be the proceeds of corruption or illicit activity. Institutions may request documentation showing:

• Salary history
  
  
• Asset sale agreements
  
  
• Inheritance records
  
  
• Business ownership and dividends
  
  

3. Ongoing Transaction Monitoring

PEP accounts must be subject to enhanced, real-time transaction monitoring. Unusual patterns - such as large international transfers, cash-intensive activities, or frequent transactions with high-risk jurisdictions - should trigger alerts and require further investigation.

4. Escalation of Onboarding to Senior Management for Approval

In the UK, regulated entities must obtain sign-off from senior management before entering into or continuing a business relationship with a PEP. This ensures accountability and oversight at the highest level and underscores the potential reputational and legal risks of engaging with high-risk individuals.

7. Screening and Monitoring Tools

Given the complexity and political sensitivity of dealing with PEPs, regulated firms leverage a range of technology and tools to identify and monitor such individuals effectively.

7.1 PEP Databases

These are subscription-based platforms that aggregate and update lists of known PEPs globally. These platforms allow for automated name-checking during customer onboarding and periodic reviews.

7.2 Sanctions Lists and Watchlists

PEPs often appear on sanctions lists, such as those maintained by:

• The UK’s Office of Financial Sanctions Implementation (OFSI)
  
  
• The United Nations
  
  
• The US Office of Foreign Assets Control (OFAC)

These lists are used to identify individuals with restricted access to financial systems due to political, criminal, or military affiliations.

7.3 Adverse Media Screening

Adverse media (or negative news) searches help uncover any involvement in scandals, investigations, or public accusations. This type of open-source intelligence gathering is vital, especially for PEPs from regions where corruption may be systemic and underreported in official sources.

7.4 Customer Self-Declaration

While not fully reliable, asking clients to self-declare their PEP status remains a necessary part of the KYC (Know Your Customer) process. This typically occurs during account setup or periodic customer reviews.

7.5 Dynamic Monitoring and Trigger Events

A person can become a PEP after the establishment of a business relationship. Known as a “trigger event,” such a change necessitates a re-evaluation of the customer’s risk. Firms should:

• Monitor for career changes via external databases or internal alerts
  
  
• Regularly refresh customer data
  
  
• Flag accounts that show increased political exposure or media attention
  
  

8. Challenges in Managing PEP Risk

Despite the regulatory emphasis, managing PEP risk presents numerous challenges for institutions.

8.1 Identification Difficulties

Many PEPs operate in opaque environments where information about public officials is not readily available. Additionally, they may:

• Use intermediaries or shell companies to mask ownership
  
  
• Register assets in family members' or associates' names
  
  
• Operate in cash-heavy economies where paper trails are limited
  
  

The identification of family members and close associates is even more problematic, especially in jurisdictions where familial relationships are not clearly documented.

8.2 False Positives

Automated screening tools often flag names that match or closely resemble those of PEPs. For example, “John Smith” may return multiple irrelevant hits. These false positives can:

• Waste internal resources
  
  
• Delay onboarding or transactions
  
  
• Cause frustration for legitimate customers
  
  

Firms must therefore balance automation with human oversight to interpret results accurately.

8.3 Balancing Risk and Customer Experience

Not all PEPs pose the same level of risk. A retired ambassador from a stable, low-risk country may not warrant the same level of scrutiny as a minister from a high-corruption-risk nation. Blanket approaches can lead to:

• Over-de-risking
  
  
• Loss of legitimate business
  
  
• Damage to the firm’s reputation for fairness
  
  

Firms must apply a proportionate, risk-based approach that aligns compliance obligations with a customer-centric ethos.

9. Termination of PEP Status

One of the most debated topics in financial compliance is the duration of PEP status. While the risks associated with political exposure tend to diminish after leaving office, they do not vanish immediately.

9.1 FATF Recommendations

The Financial Action Task Force (FATF) recommends that individuals be treated as PEPs for at least 12 months after they leave office. This cooling-off period allows institutions to:

• Monitor for any post-tenure abuse of influence
  
  
• Capture late-emerging corruption or misconduct allegations
  
  
• Assess whether the individual remains politically connected
  
  

9.2 Industry Practice

In practice, many financial institutions extend this period well beyond one year, particularly if:

• The individual held a very senior role (e.g. president, finance minister)
  
  
• There is ongoing media or legal scrutiny
  
  
• They are based in countries with weak anti-corruption controls
  
  

Downgrading a PEP's status typically requires formal internal review and documented justification.

10. Examples and Case Studies

Real-world scandals involving PEPs illustrate why Enhanced Due Diligence is so critical.

10.1 The 1MDB Scandal (Malaysia)

The 1Malaysia Development Berhad (1MDB) case is among the most notorious PEP-related financial crimes. Former Malaysian Prime Minister Najib Razak was accused of embezzling over $4 billion from the sovereign wealth fund. Funds were channelled through complex networks of shell companies, real estate purchases, and luxury assets around the world. Financial institutions that failed to detect suspicious transactions were later fined and investigated.

10.2 Odebrecht Bribery Case (Latin America)

Odebrecht, a Brazilian construction firm, was at the centre of a vast corruption scheme. The company admitted to paying bribes to politicians, ministers, and presidents in more than ten countries in return for infrastructure contracts. Many of those implicated were PEPs, illustrating the risks when government officials are involved in large-scale public procurement.

10.3 UK Exposure: Property and Shell Companies

The UK has come under scrutiny for its role in enabling foreign PEPs to launder money through its property market. Investigations by NGOs and journalists uncovered that:

• Millions were spent on London real estate by PEPs from high-risk jurisdictions
  
  
• These purchases were made through offshore shell companies
  
  
• The identities of the beneficial owners were hidden
  
  

This prompted the UK government to introduce Unexplained Wealth Orders (UWOs), allowing authorities to compel individuals to explain the source of funds used for significant asset purchases. High-profile cases include:

• The wife of a jailed Azerbaijani banker ordered to explain £16 million spent at Harrods
  
  
• Politicians from Central Asia whose properties were later seized
  
  

11. Consequences of Failing to Identify PEPs

Regulated firms that fail to identify PEPs and apply proper due diligence may face:

• Fines and enforcement actions from the FCA or other regulators
  
  
• Reputational damage
  
  
• Criminal liability in severe cases
  
  
• Loss of banking licences or restricted operations
  
  

A notable case includes Standard Chartered Bank, which paid hefty fines for AML compliance failures, including inadequate screening of high-risk customers.

{{snippets-case}}

12. Best Practices for Firms

To effectively manage PEP risks, firms should:

• Maintain up-to-date PEP screening systems
  
  
• Integrate onboarding, EDD, and ongoing monitoring into a single process
  
  
• Train staff regularly on how to identify and handle PEPs
  
  
• Ensure senior management oversight and a documented audit trail
  
  
• Apply a risk-based approach, not a box-ticking exercise
  
  

13. Technology’s Role in Managing PEP Risk

Modern RegTech solutions enable more effective management of PEP risks:

• Machine learning algorithms can reduce false positives
  
  
• Natural language processing for scanning adverse media
  
  
• Blockchain-based KYC tools for immutable identity verification
  
  
• Real-time alerts for trigger events (e.g., someone elected to office)
  
  

AI and automation are rapidly transforming how firms handle compliance, helping reduce costs while improving accuracy.

14. The Future of PEP Regulations

Several developments will likely shape the landscape:

• Expansion of PEP definitions to include new roles (e.g., influential digital leaders)
  
  
• Cross-border collaboration on AML initiatives
  
  
• Tightening of property and real estate loopholes, especially in London
  
  
• Public beneficial ownership registries
  
  

The UK’s Economic Crime and Corporate Transparency Act, introduced in 2023, signals a shift toward stronger enforcement and transparency.

15. Conclusion: What is a PEP?

Politically Exposed Persons (PEPs) represent a critical focus for anti-money laundering frameworks. While not inherently guilty of wrongdoing, their positions of influence necessitate greater scrutiny. Financial institutions, law firms, estate agents, and other regulated businesses must understand their obligations to identify and manage PEPs appropriately.

Through a combination of regulatory compliance, technology, and a nuanced understanding of political risk, firms can meet their obligations while maintaining good customer relationships. As financial systems become more complex, so too must the mechanisms that protect them from abuse - and managing PEPs is an essential part of that defence.

sanctions.io is a highly reliable and cost-effective solution for real-time screening. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons why customers globally trust us with their compliance efforts and sanctions screening needs.

‍

To learn more about how our sanctions, PEP, and criminal watchlist screening service can support your organisation's compliance program: Book a free Discovery Call.

‍

We also encourage you to take advantage of our free 7-day trial to get started with your sanctions and AML screening (no credit card is required).

‍