When you mention PEPs in legal and financial circles there can
be a range of assumptions as to what you are referring to:
percentage per equity partner, personal equity plans, or
politically exposed persons.
While it is politically exposed persons that are the focus of
enhanced anti-money laundering controls, even when the acronym is
correctly identified they seem to be considered as creatures of
myth by many in the legal sector.
Yet recent publications by the FSA
(PDF) and the
World Bank (PDF); not to mention repeated press reports on how
the assets of deposed dictators have been located in the UK, all
point to the fact that politically exposed persons are alive and
well and possibly instructing your firm.
On this basis it is important to ensure that your fee earners
are able to spot a PEP and know what they are legally required to
do, in a proportionate and effective manner.
A PEP is a natural person appointed by a foreign government or
an international organisation to a high profile position, who has
held that position within the last 12 months. It is also a family
member or a close business associate of such a person.
Under the new FATF recommendations this definition will be
extended to include such individuals whether they are your client
or a beneficial owner of your client and to such persons who are
appointed by your national government.
The specific list of the roles considered to be high profile
positions is contained in the 2007 Money Laundering Regulations
(the Regulations), but includes Government Ministers, Supreme Court
Judges and directors of state owned enterprises.
Firms are required to have in place a risk based process for
establishing whether they have a PEP as a client. Once they find
that they have a PEP they are required to:
- seek senior management approval for the business
- take adequate measures to establish source of funds and source
- conduct closer ongoing monitoring of the business
The main aim of the PEP provisions is to prevent corrupt PEPs
from hiding the proceeds of bribery and corruption or otherwise
stripping assets from their country.
But as can be seen from the examples below, not every PEP client
will pose the same level of risk of such corrupt conduct:
- a family member of political leader in a country which is
currently the subject of sanctions seeking legal assistance to
obtain asylum and purchase a property in the UK
- a politician from a country with a poor transparency perception
rating using defence force accounts to pay for shopping trips,
children's school fees and multiple property purchases in the
UK and abroad
- a housewife whose brother is a foreign government minister
purchasing a property in the UK when her only income is paid
directly from the foreign government
- an ambassador to a reputable international organisation who
wants to set up a trust to fund their child's education in
- the sister of a senior judge from a country with a good
transparency perception rating, who has lived in the UK for a
number of years and is seeking assistance in setting up a small
company to run a local business
- the family member of a director of a recently nationalised bank
who is selling their house and purchasing a new one with a mortgage
and the proceeds of the sale.
Once you establish that you have a PEP, you can look at the
basis on which they are categorised and the nature of the retainer
they are asking you to undertake to ensure that your enhanced due
diligence is proportionate and effective.
Where the transaction is effectively a normal transaction which
would be undertaken by non-PEPs on a regular basis and there is so
question of unusual funding, simply asking basic questions and
documenting the responses may constitute adequate measures to
mitigate the increased risk of money laundering.
E-verification providers and internet sources can often provide
further information about the individual, their source of wealth
outside of the political position and their remuneration for their
current role. They can also highlight whether there are any
credible allegations of or investigations into criminal activity
which you should take into account when assessing risk.
Where the jurisdiction which has appointed the PEP is higher
risk, the funding for the transaction is substantial or from an
unusual source or the type of transaction is higher risk, then
further questions will need to be asked and more documentary
evidence is likely to be required to verify the answers
Higher risk PEPs are also more likely to continue to pose some
risk after they leave office. As such firms may choose to undertake
enhanced due diligence for a longer period in relation to a former
PEP under the generic enhanced due diligence requirements in the
It is important to remember that a risk-based approach to
dealing with PEPs only relates to how many questions you ask to be
comfortable that the retainer is consistent with the legitimate
funds available to the PEP and that you do not have a suspicion of
Where you have information that gives rise to a suspicion that
the individual is not using legitimate funds, you are not able to
take a decision on the business and reputational risks of getting
caught dealing with these funds and with this person. You need to
consider whether you will be money laundering, whether you need to
make a suspicious activity report and whether you can continue
acting for the client.
As both the World Bank report and the FSA thematic review
demonstrate, those firms who choose to turn a blind eye to the
activities of corrupt PEPs and try to simply 'manage'
the relationship face a risk of serious sanction.