How should PEPs be treated during onboarding?

A politically exposed person (PEP) is someone who holds, or has held, a prominent public position. Because PEPs have access to power, influence and public funds, they carry a higher inherent risk of money laundering, corruption and bribery. And so onboarding a PEP means applying some form of enhanced due diligence. 

FATF Recommendation 12 sets this out as a requirement for regulated firms internationally. The extent of this depends on the risk factors and your own AML policies, controls and procedures (PCPs). The same onboarding requirements apply to a PEP’s immediate family members and close associates.

What FATF requires

FATF defines a PEP as an individual who is or has been entrusted with a prominent public function. Examples include members of parliament, senior judges, ambassadors, military officers and executives of state-owned enterprises.

FATF Recommendation 12 sets out the core PEP requirements, which apply to both domestic and foreign politically exposed persons. When a client is identified as a PEP, or a family member or close associate of one, you’re required to:

• have risk management systems in place to determine whether a customer or beneficial owner is a PEP;
• establish source of wealth and source of funds;
• obtain senior management approval;
• conduct enhanced due diligence (EDD) as appropriate;
• conduct enhanced ongoing monitoring.

These apply whether the PEP is based domestically or overseas, with a level of scrutiny that’s proportionate to the risk. 

FATF requires some form of enhanced due diligence (EDD) for foreign PEPs as standard. For domestic PEPs and PEPs entrusted with a prominent function by an international organisation, it applies wherever the relationship or transaction carries higher risk.

How to identify a PEP

The starting point is your customer due diligence (CDD) under FATF Recommendation 10, which requires you to identify the customer, verify their identity, and determine whether they’re acting on behalf of another person.

To identify PEPs effectively:

• use reliable screening tools that access databases across global lists, such as our PEP and Sanctions Checksfeature;
• ask the right questions at onboarding, for example whether the client holds any public office, or has family links to individuals who do;
• cross-check open sources such as company registries, news reports and government websites;
• document the rationale behind your decision, whether or not a client is classified as a PEP.

Remember that PEP status can change over time. The obligation continues after the client is onboarded, through ongoing CDD and monitoring.

What enhanced due diligence should include

Enhanced due diligence means going beyond standard checks. Under FATF Recommendation 12, EDD in some form is mandatory whenever a client or beneficial owner is a PEP, or a family member or close associate of one.

During onboarding, your EDD should include:

1. Deeper verification of identity. Confirm the client’s identity using independent and reliable sources. This might include verifying official appointments and positions through public registers.
2. Understanding the relationship and purpose. Clarify why the PEP is engaging your services and assess whether it makes sense given their background and role.
3. Establishing source of wealth and source of funds. This is one of the most scrutinised areas during inspections. Document how the client acquired their wealth (for example: inheritance, salary or business income) and where the specific funds for the transaction are coming from. Supporting evidence might include asset sale contracts, payslips or bank statements.
4. Senior management approval. FATF Recommendation 12 requires a senior manager to approve the relationship before it begins. Keep a record of who approved it, when and on what basis.
5. Enhanced ongoing monitoring. Continue to monitor the relationship more closely, for example by reviewing transaction patterns, media coverage or changes in position.

Red flags to watch for

FATF’s guidance on PEPs emphasises that PEPs are a high risk for sanctions evasion and cross-border money laundering, particularly where a transaction links to a high-risk jurisdiction. 

Red flags for PEPs include:

• unexplained or inconsistent wealth compared with known income;
• complex ownership structures or use of intermediaries;
• reluctance to provide source of wealth evidence;
• connections to high-risk jurisdictions or sanctioned entities;
• large or rapid fund transfers shortly after onboarding;
• adverse media suggesting corruption, bribery or political controversy.

Record-keeping and demonstrating compliance

FATF Recommendation 11 requires you to keep all due diligence and EDD records for at least five years after the business relationship ends. This includes copies of identification documents, internal approvals, risk assessments and evidence of ongoing monitoring. 

When regulators review your AML framework, they’ll expect to see:

• documented risk assessments for each PEP;
• the reasoning behind your EDD measures;
• records of senior management approval;
• evidence that monitoring continues throughout the relationship.

Every PEP you onboard is an opportunity to show the strength of your AML framework. When your records clearly prove that enhanced due diligence was performed, approvals were obtained and risks were actively monitored, you protect your firm and the integrity of the financial system.