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PEP Screening

Types of PEPs: FATF’s point of view

Why Do People In Power Need To Be Monitored?

A Politically Exposed Person is someone who has immense social and high public standing as they hold a powerful public office and exert massive social influence. Psychologists explain how the paradox of power has one significant implication: once a person climbs the ladder of power, their moral compass and ethical values change as they acquire the position of power. One psychological drawback of attaining authority is that it makes us less empathetic and more egoistic. Since the evolution of human species, the power dynamics revealed by the study of the history of financial crimes have substantiated this point over and over again.  

Why Do Regulatory Bodies Add PEPs into Watchlists?

In the world of financial crimes, power is paramount. One can never execute their financial crimes without possessing influence and power. Therefore, the international regulatory bodies, government organizations and law enforcement agencies have collaborated and laid down the regulatory guidelines regarding PEP screening to have a risk-based approach by keeping an eye on the financial activities of people in power. 

Financial Action Task Force’s (FATF) Recommendations 12 and 22 specifically discusses the essential details regarding the PEP screening system in identifying, monitoring and dealing with Politically Exposed Persons (PEP). When it comes to politically exposed persons, there is no hard and fast and fixed definition. Politically exposed person is a broad term that covers people working in the position of authority and holds power. However, for the sake of better understanding and an effective pep screening system, the compliance world classifies politically exposed persons into different categories. Let’s delve deeper into the types of politically exposed persons.

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Classification of Politically Exposed Persons

Politically exposed persons are classified as follows:

Domestic Politically Exposed Persons (PEPs)

People holding positions of power at the domestic levels are classified as Domestic Politically Exposed Persons (PEPs). These include party chairman of political parties, senior judicial officials, head of government and head of state of the country, top military leadership, senior executives of big firms, cabinet ministers, chief ministers of provinces, provincial cabinet ministers, union councilors, top bureaucracy, senior district government members, and top executives of the state-owned firms in the country.  

Foreign Politically Exposed Persons (PEPs)

Powerful individuals from foreign countries who possess considerable power and influence in the foreign country are classified as the foreign politically exposed persons. These include senior government officials of foreign governments, cabinet ministers and heads of government as well as heads of state of the foreign countries, military officers of foreign countries, party leaders of foreign political parties and senior executives of foreign state-owned firms are classified as the foreign politically exposed persons.  

International Politically Exposed Persons (PEPs)

Powerful individuals who work in the big international non-government organizations and possess considerable international influence are put in the category of international politically exposed persons such as senior executives and board of members like in the United Nations, International Money Funds (IMF), World Bank, World Economic Forum, International Red Cross, International Court of Justice (ICJ) and so on. 

Family Members of Politically Exposed Persons (PEPs)

As revealed in most of the money laundering, corruption, bribery and tax evasion cases, politically exposed persons use people close to them whom they can trust to conduct their illegal activities. Family members tend to be their top choice. Therefore, the family members of politically exposed persons are also put into the category of politically exposed persons. 

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Close Associates of Politically Exposed Persons (PEPs)

Close associates including the friend circle and close business partners of politically exposed persons are as much prone to committing financial crimes as the politically exposed persons themselves. 

Financial crimes committed by the people sitting in the corridors of power causes a deep black hole in the world economy. This is because trillions of dollars of economic revenue are lost due to financial crimes every year. This staggering trillions of dollars could have been invested in the development projects and infrastructure building of developing nations across the world. 

This is why government organizations, law enforcement agencies and regulatory bodies release lists of politically exposed persons or PEP lists and mandate the financial institutions to identify powerful clients prone to committing financial crimes, monitor the financial activities of powerful clients or PEP, determine their risk levels and update their PEP status whenever needed. 
Financial firms are advised to employ tools like pep list screening before considering people with high social standing and considerable influence in the society as their potential clients. Employing a pep screening system is a risk-based strategy which is meant to protect banks, investment firms, insurance firms, payment processing companies and many more from getting embroiled in the financial scandal of their PEP clients.