By Michael Afolabi Oluwole
Robbin Michael Consulting and Risk Advisory Services
In the global fight against corruption and money laundering, a term often used but less understood is “Politically Exposed Persons,” often shortened to PEPs. Understanding this concept is crucial to maintaining transparency and integrity in financial institutions and society at large.
Who are Politically Exposed Persons (PEPs)?
According to the Financial Action Task Force (FATF), a PEP is an individual who is or has been entrusted with a prominent public function. This categorization is not limited to national figures but includes international organizations and foreign figures. PEPs typically comprise heads of state, senior politicians, high-ranking military officials, senior executives of state-owned corporations, and important political party officials.
Why the focus on PEPs?
PEPs, by virtue of their position, have greater potential access to state resources and may, therefore, be at higher risk for involvement in unlawful activities such as bribery and corruption. The wealth and influence they possess can make it easier for them to manipulate the financial system and hide illicit funds. That’s why transactions involving PEPs are often subjected to enhanced scrutiny by financial institutions, a practice known as Enhanced Due Diligence (EDD).
PEPs – Not Necessarily Corrupt
It’s essential to note that being a PEP does not automatically mean a person is corrupt or involved in illicit activities. Many PEPs carry out their duties with the highest integrity and dedication. The classification serves as a caution for potential risks and not a conclusion of wrongdoing.
Managing the Risks associated with PEPs
Financial institutions use different measures to manage the risks associated with PEPs. These include identifying and verifying PEPs through a risk-based approach, increased monitoring of PEP-related transactions, and enhanced due diligence procedures.
Additionally, when a PEP is no longer entrusted with a prominent public function, it doesn’t immediately mean they pose a lower risk. The FATF recommends financial institutions to consider the continuing risk posed by the individual and to apply appropriate and risk-sensitive measures for a reasonable period.
The focus on Politically Exposed Persons is an integral part of the global effort to combat corruption, money laundering, and financial crimes. By understanding who PEPs are and the potential risks they pose, financial institutions and regulatory bodies can help create a financial system that champions transparency and fairness. Despite the challenges, the continued oversight of PEPs is crucial for maintaining the integrity of financial systems worldwide.