Politically Exposed Person (PEP): Definition, Qualification & How to Verify Them

The term "Politically Exposed Person" (PEP) gained global attention following a shocking corruption scandal in the late 1990s involving Nigeria's former military dictator, General Sani Abacha. During his regime, Abacha and his associates embezzled an estimated $5 billion, funnelling the money into foreign bank accounts through fraudulent transactions. This scandal exposed the vulnerability of global financial systems to exploitation by powerful political figures and catalysed international efforts to strengthen anti-money laundering (AML) and corruption controls. 

Who is a Politically Exposed Person (PEP)?

A Politically Exposed Person (PEP) is any individual who holds or has held a prominent public position, either in government, an international organisation, or a political party. These individuals are considered high risk due to their access to state resources and influence, making them potential targets or participants in corruption, money laundering, or financial fraud.

The Financial Action Task Force (FATF) defines three broad categories of PEPs:

1. Foreign PEPs:
   Individuals entrusted with public functions by a foreign government, such as heads of state, senior politicians, high-ranking military officers, or executives in state-owned enterprises.
2. Domestic PEPs:
   Prominent figures within their own country, including national or regional politicians, government officials, and judicial officers.
3. International PEPs:
   Leaders within international organizations, such as directors, deputy directors, or members of governing boards.

In addition to these categories, Relatives and Close Associates (RCAs) of PEPs—such as spouses, parents, siblings, and business partners—are also flagged due to their proximity to power.

“It’s important to note: PEPs are not inherently engaged in illicit activities, but their positions expose them to higher risks, necessitating stricter due diligence processes.”

How Does the PEP Screening Process Work?

Screening for Politically Exposed Persons (PEPs) is a critical part of an institution’s risk-based approach to combating money laundering and financial crimes. The process involves several structured steps, from gathering customer data to continuous monitoring, ensuring compliance with AML regulations and safeguarding against reputational damage.

Here’s a detailed look at how the process works:

1. Gather Customer Identification Data

The process begins with collecting essential customer information during onboarding, such as:

• Full Name
• Date of Birth
• Nationality
• Residential Address
• Occupation
• Tax Identification Number (TIN)

This data serves as the foundation for screening and risk assessment.

2. Software-Driven PEP Screening

Once the data is collected, specialised AML software screens the information against a comprehensive database of politically exposed persons. This automated process uses fuzzy matching algorithms to identify potential matches, even if the input data is slightly inconsistent. Financial institutions can configure the strictness of these matches to balance accuracy and efficiency.

3. Detecting and Resolving False Positives

Initial screenings often generate alerts for potential matches. Compliance officers, such as Money Laundering Reporting Officers (MLROs), must then review these hits to distinguish between true matches and false positives. This step ensures that legitimate customers are not mistakenly flagged, avoiding unnecessary disruptions.

4. Risk Scoring

Each customer is assigned a risk score based on their profile and screening results. Risk scores consider factors such as:

• Residency in a high-risk third country.
• Status as a PEP, their family member, or close associate.
• Adverse media hits related to corruption, bribery, or similar offences.

The assigned risk score determines the level of due diligence required:

• Simplified Due Diligence: For low-risk customers.
• Regular Due Diligence: For medium-risk customers.
• Enhanced Due Diligence (EDD): For high-risk customers, including PEPs.

5. Enhanced Due Diligence (EDD)

For high-risk customers, institutions perform a deeper investigation to mitigate potential threats. EDD involves:

• Collecting additional verification documents, such as financial statements or tax records.
• Verifying the ultimate beneficial owner’s source of wealth.
• Assessing adverse media coverage for potential red flags.
• Implementing a monitoring plan to track the customer’s activities continuously.

6. Documentation and Reporting

Compliance officers document every step of the screening process, creating an audit trail for internal reviews and regulatory reporting. This includes recording decisions, risk assessments, and supporting evidence to ensure transparency and accountability.

7. Ongoing Monitoring

The screening process doesn’t end after onboarding. Financial institutions must conduct ongoing monitoring to identify changes in a customer’s risk profile. This includes:

• Alerts for newly acquired PEP status.
• Updates on adverse media coverage.
• Detection of unusual financial activities.

Smile ID’s AML Check solution simplifies ongoing monitoring by providing continuous tracking of flagged customers for up to 12 months, ensuring institutions remain compliant with global standards.

Who Qualifies as a PEP (and Who Doesn’t)?

Understanding who qualifies as a Politically Exposed Person (PEP) is crucial for accurate screening and risk assessment. PEPs are individuals entrusted with prominent public functions, often exposed to higher risks of corruption or financial crimes. However, not everyone with influence or wealth meets the criteria. Let’s clarify this with examples:

Examples of Politically Exposed Persons (PEPs):

1. Mayors:
   • Reason: They wield significant administrative power over cities or towns, influencing local policies and budgets, which exposes them to risks like bribery and corruption.
2. Judges:
   • Reason: As high-ranking legal officials, judges interpret and enforce laws, making them vulnerable to financial coercion and corruption.
3. Military Generals:
   • Reason: Senior military officers hold critical decision-making roles and have access to resources, making them susceptible to financial crimes.
4. Ambassadors and Diplomats:
   • Reason: These individuals represent their countries on the global stage, holding significant influence and access to resources, which exposes them to bribery or corruption risks.

Who Does Not Typically Qualify as a PEP?

1. Celebrities:
   • Reason: Despite their wealth and social influence, most celebrities lack administrative or governmental power. They are not considered PEPs unless directly involved in politics or government activities.
2. CEOs of Private Companies:
   • Reason: CEOs are usually not classified as PEPs unless they lead state-owned enterprises or have close political ties.

Family Members and Close Associates of PEPs:

While not always classified as PEPs themselves, family members and close associates are often considered high-risk due to their potential access to the same resources and influence as the PEP.

PEP Risk Levels: Understanding the Spectrum of Risk

Not all Politically Exposed Persons (PEPs) present the same level of risk. Categorising PEPs by their risk level allows financial institutions to tailor their due diligence processes and allocate resources effectively. Below are the typical risk levels, their categories, and examples:

High-Risk PEPs (Level 1)

These individuals hold national leadership roles or wield significant power, making them highly susceptible to corruption and financial crimes. Enhanced due diligence is essential for this group.

• Examples:
  • Heads of state and government members
  • Parliamentary representatives, such as senators or members of the house
  • Army chiefs, chief justices, and other leading officials in the judiciary, law enforcement, and military
  • Prominent political party members

Medium-High Risk PEPs (Level 2)

While not at the apex of power, these individuals occupy senior positions in government, law enforcement, or state-owned entities and maintain a moderate influence.

• Examples:
  • Senior military and law enforcement officials, such as generals or directors of agencies
  • Ambassadors and diplomats
  • Senior civil servants and religious authorities
  • State commissioners

Medium-Risk PEPs (Level 3)

This category includes individuals in senior management positions within government-owned entities or board members of state agencies. Though their roles are significant, the scope of their influence is narrower.

• Examples:
  • Senior management in government-owned companies
  • Board members of state agencies

Low-Risk PEPs (Level 4)

These individuals hold less influential roles and typically present a lower risk. While still requiring screening, simplified due diligence may suffice.

• Examples:
  • District assembly members
  • Subordinate officials in international organisations
  • Lower-level government employees

Why Do PEP Risk Levels Matter?

Understanding these categories enables financial institutions to calibrate their compliance processes based on a risk-based approach. High-risk PEPs may require robust ongoing monitoring and comprehensive Enhanced Due Diligence (EDD), while low-risk PEPs can often be handled with less stringent measures.

How Organisations Can Assign Risk Levels Using Smile ID's AML Check

Smile ID’s AML Check offers a seamless way to categorise PEPs into appropriate risk levels by leveraging automated screening and risk scoring. The solution integrates robust PEP databases and advanced algorithms to match customer profiles against global watchlists, ensuring compliance with a risk-based approach.

Key features include:

• Comprehensive Screening: Detects PEPs across all risk levels using fuzzy matching to identify potential connections, even with variations in names or other parameters.
• Risk Scoring: Automatically assigns risk scores based on factors like the PEP's role, geographic location, and any adverse media hits. This risk score determines whether the individual falls into a high, medium, or low-risk category.
• Actionable Insights: Provides compliance officers with detailed reporting and recommendations, enabling them to apply the appropriate due diligence measures, from simplified processes for low-risk PEPs to Enhanced Due Diligence for high-risk profiles.

Smile ID’s AML Check simplifies and strengthens risk management, giving businesses the confidence to comply with regulations while minimising exposure to financial and reputational risks.

Changes in PEP Status

A customer's PEP status can evolve over time due to various life events, such as electoral wins, political appointments, or promotions. Similarly, individuals may lose their PEP designation after stepping down from public or governmental roles. For businesses, recognising and adapting to these changes in realtime is essential for maintaining compliance and mitigating risks.

How Organisations Detect Changes in PEP Status

To effectively monitor shifts in PEP status, businesses can implement the following strategies:

• Customer Due Diligence (CDD):
  Ongoing monitoring of customer accounts ensures that any change in a customer’s PEP status is promptly detected. Comprehensive CDD measures are crucial, allowing firms to maintain up-to-date customer profiles that reflect any new political or public roles.
• Employee Training:
  Regular training programs equip employees with the skills to identify changes in PEP status. Incorporating real-life case studies and insights from compliance experts ensures that staff are prepared to act when new risks arise.
• Adverse Media Monitoring:
  News reports and adverse media can reveal changes in PEP status before official sources confirm them. A robust media monitoring strategy that covers internet, print, and other sources adds a layer of vigilance.
• Commercial and Government Databases:
  Commercially available PEP databases and government-maintained lists provide supplementary tools for identifying PEPs. While these resources enhance the screening process, they should complement, not replace, traditional CDD measures.

Declassification of PEPs

Deciding when a customer no longer qualifies as a PEP is complex. While some institutions adopt the “once a PEP, always a PEP” approach, others follow regulatory guidance to reassess risk profiles periodically.

Factors influencing PEP declassification include:

• The seniority of the role previously held.
• The duration the individual served in that position.
• The level of corruption in the associated jurisdiction.
• Whether the person maintains any political influence or connections.

Global standards, such as those from the Financial Action Task Force (FATF) and the EU Directive, emphasise a risk-based approach. For example, the EU Directive requires organisations to monitor PEPs for at least one year after leaving their public function, ensuring that declassification only occurs when the individual no longer poses elevated risks.

PEP Red Flags

When working with Politically Exposed Persons (PEPs), organisations must remain vigilant for signs of unusual or suspicious activity that could indicate potential financial misconduct or corruption. Identifying these red flags early is crucial for mitigating risks and ensuring compliance with anti-money laundering (AML) regulations.

Key Red Flags to Watch for When Dealing with PEPs

1. Unusual Financial Transactions

• Significant and unexplained sums of money moving in and out of accounts.
• Regular transfers involving foreign accounts, particularly in high-risk jurisdictions.
• The use of multiple accounts, intermediaries, or shell companies to obscure the origin or destination of funds.

2. Inconsistent Financial Behavior

• Sudden acquisition of substantial assets or wealth inconsistent with the PEP’s known income.
• High-value purchases, such as real estate or luxury items, that do not align with declared financial profiles.

3. Connections to High-Risk Entities

• Ties to individuals or organisations with a history of financial crimes or illicit activities.
• Involvement in industries prone to corruption or financial crime, such as government contracting, mining, or real estate.

4. Lack of Transparency

• Use of complex corporate structures, trusts, or proxies to hide true ownership of assets.
• Reluctance or refusal to provide critical due diligence information, such as the source of funds or beneficial ownership details.

5. Political and Social Indicators

• Recent appointments to or removals from significant political positions, which may heighten the risk of misconduct.
• Negative media coverage, allegations of corruption, or public scandals involving the PEP.

6. Unusual Account Activity

• Dormant accounts suddenly showing significant activity.
• The PEP holding numerous accounts across different financial institutions without a legitimate reason.

7. High-Risk Geographies

• Financial activities linked to countries with high levels of corruption or weak regulatory frameworks.
• Regular travel to or from regions with political instability or known financial crime risks.

Challenges and Best Practices of PEP Screening

When it comes to PEP screening, businesses often find themselves walking a tightrope: trying to catch politically exposed persons (PEPs) without tripping over false positives or missing key red flags. It’s like looking for familiar faces in a bustling crowd—only the crowd never stops moving, and the faces keep changing

The Challenges

1. Inconsistent and Outdated Data

PEP lists vary widely across regions, sources, and jurisdictions. Some databases are incomplete, outdated, or formatted inconsistently, which can complicate screening efforts—particularly for businesses operating across multiple markets or languages.

2. False Positives

Compliance teams often struggle with false positives, where legitimate customers are flagged because their names match those of PEPs. Without the right tools, filtering through these alerts can drain resources, slow down onboarding, and frustrate customers.

3. Identifying Relatives and Associates

Screening doesn’t stop at the PEP—it extends to family members and close associates who may also pose risks. This adds another layer of complexity, especially in regions where relationships and networks are difficult to verify due to limited documentation.

4. Keeping Up with Status Changes

A customer’s PEP status isn’t static. Political appointments, promotions, or even resignations can alter a risk profile overnight. Businesses that rely on one-time checks risk missing these changes, leaving gaps in their compliance processes.

Best Practices to Stay Ahead

To overcome these challenges, businesses should focus on building a robust and efficient PEP screening process.

• Automate Screening with Real-Time Tools: Use systems that update continuously to ensure PEP data is accurate, current, and reliable.
• Leverage Global and Regional Databases: Combine comprehensive global sources with regional insights to improve coverage and address local nuances effectively.
• Calibrate for Accuracy: Implement smart matching algorithms to reduce false positives and focus resources on legitimate risks.
• Regularly Train Compliance Teams: Equip teams with the skills to interpret screening results, manage alerts, and navigate complex PEP networks effectively.
• Implement Continuous Monitoring: PEP screening isn’t a one-time task. Real-time monitoring helps businesses detect changes in customer risk profiles as they happen, ensuring long-term compliance and risk mitigation.

Regulatory Requirements for PEP Compliance

Compliance with PEP screening regulations is a non-negotiable requirement for businesses operating in financial services and other regulated industries. Globally, standards set by organisations like the Financial Action Task Force (FATF) mandate enhanced due diligence (EDD) for PEPs to mitigate corruption, bribery, and money laundering risks.

Navigating the regulatory landscape of Politically Exposed Persons (PEPs) is crucial for businesses operating in Africa. Each country enforces specific guidelines to mitigate risks associated with financial crimes.

Nigeria

In Nigeria, the Central Bank of Nigeria (CBN) has issued comprehensive guidance on managing PEP risks. Financial institutions are mandated to conduct both onboarding and ongoing screening for all customers, with an emphasis on automating the PEP screening process where feasible. This approach ensures continuous monitoring and compliance with anti-money laundering (AML) regulations.

Kenya

Kenya's AML framework requires financial institutions to implement robust customer due diligence measures, including the identification and verification of PEPs. The Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) mandates enhanced scrutiny of transactions involving PEPs to prevent corruption and money laundering activities.

South Africa

In South Africa, the Financial Intelligence Centre (FIC) oversees the identification and monitoring of PEPs, referred to locally as Politically Influential Persons (PIPs). The FIC Act obligates accountable institutions to apply enhanced due diligence when establishing business relationships with PIPs, ensuring that potential risks are adequately managed.

Non-compliance can result in severe penalties, reputational damage, and loss of trust—emphasising the need for robust screening processes.

In Conclusion

Staying ahead in the fight against financial crime can feel like navigating an endless maze—every turn presents new risks, new faces, and new challenges. But with the right tools in hand, you can turn that maze into a well-lit path toward compliance and trust.

Smile ID’s AML Check Solution helps businesses tackle PEP screening and AML compliance without breaking a sweat. By screening users against 1,100+ global and African sanctions & PEP lists and monitoring 70,000+ adverse media sources, you can identify risks quickly and accurately. In just seconds, our system provides a comprehensive risk assessment:

• PEP Checks
• Sanctions Matching
• Adverse Media Screening
• News Monitoring

And because financial crime doesn’t rest, we offer automated monitoring for 12 months—ensuring you’re always one step ahead.

Protect your business, stay compliant, and build stakeholder trust. Book a demo today to get started.