A politically exposed person (PEP) is an individual who is or has been entrusted with a prominent public function, such as a head of state, senior politician, senior judge, senior military officer or executive of a state-owned enterprise. The term also covers the person's family members and known close associates. Financial institutions treat PEPs as higher risk because such positions can be abused for bribery, embezzlement and the laundering of the proceeds of corruption.
PEP status is a risk classification, not an accusation. Most PEPs are not involved in wrongdoing, and the rules do not prohibit serving them; they require firms to understand the relationship and the origin of the money involved and to apply additional controls.
Origins of the PEP concept
The concept emerged in the late 1990s and early 2000s after cases in which funds looted by political leaders were found in major banks. The Financial Action Task Force (FATF) included PEPs in its recommendations in 2003, and the current standard is FATF Recommendation 12, supplemented by guidance published in 2013. The UN Convention against Corruption also calls on states to require enhanced scrutiny of accounts held by prominent public officials.
Categories of PEP
- Foreign PEPs: individuals entrusted with prominent public functions by a foreign country. FATF standards require enhanced measures for all foreign PEPs.
- Domestic PEPs: individuals holding such functions in the institution's own country. Enhanced measures apply where the relationship is assessed as higher risk.
- International organization PEPs: senior management of bodies such as UN agencies and international financial institutions, treated like domestic PEPs.
- Family members and close associates, such as spouses, children, parents, business partners and joint owners of legal entities.
Middle-ranking and junior officials are not normally PEPs. How long a person remains a PEP after leaving office is decided on a risk basis; the EU requires measures for at least 12 months after the function ends, and FATF guidance focuses on the continuing risk rather than a fixed period.
Due diligence for politically exposed persons
When a customer or beneficial owner is identified as a higher-risk PEP, institutions apply enhanced due diligence, which typically includes:
- senior management approval to establish or continue the relationship;
- reasonable measures to establish the source of wealth and the source of funds;
- enhanced ongoing monitoring of transactions and periodic review.
Identification usually relies on screening customers at onboarding and periodically against commercial PEP databases, combined with adverse media searches. PEP screening is distinct from sanctions screening: a sanctioned person cannot be dealt with, whereas a PEP can be served subject to controls. Both feed into the institution's risk-based approach to customer due diligence.
Regulation in major jurisdictions
In the European Union, PEP requirements are set by the anti-money laundering directives and, in future, the EU AML Regulation. In the United Kingdom, the Money Laundering Regulations 2017 apply, with guidance from the Financial Conduct Authority; following the Financial Services and Markets Act 2023, the starting point for domestic PEPs is a lower level of risk than for foreign PEPs. In the United States, there is no general statutory PEP definition, but section 312 of the USA PATRIOT Act requires enhanced scrutiny of private banking accounts for senior foreign political figures, and regulators expect risk-based due diligence for such customers more broadly.
Criticism and de-risking
Critics note that broad PEP definitions can capture large numbers of low-risk people, such as local officials' relatives, and that some banks respond by refusing PEPs altogether, a form of de-risking. Supervisors have repeatedly said that PEP status alone should not lead to automatic rejection. Others argue the controls remain too weak, citing corruption cases in which PEP funds passed through regulated institutions despite enhanced checks. Robust anti-bribery and corruption programs are often run alongside PEP controls.