Politically Exposed Persons (PEPs): What Investors Need to Know

Due diligence is all about risk mitigation and comprehensive knowledge about who you consider partnering with—financially, professionally, and in other ways. While due diligence includes gathering information about one’s professional experience, legal history, and reputational standing, it’s also crucial to be aware of the political affiliation and exposure of a potential partner, investee, or employee for transparency and compliance. Whether or not you agree with one’s political stance, being aware of their political exposure can help you identify potential reputational risks and allow you to get ahead of any concerns that may arise with regard to their position.

A politically exposed person (PEP) typically serves in a position of influence and power or a public role. Due to the nature of their jobs, these individuals are often associated with a higher risk of being involved with corruption, money laundering, or financing criminal activity.

In this article we will cover the basics of what it means to be a politically exposed person and what potential risks you should consider when getting involved with a PEP. Namely, we’ll cover who is considered a PEP, different types of PEPs (domestic, foreign, and international), how long someone is considered to be politically exposed for, and some of the challenges and risks involved when partnering with someone that has political exposure.

Who is considered to be a PEP?

Generally, a politically exposed person is an individual who serves in a high-ranking governmental or public role. However, a PEP can also be an individual in a prominent position in a private organization or institution.

Common examples of politically exposed people include:

• Members of the legislative and executive branches of the Government

• Diplomats and/or those holding diplomatic positions

• Members of judiciary bodies

• Senior executives of state-owned enterprises

• High-ranking members of the armed forces

• Top-level positions in major financial institutions

• Members of international sports committees

A PEP can extend to close associates and relatives of politically exposed people that fit within the above categories as well. For example, an individual who jointly owns a legal entity with a PEP or works in a close business relationship with a PEP is also considered, by extension, politically exposed. Similarly, an individual who owns a legal entity that solely benefits a PEP is regarded as such. First-tier family members, such as parents, children, siblings, aunts, uncles, and spouses or partners are also considered PEPs.

Types of PEPs: Domestic, Foreign and International

Three main categories have been recognized by the Financial Action Task Force (FATF), an international standard-setting organization, for classifying different types of PEPs.

1. A domestic PEP describes an individual serving in a prominent position domestically. Take, for instance, an individual who holds a political, governmental, or another public role in the U.S. They would be considered a domestic politically exposed person within the United States. 

2. On the flip side, A foreign PEP describes an individual entrusted with a prominent role by a foreign country. For example, an individual who serves as CEO of a state-owned company in Canada is considered to be a foreign PEP within the United States.

3. An international PEP describes an individual with a prominent role in an international organization. This includes board members and senior management. One such example could be an individual who works in the United Nations. The difference between a foreign PEP and an international PEP is reliant upon the type of organization they work within.

How long is an individual considered to be a PEP?

Countries vary in their standards of how long an individual is considered a PEP after leaving their prominent position. For instance, in Canada, an individual (and by extension their relatives, as noted above) is still considered to be politically exposed for five years after leaving their position. In Australia, on the other hand, once a PEP leaves their job, they are no longer considered a PEP immediately, which also extends to their first-degree relatives.

In any case, if an individual is presently a PEP or has been one in the past, a background check should reveal this pertinent information for your consideration.

Why are politically exposed persons considered high risk?

Due to the concealed nature of criminal financial activity, there is limited data on financial crimes involving PEPs. However, the World Bank has estimated that over $1 trillion is paid in bribes yearly. The Stolen Asset Recovery (StAR) Initiative has estimated that public officials in transition and developing countries receive $20-$40 billion of corrupt money annually. These estimates and the myriad of media stories of public figures and financial crimes indicate that this is a global phenomenon.

Consequently, PEPs require due diligence procedures beyond those of the broader population, as well as ongoing monitoring during their tenure in these positions. Regulatory agencies such as the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the Financial Conduct Authority (FCA) of the UK, the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Financial Crimes Enforcement Network (FinCEN) require companies and businesses involved with PEPs to provide additional screening and more stringent due diligence procedures because of the sheer amount of risk involved.

Risks and benefits of doing business with a PEP

Due to the nature of their position, politically exposed persons are unique in their influence and power as well as in their access to certain resources. Studies conducted by the Financial Action Task Force (FATF) and other organizations have found that PEPs are more likely to be targeted by corrupt individuals, or even terrorists, for financing or enabling criminal activity and have increased exposure to illegally obtaining assets through bribery or money laundering.

Being a politically exposed person does not connote criminal involvement or illegal activities. However, it indicates that an individual is potentially more vulnerable to certain financial crimes than an average person.

Additionally, PEP screening can provide investors with insight into an individual’s political affiliations. Although this may be seemingly insignificant to an investor, a PEP’s political outlook can have significant repercussions. 

For example, if a PEP is associated with a party that supports contended viewpoints—not only can that be reflective of their character, but the reputational damage that might ensue from going into business with them could lead to devastating financial losses. Furthermore, financial contributions made by PEPs to specific political campaigns can be construed in a way that could also cause potentially adverse effects as the matter immediately becomes publicly significant.

While the political views of the subject at hand may seem inconsequential to a decision to partner or hire, they are an important contextual layer to have when considering whether or not to move forward with a deal.

Challenges of identifying PEPs

Various authoritative bodies who have outlined regulations and guidelines regarding PEPs provide different definitions that constitute a PEP.

For instance, the FATF and UNCAC consider both immediate and extended family members of a PEP to be PEPs as well. However, the Wolfsberg Group, an international entity of numerous financial institutions, only considers first-degree family members, such as spouses, parents, children, and siblings, to be PEPs. These inconsistencies can cause complications when it comes to identifying who exactly is considered to be politically exposed.

Additionally, while the FATF has set out over 40 recommendations for countries to adopt in their policies, countries differ widely in their level of compliance with these recommendations. Twenty-four percent of countries have not satisfactorily implemented these recommendations according to a report from 2022. 

PEP regulations in the European Union are broadly similar and required for all the various types of PEPs. While Canada and Mexico require foreign, domestic, and international PEP screening as part of their AML/CFT frameworks, the United States diverges by not requiring domestic PEP screening.

Other countries and regions, such as Latin America or Asia, vary notably in their requirements, especially when it comes to domestic PEPs. These differences in regulations between countries create further inconsistencies when it comes to identifying PEPs and require a thorough understanding of each national legislation.

Intelligo’s coverage of PEPs

Intelligo’s AI-powered background intelligence platform provides reliable coverage on PEPs, allowing you to make informed decisions and mitigate potential risks.

Intelligo leverages artificial intelligence to perform an exhaustive search on various databases, including known PEPs. Its sophisticated algorithms extract relevant information, match the data to the subject’s background, and flag adverse or sensitive results.

Beyond automated reports, seasoned research analysts extensively research an individual’s history to determine whether that person has significant political exposure. The analyst review is particularly beneficial in cases when individuals are not listed in a database, yet circumstances from their personal, professional, public, and social media history could imply higher risk.

Improving your due diligence practices

Identifying and monitoring PEPs is essential to ensure you have a clear and complete picture of an individual and their potential associated risks. Identifying this unique status in a potential partner, investor, or investee will give you the awareness and the ability to monitor and mitigate the potential risks involved, allowing for sound decisions regarding your investments.