A PEP, or Politically Exposed Person, who is residing within the country, cited as a Domestic PEP.
### FATF Guidelines for Identifying and Assessing Politically Exposed Persons (PEPs)
The Financial Action Task Force (FATF) has established guidelines to help financial institutions identify and manage the risks associated with Politically Exposed Persons (PEPs) both domestically and abroad. Here's a summary of the key FATF guidelines for PEPs.
#### Identification of PEPs
- **Definition and Scope**: A PEP is an individual entrusted with a high-ranking, prominent public function, including foreign officials, domestic government figures, and those holding positions in international organizations [1][3][4]. - **Customer Due Diligence (CDD)**: Financial institutions must have risk-management systems in place to determine whether a customer or beneficial owner is a PEP [1][3]. - **List-Based Identification**: While FATF does not publish a global PEP list, it requires institutions to establish their own processes for periodic identification and monitoring in line with local definitions [4].
#### Risk Assessment and Enhanced Due Diligence (EDD)
- **EDD Mandate**: For foreign PEPs, financial institutions are required to perform enhanced due diligence (EDD) beyond standard customer due diligence when entering into or continuing business relationships [1][3][4]. - **Domestic and International PEPs**: Similar EDD procedures should also be applied to domestic PEPs and those holding prominent functions at international organizations, especially where higher risks are identified [1]. - **Risk-Based Approach**: Risk assessments should be conducted on a case-by-case basis, considering the individual’s position, level of influence, and other relevant risk factors, rather than applying a blanket approach [5]. - **Source of Wealth and Funds**: Institutions must take reasonable measures to establish the source of wealth and source of funds involved in transactions or business relationships with PEPs [1]. - **Ongoing Monitoring**: Enhanced ongoing monitoring must be maintained throughout the business relationship with a PEP [1][3].
#### Approval and Oversight
- **Senior Management Approval**: Institutions must obtain senior management approval before establishing (or continuing) business relationships with PEPs [1]. - **Appropriate Measures**: The measures applied should be proportionate to the level of risk identified, allowing for flexibility based on whether the PEP is domestic or foreign and the specific risks presented [5].
#### Additional Considerations
- **PEPs by Country**: For example, UK guidance clarifies that only truly prominent domestic individuals should be classified as PEPs, and even then they should generally be considered lower risk than foreign PEPs [5]. - **Non-Discrimination**: Measures should be applied without unfairly restricting beneficial business relationships, provided risk is effectively managed [5]. - **Global Compliance**: Similar principles are reflected in EU and U.S. regulations, with emphasis on identification, ongoing monitoring, and regulatory liability for non-compliance [4].
#### Summary Table: Key FATF Guidelines for PEPs
| Activity | Foreign PEPs | Domestic PEPs / Int’l Org. PEPs | General Principle | |-------------------------|------------------------------|-------------------------------------------|----------------------------------| | Identification | Required | Required | Risk-based checks | | Enhanced Due Diligence | Mandatory (EDD) | Required for higher-risk cases | Case-by-case risk assessment | | Source of Funds/Wealth | Required | Encouraged/Required if higher risk | Reasonable measures | | Ongoing Monitoring | Mandatory | Mandatory if higher risk | Proportional to risk | | Senior Mgmt Approval | Required | Encouraged/Required if higher risk | Proportional to risk |
#### Conclusion
FATF standards require financial institutions to identify PEPs through robust risk-management systems, apply enhanced due diligence, seek senior management approval, and conduct ongoing monitoring—tailoring measures to the specific risks posed by each PEP, whether domestic or foreign [1][3][4]. These guidelines are designed to prevent the misuse of the financial system by individuals in positions of influence, while enabling institutions to manage risk proportionately and without undue burden.
Examples of domestic PEPs include officials of local political parties, heads of state corporations, senior politicians, and top military officials. Politically exposed persons can present potential reputational risks for businesses. AML screening services can be beneficial in managing risks associated with politically exposed persons.
- In the realm of personal-finance and business, financial institutions should implement risk-management systems to determine if a customer or beneficial owner is a Politically Exposed Person (PEP), following the FATF guidelines.
- Financial institutions are advised to conduct source-of-wealth investigations when engaging in transactions or business relationships with PEPs, as outlined in the FATF guidelines for managing risks related to personal-finance and business.
