Pep Money Laundering

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Written By Chris Ekai

PEP(Politically exposed person pep) is an individual who has been entrusted with a prominent public function. This could be a government official, someone who works for a state-owned enterprise, or even a prominent political figure.

Because of their positions of power, PEPs are often targets for bribery and corruption. As a result, they may engage in money laundering activities to hide the illicit origins of their funds.

There are many ways that PEPs can launder money, but some of the most common methods include the following:

● Property transactions: PEPs may buy or sell property using shell companies or frontmen to mask their involvement in the transaction.

● Invoice fraud: PEPs may inflate the invoices of companies they own or control to funnel illicit funds into those businesses.

● Loan fraud: PEPs may take out loans using false information to hide their assets and income.

● Shell companies: PEPs may set up shell companies—or companies that exist on paper only—to move money around without disclosing their involvement.

● Beneficial ownership: PEPs may use trusts, nominee directors, and other means to beneficial ownership and conceal their involvement in companies and transactions.

PEPs are individuals who hold prominent public positions in government organizations or international organizations. A person with close family relations or close friends can be viewed as an “EP.” PEPs often possess power over government spending policies, purchasing decisions, and grants. Some examples of PEPs have been heads of state and government leaders or equivalent politicians.

Politically uncovered individuals (PEPs) don’t predict criminal behavior. Still, the risks it poses mean the financial institution must apply additional security measures to identify suspicious activities, monitor its customer risk profile, and maintain security. PEP monitoring is preventative and does not indicate criminal behavior.

In this blog post, we’ll take a closer look at how PEPs launder money and what compliance officers can do to prevent it.

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Definition of Politically Exposed Person

The term “politically exposed persons,” often interchangeable with “senior Foreign Political figures,” emerged during the late 90s after an alleged bank fraud scandal in Nigeria and spurred global efforts to curb abuse and corruption in the country.

The Financial Action Taskforce (FATF) subsequently redesigned this terminology by providing the following three classifications of PEP: The FATF argues that its three classifications of PEP are aimed mainly at middle-ranking and political persons.

Politically exposed persons are individuals in high-profile political positions with a public office or a prominent public position. This person may be more susceptible to financial crimes because of their position in terrorism.

What are the three types of PEP?

A Political Exposed Person (PEP) is an individual elected to public office, appointed to a public position, or has been prominently involved in politics. In addition, their family members and close associates may also be considered PEPs( term politically exposed person). There are three types of PEPs: Domestic, Foreign, and International.

Domestic PEPs are individuals who have been prominent in the politics of their home country. They may have been elected to office, appointed to a position in the government, or otherwise involved in politics. Their family members and close associates may also be considered Domestic PEPs.

Foreign PEPs are individuals who have been prominent in the politics of a foreign country. They may have been elected to office, appointed to a position in the government, or otherwise involved in politics. Their family members and close associates may also be considered Foreign PEPs.

International PEPs are individuals who have been prominent in the politics of more than one country. They may have been elected to office, appointed to a position in the government, or otherwise involved in politics. Their family members and close associates may also be considered International PEPs.

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What does PEP stand for in banking?

Politically Exposed Persons (PEPs) have been entrusted with a prominent public function or are closely associated with such persons. In the banking world, PEPs are considered to pose a higher risk of being involved in bribery and corruption. As a result, banks are required to take additional measures to mitigate the risks posed by PEPs through a customer relationship mechanism.

These measures may include enhanced due diligence, involving extra scrutiny of a PEP’s financial activities. In some cases, banks may even refuse to provide services to PEPs.

What Compliance Officers Can Do To Prevent Money Laundering by PEPs

Compliance officers must be vigilant in preventing money laundering by PEPs. Some steps they can take include:

● Knowing who your customers are: It’s important to clearly understand who you’re doing business with—including any individuals with signatory authority. Conduct due diligence on all new customers, paying close attention to any based in high-risk jurisdictions or complex corporate structures.

● Understanding your customer’s business: Take the time to understand your customer’s business—including its standard operating procedures, typical transactions, and sources of income. This will help you identify any suspicious activity more easily.

● Monitoring transactions: Pay close attention to all transactions—particularly large or uncharacteristic—and flag anything that looks suspicious. Be sure to investigate any unusual activity thoroughly before instituting any corrective action.

● Keeping current on risk factors: Political risk factors can change quickly, so it’s important to stay up-to-date on current events that could impact your customers. For example, new sanctions or regulations could suddenly make doing business with certain individuals or entities riskier.

Identification of Politically Exposed persons

Globally, there is an increased focus on anti-money laundering and countering the financing of terrorism. Part of this involves identifying Politically Exposed Persons (PEPs) who may be at greater risk of being involved in corrupt activities. PEPs are individuals who have been entrusted with a prominent public function and, as such, may be susceptible to bribery or corruption.

To identify PEPs, financial institutions must have robust systems and controls in place. This process typically begins with enhanced due diligence, which may involve additional screening of the individual’s background and financial history.

Once a PEP has been identified, the institution must take appropriate measures to mitigate the risk of corruption. This may include enhanced monitoring of the account or transactions and/or implementing special controls.

The process is sometimes difficult because the criteria for the qualification and eligibility to become a PEP are broad and differ from country to country. The FATF publishes periodic updates on AML/CFTC recommendations about PEP, a move that complicates introducing a definitive PEP list. Nevertheless, the definitions outlined in many countries by the International Criminal Justice Organisation are often based on FATF guidance that covers the roles of PEPs broadly especially foreign pep:

Relatives and close associates

These persons’ relatives and close friends (RCA) are categorized as politically exposed persons. This group includes immediate family members, close friends, or contacts in government or politics. This includes the parents, siblings, or parents. The Customer boarding guides.

Government officials

Government officials represent current or former officials in domestic or foreign ministries. These PEPs include heads of state or persons whose roles have been electorate or elected. International organisation peps.

Senior Executives

These types of PEP include senior executives whose positions have included senior leadership positions in government companies and international organizations, including board and director positions. Senior foreign political figure

Political Party Officials

Politically exposed individuals can include top officials who hold leadership positions at major parties abroad and at home. Important political party officials like the secretary general of a party as a pep status.

Changes in PEP Status

The political landscape is constantly changing, and with that comes changes in the exposure of different individuals. As new scandals break and old alliances crumble, the amount of exposure that a person gets can increase or decrease dramatically.

For some, this may mean more opportunities to gain attention and further their career. For others, it might mean being forced out of the spotlight and into obscurity. No matter what the result, changes in exposure can have a significant impact on a person’s life.

Customers become PEPs in many different forms, including winning the election and changing jobs and promotions – and businesses must capture this change in risk profile as soon as possible. Likewise, companies must know if a customer has been declassified as a PEP. FATF has a guide on the declassification of a PEP when someone quits his government role or public position. The removal of the political role may, in fact, be not able to affect the risks for the customer.

Risk-based PEP screening

Risk based approaches require companies to deploy AML / CFT measures proportional to the risk the company presents – applying enhanced due diligence measures to high-risk customers. Firms should ensure their definitions of PEP screening best practices include family members and close associates. Risk-based screening for PEP screening should follow these principles:

In practice, this usually takes the form of risk-based screening. Financial institutions will assess the level of risk posed by a potential PEP client, and put in place appropriate measures to mitigate that risk. This may involve enhanced customer due diligence, ongoing monitoring of the account, and setting limits on the type and value of transactions that can be conducted

The four quadrants of risk

AML/CFTP risks are higher in some PEPs as opposed to others. With these considerations, the levels of PEP risk might be divided into the following four quadrants. In addition, firms should examine new customers for a risk-based approach to AML suggested by the FATF.

The Financial Action Task Force (FATF), an international body that sets AML standards, has divided PEPs into four quadrants based on their level of risk. Quadrant one includes Heads of State and Government, as well as their family members and close associates.

Quadrant two includes senior figures in the executive branch, as well as legislative and judicial officials. Quadrant three includes senior members of the military, as well as key personnel in state-owned enterprises.

Quadrant four includes individuals who are running for political office, as well as those who have been appointed to a public body. Each quadrant carries its own level of risk, and financial institutions must take this into account when conducting EDD on PEPs.


PEPs present a unique challenge when it comes to anti-money laundering compliance. They often have complex financial portfolios and relationships that can make identifying the beneficial owner of funds difficult. In order to properly vet PEPs, financial institutions must implement enhanced due diligence measures. These may include obtaining detailed information about the PEP’s source of wealth and conducting frequent reviews of their account activity.

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