Politically exposed persons in the context of money laundering prevention
Politically exposed persons (PEPs) – this term comes up frequently in the context of the KYC process. But what exactly does this term mean, what role do PEPs play in KYC , and to what extent must this group of people be considered by those subject to KYC requirements? Today, we would like to tell you more about politically exposed persons.
Definition of a PeP
According to Section 1 Paragraph 12 of the Money Laundering Act (GwG), politically exposed persons are persons who hold a leading, public, significant office at the national, European or international level.
As such, your office will often require you to make important decisions with economic consequences – for example, awarding lucrative contracts to companies or financing projects with public funds. Political office therefore carries an increased risk of bribery, corruption, and money laundering.
It should be clarified that the requirements regarding PEPs are purely preventive in nature and such persons should not be stigmatized as if they were inherently involved in criminal activity (see Recital 33, Directive (EU) 2015/859). Business dealings with politically exposed persons are generally permitted – however, stricter due diligence obligations must be met.
Developments in money laundering law
As early as 2003, the FATF recommended in its guidelines that enhanced due diligence should apply to foreign politically exposed persons (PEPs),¹ but initially only encouraged similarly enhanced due diligence for domestic PEPs. In 2012, the recommendations were finally expanded, and no distinction was made between domestic and foreign PEPs with regard to the due diligence requirements.²
Accordingly, the concept of a politically exposed person was first defined in the third European Money Laundering Directive (2005/60/EC), which the Member States had to comply with by 15 December 2007.
Here too, enhanced due diligence obligations were only foreseen for foreign PEPs; for domestic PEPs, at least the general due diligence obligations applied (see Recital 25, Directive 2015/849/EC). Germany also implemented this directive and the associated Implementing Directive 2006/70/EC in 2008.
The fourth Money Laundering Directive (which came into force in 2015) took into account that increased due diligence obligations should also apply to domestic PEPs in principle.
The EU-wide PeP-List
The last change concerning PEPs was introduced by the Fifth Anti-Money Laundering Directive . This requires all Member States to publish lists identifying specific functions that qualify as important public offices (see Recital 23, Directive (EU) 2018/843). International organizations headquartered in a Member State should also publish a list of their important public offices.
All lists of important public offices are to be compiled and published by the Commission in a single list, in accordance with Article 20a(3)³, to facilitate the identification of politically exposed persons (PEPs) within the Union. This is intended to make it easier for obliged entities within the European Union to identify PEPs. These entities must take into account the social, political, and economic differences between individual countries when determining PEP status (Recital 1, Directive 2006/70/EC).
Basically, only offices at the international, European, and national levels are eligible. Regional functions, on the other hand, should generally be considered non-essential public offices (see Recital 3, Directive 2006/70/EC), but may nevertheless be considered relevant under certain circumstances. Local government functions are not to be taken into account.⁴
The list has not yet been published. The last update on its progress was published on February 9, 2023, following a meeting of the European Commission's expert group on money laundering and terrorist financing⁵ . The minutes of the meeting indicate that the list has already been translated into all 24 official languages and is therefore consolidated. The Commission is currently in the process of adopting a decision regarding the list's publication. While publication was expected in Q2 2023 following the minutes, there have been no further updates since July 4, 2023, at 11:30 a.m.
Who is considered a PEP? A list
But who exactly qualifies as a politically exposed person? According to the Money Laundering Act (GwG), the following persons, among others, can be considered politically exposed persons (PEPs):
- Heads of state and heads of government: This includes presidents, prime ministers, kings or queens who hold the highest executive position in a country.
- Members of governments and comparable high-ranking political positions: This includes ministers, state secretaries, ambassadors, members of parliament or senior executive officials.
- Members of supreme courts, constitutional courts or other high judicial positions: This includes judges who serve in the highest courts of a country.
- Military leaders: This refers to high-ranking officers in the armed forces, such as generals, admirals or comparable positions.
- Senior officials of political parties: This includes chairpersons, general secretaries and other leading figures of political parties.
- Executives of state-owned enterprises: This includes board members and managing directors of companies that are majority-owned or controlled by the state.
- Close family members: Spouses, partners, children and parents of politically exposed persons may also be considered PePs, as they pose an increased risk of corruption and money laundering due to their relationships.
You can find a precise overview in Section 1 Paragraph 12 No. 1 of the Money Laundering Act (GwG).
Excursus: PePs in practice – The Panama Papers
The "Panama Papers" are one of the biggest revelations in the history of investigative journalism. In 2016, over 11,5 million documents were leaked from the database of the Panamanian law firm Mossack Fonseca.
These documents revealed a vast network of offshore companies and tax avoidance strategies involving politicians, celebrities, and other politically exposed persons (PEPs). By concealing the identity of the actual owners of offshore companies, PEPs were potentially able to easily launder illegally obtained assets.
Impact of the revelations
The publication of the Panama Papers had a significant global impact, particularly on politically exposed individuals. Some of the most prominent politicians and public figures were publicly discredited . The revelations exposed a culture of corruption and the exploitation of tax loopholes, threatening to shatter public trust in political institutions.
Fulfillment of due diligence obligations in the KYC process
Obligated entities dealing with politically exposed persons (PEPs) must, as part of their general due diligence obligations pursuant to Section 10 Paragraph 1 No. 4 of the German Money Laundering Act (GwG), first determine whether their contractual partner or the beneficial owner is a politically exposed person. Family members or persons closely associated with the politically exposed person must also be identified as such.
This investigation is usually part of the so-called KYC process. KYC stands for "Know Your Customer" . In this process, entities obligated under the Money Laundering Act check whether there is an increased risk of money laundering in their business relationship with their (potential) customers.
As part of KYC (Know Your Customer) procedures, individuals and beneficial owners are identified, and corporate affiliations are disclosed. A name screening is conducted against blacklists, watchlists, and for PEP (Persons Exposed to Persons) status. A check against sanctions lists may also be part of the process.
Ultimately, all the tests determine the level of risk for money laundering and terrorist financing and whether increased due diligence obligations apply to the customer relationship.
Determine PePs at the touch of a button with KYCnow
Due to the large number of national and international political offices, manual PEP screening is virtually impossible today. Automated PEP detection is not mandatory for entities obligated under the Money Laundering Act (GwG).
With KYCnow , we identify beneficial owners and other persons acting on behalf of the company in no time and automatically check their PEP status. You also receive relevant documents from public registers and a risk assessment directly within KYCnow. This provides you with a solid foundation for fulfilling your due diligence obligations.
We would be happy to introduce you to KYCnow in a free consultation. Book your appointment conveniently online now.
Sources
¹ https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Peps-r12-r22.html
² https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Peps-r12-r22.html ; Recommendation s 12 , 22
³ EU Directive 2018/843 of 30.05.2018, L 156/43
⁴ BaFin's Guidance Notes on the Money Laundering Act, p. 52, as of October 2021
⁵ https://ec.europa.eu/transparency/expert-groups-register/core/api/front/document/95729/download
Photo credit: Photo by Hansjörg Keller from Unsplash
Lisa Roczniewski