Abbreviations are frequently used like confetti in the banking and financial industry. PEP, or politically exposed person, is one that you may have heard of. It may sound like something from a spy film, but it’s a very real and significant idea in international banking and compliance.
What Does “Politically Exposed Person” Mean?
A PEP is someone who holds (or has held) a prominent public position, typically in government, politics, or an international organization. This includes:
- Heads of state or government
- Senior politicians
- High-ranking government officials
- Judicial or military officials
- Senior executives of state-owned corporations
- Important figures in political parties
- Close family members and known associates of the above
The key idea here is that due to their position and influence, PEPs present a higher risk of being involved in corruption or money laundering. That doesn’t mean all PEPs are doing shady things—but from a risk management perspective, banks need to take extra care when dealing with them.
Why Do Banks Care?
Banks and financial institutions are under strict regulations to prevent their services from being used for illegal activities, such as:
- Money laundering
- Terrorist financing
- Corruption
Because PEPs are more vulnerable to bribery and corruption, banks are required by Anti-Money Laundering (AML) and Know Your Customer (KYC) laws to apply extra scrutiny. This is known as Enhanced Due Diligence (EDD).
EDD might include:
- Verifying the source of wealth and funds
- Ongoing monitoring of transactions
- Approval from senior management before opening or continuing the business relationship
PEPs Are Not Criminals
It’s important to note that being classified as a PEP is not an accusation. It’s simply a risk classification. Think of it like this: just as a bank might be more cautious with a very large, unexpected deposit, they are also cautious with customers who, by nature of their job, have greater access to power and public funds.
How Long Is Someone Considered a PEP?
Interestingly, even if someone leaves their public role, they may still be considered a PEP for a certain period of time afterward—typically 12 to 18 months, although this varies by country. This is because the influence and risk don’t disappear overnight.
Final Thoughts
Understanding what a PEP is helps shed light on the often invisible layer of compliance that banks operate under. It’s not about suspicion—it’s about protection: for the financial system, for the bank, and for customers.