July 24, 2025
Politically Exposed Persons (PEPs) in financial services compliance are individuals who hold or have held prominent public positions that grant them significant power and influence. The influence and access to public funds that PEPs possess can make them targets for bribery and increase AML/KYC risk for those seeking to launder money or engage in corrupt activities.
The cost of failing to manage exposure to PEPs effectively is steep. In fact, the World Bank has estimated that over $1 trillion is paid in bribes annually, while the Stolen Asset Recovery Initiative estimates that public officials in developing countries receive $20-$40 billion of corrupt money each year.
Being classified as a PEP does not automatically indicate criminal involvement. However, an influential position comes with inherent risks and vulnerabilities that require enhanced due diligence from financial institutions to detect and prevent potential misuse of the financial system.
How do firms effectively manage risk from politically exposed persons? Effective PEP risk management requires understanding who qualifies as a politically exposed person, implementing enhanced due diligence measures, and maintaining ongoing monitoring systems that adapt to changing risk profiles.
According to the Financial Action Task Force (FATF) Guidance on Politically Exposed Persons, a PEP is defined as "an individual who is or has been entrusted with a prominent public function." These individuals represent elevated risk in financial systems not because of guaranteed criminal involvement, but rather their potential increased vulnerability to bribery, corruption and money laundering stemming from their influential positions.
Financial institutions must identify PEPs across three distinct categories, each presenting different risk profiles and compliance requirements:
Domestic PEPs hold prominent positions within their own country, including national government officials, parliamentarians and senior executives at state-owned enterprises. Domestic PEP status applies for 5 years after leaving office in many global jurisdictions.
Foreign PEPs hold similar prominent roles in different countries. These individuals often present higher risks because their influence and connections may not be readily apparent to firms operating in other jurisdictions. Foreign PEP status often remains permanently attached to the individual.
International Organization PEPs serve as senior officials in international bodies such as the United Nations or the World Trade Organization. These individuals wield significant influence across borders and manage substantial resources that span multiple jurisdictions.
Family members and close associates expand the potential for risk
The PEP designation extends beyond the individuals themselves to include their networks. Relatives and Close Associates (RCAs), sometimes called "PEPs by association," encompass:
Relatives and close associates may serve as conduits for illicit activities; however, determining these connections can be challenging, especially when compliance analysts attempt to piece together connections between PEP and associate relationship profiles manually.
Associated persons present compliance risks because they could both exploit their relationship with a PEP for financial gain or serve as proxies for the PEP's economic interests. They might also become sole beneficial owners of entities explicitly established to benefit a PEP. Effective Politically Exposed Persons screening programs must therefore capture both direct PEP relationships and those across extended networks to prevent circumvention of financial crime laws.
PEP lists quickly become outdated as political landscapes shift through elections, scandals, and appointments. Effective PEP compliance relies on using vetted and regularly updated commercial databases that maintain comprehensive and current records
When lists are not current and comprehensive, financial institutions can face overwhelming volumes of false positives, draining resources through unnecessary manual reviews.
Another fundamental challenge stems from inconsistent PEP definitions across jurisdictions. Various regions classify different levels of officials as PEPs, with some countries including local roles, such as mayors and other local leaders. In contrast, others focus exclusively on senior positions or only on contacts outside their jurisdiction.
The Financial Action Task Force (FATF) has served as the global watchdog and standard-setter for combating money laundering and terrorist financing risks, including politically exposed person (PEP) compliance, since 2003. Its recommendations form the foundation of PEP-related regulatory expectations across jurisdictions.
PEP compliance obligations vary significantly across jurisdictions, creating complexity for firms operating internationally:
Despite jurisdictional differences, PEP compliance frameworks across the globe share the same core principles:
What are the financial crimes that are commonly associated with PEPs? Financial crimes commonly associated with PEPs include bribery, embezzlement, and asset misappropriation.
PEPs may exploit their influence to facilitate money laundering or engage in corrupt practices for personal gain. Complex financial structures and proxies including shell companies can obscure the true ownership of assets and make it difficult to trace the origins of funds.
The Panama Papers involved a leak of 11.5 million confidential documents from the Panamanian law firm Mossack Fonseca, revealing how wealthy individuals—including politicians and celebrities—used offshore entities to hide assets in secret tax havens. The revelations sparked global outrage. Officials resigned, investigations were launched worldwide and the scandal catalyzed broader efforts for transparency in offshore finance.
The corruption scandal surrounding the state investment fund 1Malaysia Development Berhad (1MDB) illustrates how senior officials can use their positions to exploit financial systems. Read more about the 1MDB scandal.
Fines extend beyond monetary penalties. Research shows that “banks find it harder to retain and/or attract customer deposits after receiving a fine, while harsher financial penalties harm banks’ profitability.”
MyComplianceOffice provides firms with a comprehensive and configurable platform to identify, assess, and monitor risk from politically exposed persons:
