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Foreign PEP

03 July, 2024

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Political exposure is among the most widely used terms in the corporate and finance sector. The denomination primarily refers to individuals with a prominent position in the public sector and can be susceptible to financial crimes such as bribery. These persons are known as Politically Exposed Persons (PEPs) and can be domestic or foreign individuals. Read more to discover who is a Foreign PEP.

What is A Foreign PEP?

A Foreign Politically Exposed Person (PEP) includes current and former leaders of state, other high-ranking officials of foreign governing bodies, members of their immediate families, and any businesses or other organizations owned by these individuals. According to the Financial Action Task Force (FATF), a foreign PEP is someone who holds a high-ranking public office on behalf of a foreign government that is distinct from the government of the country where the bank is based. In fact, foreign PEPs include individuals like:

  • Ministerial council, chief executive officer
  • Officials serving on the cabinet
  • An experienced soldier
  • Head of the central bank division
  • Head of any corporation that is owned by the state
  • A prominent political party’s senior executives

Are Foreign PEPs High-Risk?

Even with prior experience in related positions, foreign PEPs should be categorized as high-risk because of their continued status as such. Risk assessment for Domestic PEPs is not influenced by factors such as their location of birth, residency, or citizenship. As a result, banks should be very careful when dealing with foreign PEPs since the risk is larger than with domestic PEPs. The only way for financial companies to reduce these risks is to monitor foreign PEPs closely. For this reason, it must be emphasized that PEPs from other countries pose a greater threat than PEPs that are domestic.

Foreign PEP infographic

Foreign PEP Identification under FATF Recommendations

To better understand, evaluate, and control risks related to Foreign PEPs, the FATF has suggested that financial institutions implement Enhanced Due Diligence procedures and a thorough risk management framework. As part of this framework, the institution should establish rules and processes for handling the risks connected with foreign PEPs. If a client is suspected of being a Foreign PEP, the bank should have a reliable system to detect this.

Additionally, it is advised that financial institutions diligently monitor the accounts and transactions of foreign PEPs to keep the information collected current and relevant. In addition to conducting risk assessments on a regular basis, the institution must have well-defined protocols for reporting any suspicions or concerns about the customer’s behavior to the relevant authorities.

To help their employees better understand and mitigate the risks posed by Foreign PEPs, financial institutions should provide frequent training sessions. As part of this training, employees should learn the ins and outs of the company, how to comply with local laws, and how to spot warning signs of suspicious behavior.

To further assure compliance as well as risk reduction, financial entities should make evaluating their domestic and overseas clients’ PEP status a priority as part of their overall risk management structure.

Regulatory Framework

Efforts to prevent money laundering and terrorist funding are regulated by both international and national rules, which control the identification and monitoring of Foreign PEPs. Here are a few important rules and directions:

  • FATF

When dealing with PEPs, financial institutions are required to use enhanced due diligence (EDD) steps, according to recommendations made by the Financial Action Task Force (FATF), an international body. The need for EDD on PEPs is expressly mentioned in Recommendation 12.

  • EU Directives

Anti-Money Laundering Directives 4 and 5 (AMLD4 and AMLD5) require member states to set up systems to track down and keep tabs on PEPs.

  • The US Patriot Act

Part 312 of the USA Patriot Act mandates that financial institutions identify and evaluate risks related to foreign PEPs as part of their due diligence processes.

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