Navigating PEP Status: Risks and Realities of Being Politically Exposed

PEP, or Politically Exposed Person, is a term used in the financial industry to denote high-ranking officials, politicians, and individuals associated with government. These individuals are considered to be at higher risk of involvement in corruption and money laundering due to their positions. Consequently, individuals with PEP status are subject to enhanced scrutiny when opening accounts or applying for residency permits and face a greater risk of being added to sanctions lists.

However, holding a government position isn't always necessary for a bank or immigration service to decline services based on PEP status. How is this possible? To understand this, we need to examine the definition of PEP more closely and identify the specific categories of individuals classified as politically exposed persons.

There isn't a universally accepted definition of "politically exposed person" in international practice. However, most organizations adhere to the guidelines issued by the Financial Action Task Force (FATF), an international body that sets global standards for combating money laundering. According to these guidelines, the following categories are typically classified as PEPs:
V Individuals currently or formerly holding prominent public functions
V Senior management of state-owned enterprises and members of their boards of directors
V Family members of politically exposed persons
V Close business associates of politically exposed persons

As you can see, the scope of individuals potentially designated as PEPs is quite broad and open to interpretation.

PEP status triggers more stringent scrutiny of individuals and their financial transactions. The FATF considers them a high-risk group due to their connections and influence, which can be exploited for money laundering or other illicit activities.

The UK's Financial Conduct Authority (FCA) also highlights the risks associated with engaging with PEPs. Its guidelines recommend obtaining senior management approval for any dealings with PEPs, conducting thorough due diligence on the source of their funds, and implementing continuous monitoring and enhanced controls over all transactions throughout the relationship.

Failure to comply with these guidelines when dealing with a PEP can result in significant fines for banks. For example, Barclays Bank was fined a record $108 million by the FCA for inadequate verification of clients classified as PEPs. This served as a cautionary tale for other financial institutions, making them increasingly hesitant to engage with individuals holding PEP status.

Currently, PEP status poses a significant obstacle to opening accounts at foreign banks and obtaining visas or residency permits. These individuals also face a heightened risk of inclusion on sanctions lists, based on the perception that they are inherently linked to the state.

Furthermore, if a business manager holds PEP status, the company's KYC ("know your client") procedures can become considerably more complex. This can hinder or even preclude collaboration with foreign counterparties in Europe, the USA, and other countries.

These restrictions extend beyond the individual PEP, impacting their relatives and business partners as well. We've encountered cases where clients were denied residency permits in European countries solely because a sibling held PEP status.

Banks, financial institutions, and government agencies determine an individual's PEP status using international compliance systems. The most widely used platforms include Refinitiv World-Check, Nexis Diligence (LexisNexis), and Dow Jones Risk & Compliance. These systems maintain databases compiled from publicly available sources, such as open registries, company disclosures, reputable news outlets, and social media profiles, to create a comprehensive profile of the individual.

It's common for individuals to remain on PEP lists long after leaving the position that initially triggered the designation, simply because the databases lack updated information. This can lead to ongoing complications. Compliance systems also make errors, incorrectly attributing PEP status or connections to sanctioned individuals. For instance, we successfully removed a former bank board member's connection to a sanctioned entity from the World-Check database by proving that he had left his position before the state acquired the bank. Often, these systems rely on news articles, social media profiles, and Wikipedia pages containing outdated or inaccurate information. In such cases, the strategy for addressing PEP status involves correcting these online sources.

In our experience, many entrepreneurs, managers, and Russian company executives are unaware of their PEP status until they encounter related problems. Proactive management of PEP status is essential to prevent these issues and mitigate potential consequences. The risks and problems stemming from PEP status can be substantial, affecting not only the individual and their company but also their family members and business partners.

Avagard's Global team of lawyers and compliance experts can swiftly check your PEP status using international databases, assess the potential risks of rejection by banks and immigration services, and, if necessary, develop a tailored action plan to minimize these risks.

Here's a standard process for changing your status in compliance systems:

Step 1: Submit a request to the compliance system, including a detailed profile of the individual to check for PEP status.

Step 2: Analyze the profile to identify data requiring correction and assess the feasibility and timeline for making those adjustments.

Step 3: Audit open sources (media, social networks, and online platforms) for inaccurate or outdated information about the individual. This step also involves identifying any general negative or compromising content, as it can hinder interactions with compliance systems and banking/organizational compliance procedures.

Step 4: If irrelevant or negative data is found in Step 3, remove or suppress it. Avagard Global has successfully neutralized false or irrelevant information in numerous projects, both domestically and internationally, including de-indexing damaging content from search results. This step also involves crafting a target digital profile by publishing updated content that accurately reflects the individual's current activities, such as their entrepreneurial endeavors.

Step 5: Gather the necessary documentation and submit an application to the compliance systems to adjust the PEP status.

The application may aim for complete removal from the PEP list or assignment of an inactive status by correcting information regarding the duration of professional activity, current positions held, changes in corporate structure, and connections to sanctioned individuals.

While FATF guidelines suggest a "once a PEP, always a PEP" principle, implying ongoing scrutiny regardless of how long ago the individual held the relevant position, practice demonstrates that this is merely a recommendation. World-Check and other compliance databases typically apply specific timeframes after which an individual can shed PEP status, usually within 10 years, depending on the system.

Therefore, securing an "Inactive PEP" status after leaving the position that triggered the designation is crucial. This is a key prerequisite for complete removal of PEP status after the required timeframe.

Avagard's experience demonstrates that actively managing PEP status is both possible and beneficial. However, a positive outcome is more likely if you address the issue before PEP status leads to rejections from banks and other organizations or inclusion on sanctions lists. Contact us today to discuss your specific needs with an Avagard expert.