Trust is crucial when it comes to financial transactions. To combat money laundering, terrorism funding, and other illegal activity, banks and other financial institutions have put in place robust compliance mechanisms. Finding Politically Exposed Persons (PEPs) during the KYC (Know Your Customer) process is a crucial part of this.
What is a PEP?
A Politically Exposed Person (PEP) is someone who holds (or has held) a prominent public position. This can include politicians, senior government officials, judges, military leaders, or executives at state-owned enterprises. Even close family members or associates of these individuals may be considered PEPs.
Common Examples of PEPs:
- Heads of state or government
- Members of parliament or national legislatures
- Senior members of the judiciary
- High-ranking military officers
- Ambassadors or diplomatic envoys
- Directors or board members of state-owned companies
Why are PEPs Important in KYC?
Being a PEP doesn’t automatically mean someone is involved in corruption or criminal activity. However, their position of power can present a higher risk for potential abuse — such as bribery, embezzlement, or influence over public funds.
That’s why PEP screening is a key part of the KYC process. Financial institutions must identify if a new or existing customer is a PEP so they can assess the risk level and apply enhanced due diligence (EDD) measures if necessary.
Types of PEPs
There are generally three categories of PEPs:
- Domestic PEPs – Individuals who hold positions within their own country.
- Foreign PEPs – Individuals who hold positions in foreign governments or organizations.
- International Organization PEPs – Senior officials in international bodies like the UN, IMF, World Bank, etc.
Each type can carry a different risk profile, especially when cross-border transactions are involved.
How Are PEPs Identified?
PEP identification can be challenging. People don’t always disclose their connections, and there’s no global, standardized list of all PEPs. So, financial institutions often use a combination of:
- Customer declarations
- PEP databases and watchlists
- Ongoing monitoring systems
- Manual research (e.g., news sources or public records)
If a customer is identified as a PEP, the organization typically:
- Conducts a deeper background check
- Monitors their transactions more closely
- Requires higher levels of approval for onboarding or transactions
Staying Compliant
For companies subject to anti-money laundering (AML) laws, PEP screening is not optional. Failing to identify or monitor PEPs can lead to severe penalties, regulatory sanctions, and reputational damage.
That’s why it’s crucial for businesses in the financial sector — from banks to fintechs — to have robust KYC and PEP-screening processes in place.
Final Thoughts
PEP in KYC is all about managing risk. Identifying Politically Exposed Persons helps ensure that financial systems aren’t being misused by those in power for illegal purposes. While the vast majority of PEPs are legitimate professionals, taking the extra steps to verify and monitor their activity is a key part of keeping finance clean, safe, and transparent.