Politically Exposed Persons (PEPs): What and Why?

By Christina Poursanidou, Lawyer

Politically Exposed Persons (PEPs) are considered as high-risk individuals for financial institutions and obliged entities, which justifies the application of additional Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) preventive measures with respect to business relationships with them. But who is considered as a PEP and why being a PEP poses a risk?

The Financial Action Task Force (FATF) has defined a PEP as an individual who is or has been entrusted with a prominent public function, while the Article 3 par. 9 of the 4th EU AML Directive (AMLD) repeats the definition of the FATF and provides a list of particular political positions, which make somebody a PEP. It is crucial to note that both FATF and EU have included in the scope of PEPs, the family members and close associates of PEPs, which means that not only the persons with have been entrusted with prominent public function are considered as high-risk, but also their family members and close associates. The FATF Recommendation does not define the scope of the terms family members and close associates, but according to the 4th AMLD “family members” include the spouse or equivalent, the children and their spouses and parents of a PEP. Similarly, the Article 3 par. 11 of the 4 AMLD clarifies who is considered as close associates of a PEP. Finally, PEPs, who are treated as high-risk customers under AML and CFT law, may continue to pose a high risk even after them cease holding a public position. This is consistent with a possible open-ended approach, and it is well known with the saying “Once a PEP - always a PEP”.

The ratio of the legal provisions concerning the high-risk of PEPs is their potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. It is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing. Obviously, not all persons considered as PEPs are involved in financial crimes, bribery and corruption. For this reason, refusing a business relationship with a person simply on the basis of the determination that he or she is a politically exposed person is contrary to the letter and spirit of this Directive and of the FATF Recommendations. In the same time, legislators clearly have stated that PEPs shall not be stigmatised as being involved in criminal activity.

In any case, the classification of PEPs as high-risk customers and the obligation to conduct Enhanced Diu Diligence (EDD) for them, make their life quite more difficult. There are opinions that not all PEPs shall be considered as de facto high risk individuals and that there must be an escalation, which will make a number of PEPs to be subject to Simplified Diu Diligence (SDD). Althought, the recent scandals in EU countries, such as in Cyprus, where top-tier politicians were shown aiding and abetting convicted criminals to obtain citizenship and access to the European Union’s internal markets, is a solid evidence that the fact that all PEPs pose high-risk is far from a stereotype. (photo:pixabay)

Read more articles by Christina Poursanidou here

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