Domestic PEPs and Foreign PEPs — What You Need to Know

Public officials and high-profile politicians have access to numerous resources, which makes them influential individuals. In regulated industries, these people are known as Politically Exposed Persons (PEPs). They are considered to be high-risk and particularly vulnerable to bribery, corruption, and money laundering.

As a result, screening is crucial for such individuals. By assessing risks and applying higher scrutiny to PEPs, companies can avoid getting tangled in unwanted schemes. Naturally, this also helps report and identify risks associated with new clients and ongoing business relationships.

But are all PEPs on the same level of risk? We compare domestic PEPs and foreign PEPs while digging deeper into the epicenter of “political exposure”, in particular, how to adhere to regulatory requirements and manage risks effectively.

The Definition of a Politically Exposed Person (PEP)

A Politically Exposed Person (PEP) is an individual who holds a high-profile political role or is in a prominent public position, making them more susceptible to financial crime, including bribery or corruption. As a result, PEP is often mentioned in anti-money laundering (AML) compliance guidelines, stressing the importance of stronger due diligence.

Keep in mind that different jurisdictions have different laws and regulations regarding business relationships with PEPs, including factors like identifying a PEP and how to log the former PEP, which is no longer considered a high-risk individual.

Who are Domestic PEPs?

Domestic PEPs are high-risk individuals who hold prominent public functions on a domestic level. That means they are influential people in their own countries and typically have connections with financial institutions.

Domestic PEPs are appointed or elected within their own country. For example, a domestic politically exposed person can be a local senior politician, a political party official, a senior military official, or the head of a state-owned company.

Some key facts to remember about domestic PEPs:

The place of residence is not a decisive factor in determining domestic PEPs but can influence the company’s risk assessment.
Companies are more likely to have more domestic PEPs as clients than foreign PEPs.

ACAMS pinpoints that there’s a level of complexity when dealing with domestic PEPs. For example, PEPs at the provincial or state level also require extra scrutiny. Understanding the key difference between domestic and foreign PEPs helps businesses better manage their risks when dealing with PEPs in general.

However, when a company is onboarding a new customer, it should rely on its internal risk assessment guidelines, which apply to both domestic and foreign PEPs.

Who are Foreign PEPs?

Foreign PEPs are individuals who hold or previously had strong public roles in a foreign country. This means the person operates for a different government than the financial institution. Foreign PEPs pose a higher risk profile than domestic PEPs.

Some key facts to remember about foreign PEPs:

Foreign PEPs who previously held similar positions domestically are still considered high-risk under this category.
Birthplace, current residence, or citizenship do not impact the risk assessment of foreign PEPs, unlike they might for domestic PEPs.

To manage these risks effectively, institutions must conduct more rigorous scrutiny of foreign PEPs. This means finding out why a foreign PEP wants to conduct business beyond their home jurisdiction. This can be achieved by verifying the information obtained during customer due diligence (CDD) with financial institutions in the PEP’s local area. Another important factor when assessing foreign PEPs is to check their source of funds (SOF).

Are All PEPs Equal?

Not every PEP is the same in terms of the risk they pose. That means all PEPs are vulnerable to illicit activities and money laundering, but not all are treated equally. Certain PEPs may pose a higher risk and, therefore, require additional scrutiny. For example, foreign PEPs are high-risk customers. Some domestic PEPs and PEPs from international companies are also high risk.

Critics argue that PEP positions can be complex in terms of finding the rationality behind them. This is due to several factors, which raise some interesting points, such as:

Every domestic jurisdiction is a foreign jurisdiction for another country.
Domestic PEPs are still typically considered lower risk compared to foreign PEPs, despite being located in countries with a history of political figures involved in financial crime.

Generally, conducting business with foreign PEPs is riskier compared to domestic PEPs, necessitating more thorough scrutiny. However, the distinction between domestic and foreign PEPs can complicate the application of consistent anti-money laundering (AML) compliance for companies across multinational groups. That’s because financial institutions may be less familiar with the political landscape of another country, including the potential for corruption that the PEP could exploit.

Reasons Why PEPs are Higher Risk

All PEPs are considered to be higher risk because they:

Have access to public funds. PEPs can use government resources for illegal activities, such as using the funds for personal benefits or money laundering and embezzlement.
Can conceal illicit wealth more easily. PEPs have the power to use their position to hide illicit money gained from various schemes, including corruption or money laundering, making the funds hard to trace.
Pose a reputational risk to other entities. By being linked with PEPs, financial institutions and other businesses have higher chances of getting involved in fraudulent activities, which automatically puts their reputation and the public’s trust on the line.

To manage these risks more effectively, regulatory compliance watchdogs, such as the Financial Action Task Force (FATF), stress the importance of identifying, screening and monitoring high-risk customers like PEPs. Consequently, various global regulatory frameworks require companies to follow enhanced due diligence (EDD) protocols for PEPs to manage their associated risks.

What AML Requirements are Applied to PEPs?

The FATF includes PEP guidelines in its Recommendations. As a result, international AML standards require EDD for PEP customers. This includes taking a risk-based approach to verify the PEP’s source of funds and wealth.

To stay compliant with AML requirements, companies should conduct thorough PEP due diligence based on these factors:

1. Maintain a Broad Scope

Companies must follow EDD measures for foreign PEPs and should apply the same steps when dealing with domestic PEPs if there is a higher-risk business relationship. These requirements also apply to the direct family members and close associates of PEPs.

2. Implement Monitoring Measures

Businesses should not only screen but also conduct monitoring of all PEP customers. This includes transaction monitoring of foreign PEPs to ensure that their data is up-to-date and accurate. In practice, monitoring measures often include regular risk assessments and clear procedures for reporting suspicious activities to the appropriate authorities.

On top of that, companies should integrate continuous monitoring practices to identify any potential changes in the PEP status. That’s because an onboarded PEP can change seniority levels. For example, changing from senior management to senior executive or leaving an exposed role. This is applied to both domestic and foreign clients as part of the entity’s risk management process to ensure ongoing compliance with AML rules. Regular monitoring helps protect your business from being exploited for money laundering and other crimes.

3. Conduct Internal Training

Companies should train their staff and conduct third-party audits to check if their AML program and PEP screening measures are effective. By doing so, businesses can manage risks linked to all clients, especially high-risk entities and their transactions, such as PEPs.

Typically, training includes assessing the company’s internal policies and procedures, local regulatory requirements, and changes in the regulatory landscape. Employees responsible for AML compliance procedures at financial institutions should train based on the specific criteria used by their institution to identify PEPs. By gaining new insights, staff members can better understand emerging risks and AML red flags linked to suspicious activity.

What is AML Screening for PEPs?

AML screening in the context of PEP compliance is the process of screening various lists and databases with the goal of identifying and mitigating risks linked to domestic PEPs and foreign PEPs. Financial regulators mandate that businesses take such screening measures in their AML programs.

AML screening procedures help financial institutions and regulated entities to identify and verify the identities of PEPs, assess their risk levels, and determine their PEP status. This is vital because companies should know the PEP regulations in their jurisdiction to ensure that their internal AML measures comply with money laundering laws. For example, in the US, it’s crucial to identify and report all PEPs during the customer identification program (CIP) stage for Bank Secrecy Act (BSA) compliance.

That said, AML screening involves periodically checking not only PEP databases but also sanctions lists, global watchlists, and adverse media. Such an approach enables companies to gain a thorough understanding of their clients’ and partners’ backgrounds, assess any potential links to financial crimes, and implement necessary risk management strategies.

The Key Principles for Domestic PEPs and Foreign PEPs Screening

The screening for domestic and foreign PEPs can be conducted weekly or monthly because PEP statuses are less likely to change compared to sanctions lists. Some jurisdictions allow companies to apply less intensive EDD measures to domestic PEPs compared to foreign PEPs.

However, there are key principles that make PEP screening more effective. These include:

Automation and customization. Automated AML and PEP screening tools often provide the efficiency needed for compliance officers to assess data more accurately in less time. This involves adjusting the screening settings to apply different features (such as additional checks or ongoing monitoring for high-risk clients) to customer groups based on the company’s operating industry and risk appetite.
High-quality databases. A comprehensive PEP screening process is not possible without proper, up-to-date databases that are required to establish the PEP status. The process should use live data from international, regional, local, and proprietary sources, including different PEP lists. This helps compliance officers assess the PEP’s jurisdiction and other risk factors, such as their position and influence.
Range of screening. Companies should determine the type of PEP, their status, and whether they’re a domestic or foreign PEP, as well as ensure that the whole screening process includes PEPs’ relatives and close associates. This helps screen all clients in accordance with AML requirements, as well as detect any inconsistencies.

iDenfy’s Approach to Automated PEP Screening

At iDenfy, we offer a full range of RegTech solutions, including AML screening (PEPs and sanctions screening, adverse media, watchlists screening, transaction monitoring, and other risk management tools like automated customer risk assessment for both KYC and KYB clients).

Using our AI-powered AML screening tool, you can:

Identify and screen each domestic and foreign PEP in line with AML compliance requirements.
Use up-to-date PEP information through flexible, automated screening tools that are updated daily.
Conduct continuous monitoring of the business relationship after onboarding and customizing stricter rules for certain clients using pre-made questionnaire templates and more.

Get a full hands-on experience, and we’ll answer your questions while discussing the best possible option based on your unique industry needs.