What’s a PEP?

A politically exposed person (PEP) is someone who holds, or has held, a prominent public function. Because these individuals have access to power, influence and public funds, they can pose a higher inherent risk of money laundering, corruption or bribery. 

FATF’s Recommendation 12 requires countries to make regulated businesses identify PEPs, assess the risk they carry and apply enhanced due diligence.

Who is considered a PEP?

FATF defines a PEP as anyone entrusted with a prominent public function, along with their immediate family and known close associates. That covers:

• senior politicians;
• members of parliament;
• senior judges;
• ambassadors;
• senior military officials;
• executives of state-owned enterprises.

In Recommendation 12, FATF splits this into three categories, each covering someone who holds, or has held, one of these roles, along with their immediate family and known close associates:

Foreign PEP

Someone entrusted with a prominent public function by another country. Enhanced due diligence is mandatory here. It applies on top of your normal due diligence, regardless of how you’d otherwise assess the relationship.

Domestic PEP

The same kind of role as a foreign PEP but held in your own country rather than abroad. Take reasonable measures to verify that they are a PEP and apply enhanced due diligence only once you’ve identified the relationship as a higher risk.

International organisation PEP

This is specifically senior management at an international organisation, which means directors, deputy directors and board members, not junior or middle-ranking staff. The same rule as domestic PEPs applies.

These requirements extend to family members and known close associates of a PEP as well, whichever category they fall under.

Why PEPs matter for AML

Regulated businesses act as gatekeepers to the financial system. For any client with political influence, there is a greater risk that criminal funds could flow through legitimate services.

This is why PEP identification sits at the heart of your customer due diligence (CDD). It ensures you understand who the client is, how they built their wealth and whether the relationship is appropriate in the circumstances.

What due diligence is required?

Once you’ve identified a PEP, a family member or a close associate who needs enhanced due diligence, FATF’s Recommendation 12 sets out what that involves:

• establishing source of wealth and source of funds with credible supporting evidence;
• getting senior management approval before starting or continuing the relationship;
• conducting enhanced ongoing monitoring for as long as the relationship lasts;
• carrying out deeper verification and a risk-based assessment of the relationship’s purpose.

Most countries’ own laws are aligned: the obligation is to understand the client’s financial background and ensure it makes sense in context.

Identifying a PEP in practice

Good PEP identification combines technology with informed judgement. Your processes should include:

• screening clients and beneficial owners using reliable PEP and sanctions tools;
• asking direct onboarding questions about public roles or family connections;
• cross-checking open sources and news reports;
• documenting your rationale, even where you conclude a client is not a high risk.

Because PEP status changes over time, ongoing monitoring is also essential.

Common pitfalls during AML reviews

Supervisors regularly identify weaknesses in how businesses manage PEPs, including:

• relying on outdated templates instead of applying a risk-based approach;
• failing to obtain senior management approval;
• missing or superficial source of wealth evidence;
• incomplete documentation to justify decisions made.

All these issues are flagged as common findings across sectors. Your business must be able to evidence why you have taken a particular approach, not just that checks were completed.