In the intricate labyrinth of the global financial system, control and prevention measures have become essential tools to ensure transparency, security, and trust. 

In this context, it is essential to ask who Politically Exposed Persons (PEPs) are and about sanction detection. These two pillars play a fundamental role in combating money laundering and other financial crimes.

In this article, we will ask who is actually classified as a PEP, how sanction detection systems work, and, more importantly, why they are so crucial in today’s financial landscape.

Who is a Politically Exposed Person (PEP)?

A Politically Exposed Person (PEP) refers to individuals who hold or have held significant public office, either nationally or internationally. This term encompasses everyone from heads of state and government officials to directors of state-owned enterprises and judges of supreme courts.

By definition, PEPs are individuals who, due to their position and influence, have a higher risk of being involved in practices such as corruption, bribery, money laundering, and other financial crimes. This is because they may have access to public funds and may be susceptible to accepting bribes or favors in exchange for influencing important political or business decisions.

Note: the definition of PEP also extends to close family members and business associates of politically exposed individuals, as they, too, may be susceptible to financial or power abuses.

And why are these individuals relevant to companies like Silt? Many financial companies use our solution, so they need (and therefore, we need) to be aware of who PEPs are to carry out more rigorous due diligence checks and ensure that their platforms are not used to facilitate illegal activities.

What is sanction detection, and how does it work?

Sanction detection is a critical process used by financial institutions and other businesses to identify individuals or entities that have been sanctioned by international, governmental, or regulatory bodies. This practice is an integral part of compliance programs and risk management strategies.

Sanctions were first implemented by the United Nations Security Council (UNSC) in 1966.

Since then, a sanction, in this context, is a restrictive measure imposed on individuals, entities, or countries due to various reasons, such as involvement in illicit activities (e.g., terrorism, drug trafficking, corruption, money laundering) or violations of human rights.

But how does it work? In simple terms, sanction detection works by comparing the names and data of the individuals or entities being screened against the names and data on sanctions lists. If a match is found, further review is conducted to confirm whether the individual or entity being screened is indeed the same as the one on the sanctions list.

The role of PEPs in this process is crucial because, due to their position of power and influence, they may represent a greater risk to institutions. This makes them key targets for sanction detection checks.

Who decides who is a Politically Exposed Person?

Determining who is considered a Politically Exposed Person (PEP) is not the result of whim or arbitrary choice. Some criteria mainly come from international organizations tasked with setting standards in the fight against money laundering and terrorism financing.

The Financial Action Task Force (FATF), an intergovernmental entity, is one of the main sources of definitions and guidelines on PEPs. FATF has established procedures to assist countries and financial institutions in identifying PEPs and, consequently, applying enhanced due diligence measures.

Other bodies are also responsible for this, such as the United States Department of the Treasury (which has its own CAPTA sanctions list), the European Union, and the Organization for Economic Co-operation and Development (OECD).

Why are PEPs and sanction detection necessary?

The importance of PEPs and sanction detection lies in the protection and strength of the global financial system. But why?

  • Prevention of Misuse of the Financial System: PEPs, given their influence and access to resources, may be seen as targets for money laundering, terrorism financing, or corruption. By identifying and monitoring these individuals, the likelihood of the financial system being exploited for malicious purposes is reduced.
  • Enhancement of Public Trust: By implementing rigorous measures to identify PEPs and detect sanctions, financial institutions demonstrate their commitment to transparency and integrity. This helps strengthen public trust in these entities and the financial system as a whole.
  • Compliance: Globally, there are a series of laws and regulations that require financial entities to perform strict checks. Failure to identify PEPs or detect sanctions can result in substantial fines and reputational damage.
  • Financial Risk Reduction: Dealing with sanctioned individuals or entities can result in financial losses for an institution. Additionally, business relationships with high-risk individuals or entities may result in asset freezes or transaction disruptions.
  • Promotion of Global Ethical Standards: By adhering to protocols for identifying PEPs and detecting sanctions, entities support international efforts to promote a clean and ethical financial environment. These practices help create a landscape where corruption and abuse of power are hindered.

How many types of PEP lists are there?

Politically Exposed Persons (PEPs) are classified in different ways based on their degree of visibility and their role in political or administrative decision-making. Below are the three main categories of PEPs:

  1. High-level PEP: encompasses individuals who hold or have held politically or administratively significant positions, such as presidents, ministers, governors, mayors, and similar roles.
  1. Intermediate-level PEP: includes those who hold or have held politically or administratively intermediate-ranking roles, such as legislators, senate members, municipal councilors, managers of public entities, among others.
  1. Low-level PEP: refers to individuals who hold or have held politically or administratively lower-ranking roles, such as consultants, department heads, assistants, and others.

It is essential to note that the concept of PEP may differ from one nation to another.

Additionally, as mentioned earlier, certain financial institutions and regulatory bodies may include close family members or collaborators of PEPs in their monitoring lists. Also, different jurisdictions may have specific definitions of PEPs for specific sectors, such as banking or real estate.
If you want to find more info about PEPs, we recommend “Politically Exposed Persons – Preventive Measures for the Banking Sector”, a book written by Theodore S. Greenberg and Larissa Gray (among others) that can explain all the secrets of Public Exposed Persons.