Why PEPs are treated differently
People who hold, or have held, prominent public positions can be in a position to influence public contracts, licences, budgets and appointments. That creates a higher risk, in general terms, that they could be targeted for bribery or could misuse public funds. International standards set by the Financial Action Task Force ask regulated firms to identify such people and apply extra care when dealing with them.
The extra care attaches to the position. Most PEPs are honest public servants, and many have entirely ordinary financial affairs. The rules exist because, across the system as a whole, the risk associated with the position is higher, and because some of the largest corruption cases have involved proceeds moved through corporate structures and international payments.
For a business account, PEP status can arise in several ways: a beneficial owner who is a PEP, a director, an authorised signatory, a settlor or beneficiary of a trust in the structure, or a family member or close associate of a PEP in any of those roles.
Foreign PEPs
A foreign PEP is someone who holds or has held a prominent public function in a country other than the one where the regulated firm is based. Typical examples include:
- Heads of state and heads of government.
- Government ministers, deputy ministers and equivalent senior officials.
- Members of national legislatures.
- Senior judges, particularly of supreme or constitutional courts.
- Ambassadors and senior diplomatic staff.
- Senior military officers.
- Heads of central banks and members of their governing bodies.
- Heads of significant state-owned enterprises.
- Senior figures in political parties.
The exact list varies between regimes. Under the Canadian rules, for example, a foreign PEP generally remains a PEP even after leaving office, which reflects the view that influence and access can last well beyond a term of office. Other regimes apply a time limit after which status is reassessed on risk. Because the regulated firm applies its own home rules, the same person can be treated differently by providers in different countries.
Domestic PEPs
A domestic PEP holds or has held a prominent public function in the same country as the regulated firm. The categories are broadly similar to foreign PEPs, though many regimes extend them to include senior figures at sub-national level, such as provincial or state premiers, mayors of larger cities, and heads of government agencies.
Domestic PEPs are often treated on a risk basis rather than automatically subject to enhanced measures. Under Canadian rules, domestic PEP status generally lasts for five years after the person leaves office. Other countries set their own periods or rely on a risk assessment at the time.
For a Canadian provider, a Canadian provincial minister would be a domestic PEP, whereas a Polish or Cypriot minister would be a foreign PEP. A Hong Kong legislator would be a foreign PEP from the Canadian perspective.
Heads of international organisations
Many regimes include a separate category for people who head, or held senior positions in, international organisations established by governments. This can include intergovernmental bodies such as United Nations agencies, international financial institutions and regional development banks. Some regimes also cover international sports organisations.
The category generally covers the head of the organisation and, under some regimes, the deputy heads and board members. It does not usually extend to middle-management staff. As with domestic PEPs, status often falls away after a period following departure, and many regimes apply enhanced measures on a risk basis rather than automatically.
Family members and close associates
PEP rules extend beyond the office holder. The logic is that a PEP who wanted to move illicit funds would often do so through people close to them. The usual categories are:
- Family members: typically spouses and common-law partners, children and their spouses or partners, parents, and in some regimes siblings and other relatives. The precise list depends on the regime.
- Close associates: people known to have a close business relationship with the PEP, such as joint ownership of a company or legal arrangement, or a person who is the beneficial owner of an entity known to have been set up for the PEP's benefit. Some regimes also include close personal relationships.
Close associates are harder to identify than family members because the relationship is not always public. That is why providers ask direct questions on application forms. If a beneficial owner co-owns a business with a serving minister, the provider needs to know, even if the business is entirely legitimate.
What the extra checks involve
Where a provider identifies a PEP, or a family member or close associate, it typically applies some or all of these measures:
- Senior management approval to establish or continue the relationship. Someone senior has to review the file and sign off.
- Source of wealth established to a higher standard, with documentary evidence for the main wealth-generating events. Our guide to source of wealth evidence explains what that typically involves.
- Source of funds for the expected activity, with more detailed evidence for the first and largest transactions. See source of funds evidence.
- Enhanced ongoing monitoring, meaning transactions are reviewed more closely and the file is reviewed more often.
- Adverse media screening in more depth, sometimes across several languages.
The provider will also look at the connection between the PEP's public role and the business. A former transport minister who now owns a logistics company that bids for public contracts will attract more questions than the same person owning a vineyard. The difference reflects the risk that public influence and private interest could overlap.
How to disclose PEP status
The single most helpful thing an applicant can do is disclose PEP connections early and clearly. Most providers screen applicants against commercial PEP databases, so a connection is likely to surface anyway. A disclosed connection is a routine matter. An undisclosed one that the provider finds itself raises questions about candour and can lead to a decline.
A good disclosure includes:
- Who the PEP is and their relationship to the structure.
- The public role, the country, and the dates it was held.
- For family members and associates, the nature of the relationship.
- Whether the PEP has any involvement in the business, financial interest in it, or influence over its contracts.
- A short explanation of how the relevant person's wealth was built, with evidence.
Example: a Cyprus holding company is owned by a businessman whose brother was a deputy minister in another country until several years ago. A short signed note setting out the relationship, confirming the brother has no interest in or role with the company, and explaining that the businessman's wealth comes from a construction business founded before the brother entered government, deals with the issue at the start.
How PEP screening works in practice
Providers run the names of beneficial owners, directors and signatories through commercial screening databases that compile lists of PEPs, their relatives and associates from public sources. The results are rarely clean. Common names produce many potential matches, and an analyst has to work through them using date of birth, nationality, place of residence and photographs to decide which, if any, relate to the applicant.
This is why providers sometimes ask for information that seems unrelated to the business, such as a middle name or a previous country of residence. They are usually trying to rule out a false match. Answering promptly clears these quickly.
Screening also continues after onboarding. If a director is appointed to public office during the relationship, or a beneficial owner's spouse becomes a minister, the provider's ongoing screening is likely to pick it up. Most account terms require clients to notify such changes themselves, and doing so avoids an awkward conversation when the alert appears. A change in PEP status will usually trigger a review of the file, covered in our guide to periodic reviews.
Where a person has left office, the provider will look at how long ago, how senior the role was, and whether they retain influence, for example through a party role or through family members still in office. Evidence of the date of departure, such as an official announcement, can help.
Common misunderstandings
- "PEPs cannot open accounts." Incorrect. Providers can and do onboard PEPs. They must apply additional measures, and some providers have a lower appetite than others.
- "I left office years ago, so it no longer applies." It depends on the regime and the category. Foreign PEP status in particular can be indefinite under some rules.
- "My relative is the PEP, not me." Family members are covered by the rules in most regimes and must still be disclosed.
- "Local officials do not count." Many regimes include senior sub-national figures. A mayor of a large city may count; a junior municipal employee usually would not.
- "Disclosure will lead to rejection." In practice, non-disclosure is the greater risk. Our guide to why applications are declined explains how inconsistent information is treated.
Before you act
This article describes PEP categories in general terms and is not legal advice. Definitions differ between countries and are updated from time to time, so the precise treatment of a particular person will depend on the regime the provider operates under and its own policies.
If you are unsure whether someone in your structure should be disclosed, raise it early through the contact page. Our compliance approach page gives further background.
