This article appears as the "Discussion of the month" topic in AML News and Updates Newsletter - January 2023 edition which can be found here.
A Politically Exposed Person (PEP) is an individual who is or has been entrusted with a prominent public function, his/her close family members, and close associates. The exact definition of PEPs is specified in each country’s national law.
Politically Exposed Persons (PEPs) looking for financial services may expose regulated entities to significant money laundering and terrorist financing (ML/TF) risks.
PEPs often have significant positions and can influence governmental decisions. Often, they are tempted to influence a government's decisions for their benefit instead for the public’s benefit.
For example, Eva Kaili, a vice president in the European Parliament, at the time of writing this article, was accused of corruption and money laundering.
Investigators have seized nearly €1.5 million in cash from various Brussels properties, including €150,000 from her apartment. It is believed that the confiscated cash is related to an "influence scandal implicating Qatar." (source: The Guardian)
Although the above individual is not convicted yet, the case indicates that it is very easy for a PEP to do something wrong, i.e., be involved in corruption and bribery for his/her personal interests.
Should regulated entities use the “once a PEP, always a PEP” approach?
PEPs are considered by regulated entities as high risk. However, should entities treat a PEP as high risk for the rest of his/her life when he/she ceases to be a PEP?
Whether “once a PEP always a PEP” is a controversial question...
And there is no correct answer!
Whether you will always treat a PEP as PEP again depends on the national law.
In many countries, by law, once a customer is a PEP, the regulated entity must treat that individual as PEP for the rest of his/her life.
In some other countries, after some time a PEP ceases to be a PEP, the obliged entity is allowed to conduct a risk assessment that considers the following:
💡 What type of position did the PEP have?
💡 Does the customer still have influence and power due to the PEP position he held in the past?
💡 Are any risks associated with the PEP position held in the past?
Suppose the obliged entity considers that the ex-PEP has low corruption and money laundering risk sometime after a PEP ceases to be a PEP. In that case, some national regulations allow the entity to re-assess the PEP and decide whether or not it will continue to treat the PEP as high risk.
On the other hand, some regulated entities, due to their risk appetite, may decide to treat a PEP as such for ever.
Whatever decision the obliged entity takes, it must be able to justify that decision to the regulator if requested.
What other AML professionals have to say
In a recent post on the above subject, I had several interesting comments from professionals in the AML industry.
You can read some of the comments below and get an idea of how other AML professionals treat PEPs and their opinion on “once a PEP, always a PEP.”
Please note that the comments below constitute the opinions of various professionals, are provided for informational purposes only, and should not be considered legal advice.
William Callahan: “This is a good question and while a PEP may not always be a PEP, an institution may want to practice EDD on the customer.”
Mariana Riera Mialdea: “In Spain after the two-year period after the PEP ceases to hold office, the obliged entities must apply due diligence measures that are commensurate with the risk that the customer may continue to present until such time as, in the opinion of the obliged entity, the customer no longer represents a specific risk arising from its status as a PEP.”
Abiola Ajila: “According to Wolfberg 2017 Guidance on PEPs, the risk associated with a PEP is closely related to their country's political situation and the inherent corruption risk, the office or function they held, and the influence associated with that post. Although that influence may reduce significantly once they leave office, a PEP may have been able to acquire his or her wealth illegally, so a high level of scrutiny with regard to such individuals may be warranted even after they leave office.”
Ronald Daliya: “In Australia the guidance is whether the PEP is still in a position of influence and therefore exposed to similar or a different level of ML/ TF risk… the question of whether the influence remains or not is still something that is difficult to quantify. Many take the conservative view of leaving these people on the PEP register because it's a lower risk position for their organisation. However, the guidance does not believe that the "once a PEP, always a PEP" approach to managing financial crime risk is consistent with a risk-based approach.”
Luke Raven: “Clue is in the name - they should be treated as PEPs for as long as they’re “exposed.””
Lorena E. Cabrera: “Not only does the decision depend on the national law but also on the Compliance Officer’s judgment according to the risk assessment performed and the level of risk tolerance of the reporting entity.”
Solehah Zainodin: “Depends on company’s policy and risk exposure...”
Natalie C: “Per my previous experience working under Hong Kong (HKMA) and Singaporean (MAS)’s AML regimes, a PEP will always be a PEP. There are certain rare conditions that may allow to dismiss a PEP’ status, for instance, the PEP is no longer exerting any political influence, however, the individual will be placed under annual review as control measure. For high-level political exposure individuals, they will always be treated as PEPs in case of reputational risk mishap from FI’s POV. Any robust AML programs should have kept this in their guidelines.”
Nick van Benschoten: “National law and international fragmentation may complicate a risk-based approach, but the aim should be to target exposure to heightened risk of corruption (opportunity, opacity, impunity, etc). PEP status is one case study for this risk, but there are others.”
Omar Modad: Some will be considered a lifetime PEPs while others are treated on case by case basis.
Robin Lycka: “The most common practise in Scandinavia is that you may de-risk 18 months after the pep has left their political position, in Sweden it is also by law 18 months."
Iyore Usuanlele: "I will definitely treat a PEP always a PEP when there's no mismatch being a PEP only means there are precautions needed to be taken such seen as high risk special selection category of clients although a current PEP still in office well known will trigger more attention to me and institution."
There are various factors that need to be considered before deciding whether a PEP should be treated as such after he/she ceases to be a PEP.
✔ The first one is the national AML Law.
✔ The second one is the regulated entity's risk appetite and risk-based approach implementation.
✔ The third one is the professional judgement of the Senior Management and Compliance Officer.