Politically Exposed Persons (PEPs): What They Are and How to Handle Them

A Politically Exposed Person is an individual who holds or has held a prominent public function - a head of state, senior government official, judicial or military officer, senior executive of a state-owned enterprise, or important political party official. The PEP designation also extends to immediate family members and close associates of these individuals. PEPs are considered high-risk customers because their positions create opportunities for corruption, bribery, and the misuse of public funds.

The regulatory obligation for PEPs is enhanced due diligence - a more rigorous level of customer scrutiny than standard CDD. EDD for PEPs typically includes: senior management approval for establishing or continuing the relationship, identification of the source of wealth and source of funds, and enhanced ongoing monitoring of the relationship. The specific EDD measures must be documented and proportionate to the risk the individual presents.

PEP screening is the operational challenge. You cannot rely on customers to self-identify as PEPs - you must screen your customer base against PEP databases and update that screening regularly. Commercial PEP screening databases are available at various price points, and for most small businesses, a periodic manual review of high-risk customers against publicly available information is a defensible starting point. The key is that screening must be systematic and documented.

Foreign PEPs - individuals who hold or have held prominent public functions in foreign countries - are generally considered higher risk than domestic PEPs. This is particularly relevant for businesses in South Florida, where a significant portion of the customer base may have connections to Latin American governments and political systems. A business that serves a substantial international clientele and has no PEP screening program is operating with a significant compliance gap.

The practical approach for most small businesses is to incorporate PEP screening into the customer onboarding process and to conduct periodic re-screening of existing customers. When a PEP is identified, the relationship must be escalated to senior management for approval, and the enhanced monitoring must be documented in the customer file. The goal is not to refuse business with PEPs - it's to ensure that the relationship is managed with appropriate scrutiny and documentation.