How KYC ties into PEP

22 November 2016

As KYC or know-your-customer becomes a commonplace business practice to monitor and cut off money laundering activities, financial institutions are starting to question how they can go about identifying which accounts need to be more closely monitored than others.

According to the European Union Directive, a politically exposed person or PEP is defined as:

  • A current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not);
  • A senior official of a major foreign political party;
  • A senior executive of a foreign government owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual;
  • An immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse's parents or siblings.

Note that this is just one definition and that definitions may differ between different countries. However, despite the slight difference in definitions, banks and governments worldwide agree that a PEP represents an increased money-laundering risk and as such, financial activities of such persons should be closely monitored.

Financial institutions can start by implementing the following steps to help reduce the potential money laundering threat:

  • Identify the PEP from the company’s customer base.
  • Identify the country associated with them.
  • Identify the type of business, industry, and personal financial situation of the PEP.
  • Identify the PEP's affiliations, employment, associations. Most financial institutions today pride themselves on being able to profile their clients’ financial behavior and this would include a profile of the PEP’s financial activity.
  • Determine if there is any unusual activity based on the PEP’s financial profile and usual financial activities.
  • Report any unusual activity to the financial authorities both in the country the institution is based in and in the country of the PEP.
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