Politically Exposed Person (PEP) – Definition and Relevance
Politically Exposed Persons (PEPs) pose a potential risk for money laundering and corruption due to their position and influence. These risks can lead to serious legal, regulatory, and reputational consequences for organizations. Therefore, proper identification, risk assessment, and monitoring of PEPs are essential for compliance with regulatory requirements and maintaining the integrity of business relationships.
Definition: What are Politically Exposed Persons (PEPs)?
Politically Exposed Persons (PEPs) are individuals who hold or have held significant public offices. In addition to ministers and parliamentarians, this category includes individuals closely associated with them, such as state secretaries, directors, and other officials. It also encompasses individuals who were part of these groups until recently. In the context of money laundering, these individuals are subject to particularly stringent requirements. In both national and international contexts, PEPs mainly include the following groups of individuals:
- Senior officials of central banks and audit institutions
- Members of leadership bodies of political parties
- Members of certain courts
- Members of the European Commission
- Members of supervisory, managerial, and administrative bodies of state-owned enterprises
- Individuals holding leadership positions in European, international, or intergovernmental organizations
- Heads of state or government
- State secretaries and members of parliament
It is generally assumed that close relatives of individuals with PEP status belong to the group at higher risk for money laundering and corruption. This is because politically exposed persons often have business relationships with their close relatives. For this reason, these individuals can also be classified as PEP cases and subject to scrutiny in accordance with the guidelines.
Why is this topic so important for Switzerland?
Switzerland is a significant international financial hub, making its positive reputation essential. Instances of money laundering and corruption, which have seen a notable increase in recent years, can tarnish its good standing. As a result, Switzerland has long been engaged at a multilateral level in the fight against money laundering and corruption. The primary focus is on identifying politically exposed persons and uncovering money laundering cases associated with these individuals.
History has shown that politically exposed persons (PEPs) are more susceptible to money laundering and corruption than other individuals. Due to the heightened risk, it is crucial for financial institutions, such as banks, to identify PEP cases as early as possible, ideally at the onset of a new business relationship. In order to ensure the comprehensive implementation of anti-money laundering and anti-corruption measures, Switzerland has developed a versatile legal framework with numerous instruments. For instance, “Asset Recovery” aims to repatriate illegally acquired assets deposited in Swiss accounts by foreign PEPs back into the legitimate economic cycle.
The legal basis for all government measures against money laundering is the Anti-Money Laundering Act. Prevention and containment of money laundering involve, among other things, engagement on a transnational level to safeguard the integrity of financial centers, as well as the establishment of a national money laundering reporting office.
What specific measures are undertaken?
As part of general due diligence, the examination of whether individuals from an affiliated company have politically exposed person (PEP) attributes is included. In this regard, the affiliated company can contribute through self-disclosure. Additionally, customer or partner data is systematically compared with PEP lists. Such lists are provided by various reference data providers. Once an individual is categorized as a PEP, enhanced due diligence measures come into play. As part of this heightened scrutiny, an assessment is conducted to determine if a money laundering case is evident. The scrutinizing entity must clarify the source of the customer’s or partner’s assets. This pertains to the assets used in the business relationship. Both procedures involve significant bureaucracy and are therefore time-consuming.
How can the PEP verification be simplified?
The time-consuming manual PEP verification can be replaced by using software solutions for automated risk assessment in business relationships, thereby significantly simplifying the process. For instance, integrating PEP verification into KYC checks, where an automatic alert is triggered upon identifying a new PEP case. This allows the KYC compliance team to save time and focus more on case management. For example, Pythagoras Solutions offers a powerful compliance tool called Partner Screening, which can be flexibly customized to meet customer needs. Screening rules are configured by linking data filters with PEP lists. With automatic comparison to up-to-date PEP lists, the solution is suitable for both new case examinations and ongoing monitoring of existing business relationships.