Ed Long

Ed Long 

Posted Thursday April 3, 2014
 

Let's talk about PEPs: an Arachnys briefing note on political exposure

Let’s talk about PEPs: an Arachnys briefing note on political exposure

Banks and other financial institutions are rapidly expanding their activities around screening third parties for political exposure. In light of this, we have put together this briefing note to look at the definition of ‘Politically Exposed Person’ (PEP) and address some of the complications around building and using PEP screening lists, and how these relate to anti-money laundering (AML) and anti-bribery regulations.

Scroll down to read our convenient cheat sheet of how PEPs are defined in five prominent examples of active legislation around the world; and a look at the distribution of elected officials worldwide.

There is no canonical definition of a PEP

  • The guidelines published by the Financial Action Task Force (FATF) are a highly influential source in determining which classes of individuals require enhanced due diligence processes;
  • The set of designated individuals in enforceable AML and anti-bribery legislation varies significantly from country to country; often terms other than ‘politically exposed person’ is used in this legislation
  • The Foreign Corrupt Practices Act, a key regulation for compliance professionals worldwide, uses the term ‘foreign official’ rather than ‘politically exposed person’.


PEP screening is required by a range of anti-bribery and AML regulations

RegulationYearJurisdictionSummary of relevant section
FCPA 1977 USA The FCPA makes it unlawful to give or promise anything of value to a foreign official for the purpose of influencing any act or decision of the official in their official capacity.
US Patriot Act 2001 USA Financial institutions are required to conduct enhanced scrutiny of accounts of any senior foreign political figure, their immediate family or close associates.
EU AML Directive 2005 (version 4 in draft) EU The directive requires financial entities to implement ‘appropriate risk-based procedures’ to determine whether customers are politically exposed persons, to require senior management approval for business relationships with PEPs and to take additional measures to determine sources of funds.
UK Bribery Act (sec. 6) 2010 UK Section 6 of the act makes it an offence to make payment to a foreign public official in order to influence that official and obtain or retain a business advantage.
AMLO-FINMA 2010 Switzerland Requires financial institutions to treat businesss relationships with PEPs as ‘higher risk’, to have enhanced due diligence measures in place for such relationships and for senior executives to review such relationships on an annual basis.

Overview of designated entities under each regulation
Designated by regulation?FCPAPatriot ActEU AML directiveUK Bribery Act sec 6AMLO-FINMA
term used “foreign official” “senior foreign political figure” “politically exposed person” “foreign public official” “politically exposed person”
head of state yes yes yes yes yes
ministers, junior ministers yes yes yes yes yes
elected national representative yes maybe yes yes maybe
elected local representative yes no probably yes no
official of political party yes maybe, if senior no no maybe, if senior
political candidate yes maybe, if senior no no maybe, if senior
ordinary member of political party no no no no no
senior figure in state owned enterprise yes no yes yes yes, if enterprise of 'national importance'
middle-ranking official in state-owned enterprise yes no no yes no
ambassador yes yes yes yes yes
embassy staff yes no maybe, if senior yes no
senior member of judiciary yes maybe yes yes yes
lower member of judiciary yes no no yes no
professor in a state university probably no maybe, if senior maybe no
also includes:          
close family of above no yes yes no yes
business partners of above no any close associate yes no yes
inc 18 months after leaving office? no no yes no no

Download this table as a printable PDF cheatsheet

Designations are highly variable under different sets of legislation

  • The anti-bribery provisions in the FCPA and UK Bribery Act encompass a much larger range of officials than the enhanced due diligence provisions in the Patriot Act, EU AML Directive or AMLO-FINMA;
  • Specifically, the above two sets of legislation apply to junior and mid-rank officials in state organs and enterprises as well as senior officials; these are excluded from the EU and Swiss regulations;
  • While all legislation applies to senior politicians, the Patriot Act and AMLO-FINMA do not include national representatives unless they are sufficiently senior;
  • The FCPA is the only legislation which explicitly mentions candidates for political office;
  • Membership of a political party does not constitute being a politically exposed person under any of the main anticorruption regulations;
  • Neither the FCPA nor UK Bribery Act explicitly prohibit payments to the family or business associates of public officials, though payments through a third party may not be made in order to influence an otherwise designated individual;
  • Under the draft EU AML Directive, PEPs remain politically exposed for a minimum of 18 months after leaving office.

Numbers of PEPs worldwide

  • Worldwide there are around 46,882 elected or appointed political representatives at a national level (see map below) – together, these would be a bare minimum workable list for PEP screening;
  • We estimate that a list including all of the above categories as well as close family and business associates would require somewhere in the low tens of millions of entities.

World map showing global numbers of national-level political representatives

Tech solutions

  • There are several all-in-one database solutions for PEP screening on the market, which form a useful part of a complete PEP-screening process,
  • Discussions with our clients have reinforced to us the sense that building an accurate and comprehensive list is a challenge that is still to be convincingly met: databases frequently do not include individuals who are politically exposed and sometimes those who do not fit any of the above profiles find themselves listed;
  • Consequently, overdependence on these solutions exposes companies to risk if the list is not fully up to date, and especially if it cannot be verified against official sources;

Arachnys is currently working on a solution to leverage our open data expertise to help customers to better identify PEPs worldwide, in multiple languages. We would welcome our existing and prospective clients getting in contact with us to outline any specific needs in this area.

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