Politically Exposed Person (PEP)

What is a Politically Exposed Person (PEP)? 

Broadly, the concept of a PEP refers to individuals who currently hold or have held political power.

Due to the interwoven nature of politics and private capital, governments and financial institutions worldwide agree that PEPs represent an increased money-laundering risk. This is because individuals who hold political power can abuse their power to engage in money laundering and other financial crimes like corruption, bribery, embezzlement and the financing of terrorism. 

To account for this risk, national regulators ensure that PEPs are subjected to Enhanced Due Diligence (EDD) procedures designed to scrutinize the connections between a PEP’s political power and their financial transactions. 

The identification of an individual as a PEP does not make them a criminal or implicate them in any wrongdoing. Instead, the identification of an individual as a PEP ensures that the PEP is more closely analysed for suspicious behaviour – an analysis that is done through enhanced due diligence protocols. This requirement for additional due diligence is designed to make it harder for PEPs to abuse their power and engage in corruption. 

The laws and regulations regarding PEPs have serious implications for businesses, which are typically required by law to conduct due diligence on a client before any relations are formed and before any business is conducted. Failure to comply with these laws can lead to serious regulatory punishment. 

Politically Exposed Person (PEP) Definition in South Africa 

Although the general concept of a PEP is widely accepted, each country will typically have their own legal definition of what constitutes a PEP, as well as unique laws for the detection and management of PEPs. 

South Africa’s Financial Intelligence Centre (FIC) – the regulatory body responsible for applying SA’s AML/CFT legislation – uses the definition provided by the Wolfsberg Group. The Wolfsberg Group defines a PEP as any individual who is, or has in the past, been entrusted with prominent public functions in a particular country.

This definition encompasses a wide variety of actors and includes:

  • A current or former senior official in the executive, legislative, administrative, military, or judicial branch of government (elected or not).
  • A senior official of a major political party.
  • A senior executive of a government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual
  • Senior and/or influential representatives of religious organisations (if these functions are connected to political, judicial, military, or administrative responsibilities)
  • An immediate family member of such individual, meaning spouse, parents, siblings, children, and spouse's parents or siblings.
  • Closely Associated Persons, such as business colleagues and personal advisers/consultants to the PEP who obviously benefit significantly from being close to such a person, must also be classified as politically exposed.

PEP Compliance Overview – Politically Exposed Persons Checks South Africa 

What follows is an introductory overview of South Africa’s AML/CFT laws and regulations with a specific focus on PEPs, as well as how businesses, organizations and institutions can ensure regulatory compliance. 

The Impact of South Africa’s Risk-Based Approach 

PEPs fall within South Africa’s AML/CFT legislation and regulations. For such AML/CFT legislation and regulation, South Africa uses a Risk-Based Approach (RBA). 

An RBA is a system of risk management that adjusts itself depending on the risk level of a country, industry, or specific business. When applied to AML/CFT, an RBA means that obligations for regulatory compliance will vary depending on the risk of money laundering in a specific context (a small, low-risk tech startup will have fewer compliance obligations than a high-risk multinational bank). Due to this tailored approach, an RBA facilitates the creation of efficient AML/CFT programs that are tailored to a specific business or industry.  

What is an Accountable Institution – Defining Additional Responsibilities and Obligations 

Within the context of this RBA, South African law identifies certain businesses, organizations and institutions as Accountable Institutions (AIs) – examples include banks and insurance companies. AIs carry greater responsibility and are exposed to heightened levels of risk related to money laundering and other such financial crimes. 

Consequently, South African law requires AIs to comply with a wide range of regulatory requirements that span due diligence, record-keeping, reporting of information, and internal compliance governance. 

These requirements can be varied and intensive: alongside more standard customer due diligence and KYC-style checks, AIs should also be able to determine whether a customer, a potential customer or the beneficial owner is a PEP. 

It should be noted that the exact compliance requirements for an AI will vary and depend on the AI’s categorization (e.g., asset manager or FOREX). However, it is often advisable for AIs and other businesses to assess and mitigate risk above and beyond what is required by law. 

The Process of Assessing Risk and Becoming Compliant 

Because South Africa applies an RBA, there is no exact list of procedures, protocols or requirements that dictates exactly how an AI should deal with the heightened risk posed by PEPs. 

Instead, every AI needs to conduct its own risk assessment. Once completed, the AI must develop its own risk management strategy and protocols that are specific to the AI in question. 

Once an AI has conducted its own risk assessment and developed its own risk management strategy, it must submit it to the FIC for approval. When submitting these risk assessments and risk management strategies to the FIC, the Accountable Institution must detail how it plans to deal with the risk posed by PEPs – a risk that must be mitigated through the usage of PEP and sanction checks as part of a KYC and enhanced due diligence process. 

Becoming and remaining compliant with AML/CFT regulations is crucial. Failure to do so can lead to serious penalties like fines and jail time. 

As South Africa’s leading provider of identity verification and enhanced due-diligence solutions, ThisIsMe offers world-class PEP and sanction scanning solutions that enable businesses and institutions to meet regulatory requirements and secure their transactions. 

In addition to our advanced API that caters for automation and large-scale processing, ThisIsMe offers prepaid solutions that cater for smaller batch processing at a highly cost-effective rate. To find out more about how ThisIsMe can help your business conduct advanced due diligence and easily meet its PEP scanning obligations, book a demonstration by contacting our team here

Politically Exposed Persons – A Global Overview

Global issues such as money laundering necessitate the creation of multinational organizations tasked with developing internationally applicable policy guidelines to assist in the AML/CFT. One such organization is the Wolfsberg Group, which is an association of thirteen global banks that aims to develop frameworks and guidance for the management of financial crime risks. South Africa’s Financial Intelligence Centre defines PEPs in accordance with the Wolfsberg Group’s guidelines. 

Similar to the Wolfsberg Group is the Financial Action Task Force (FATF). The FATF is a leading intergovernmental organization founded to develop anti-money laundering guidelines and policy recommendations. The FATF has its own definitions of PEPs, as well as numerous guidelines and recommendations for how financial institutions are to deal with PEPs. 

The FATF defines a PEP as:

a present or past senior government official;

prominent politicians belonging to a certain party;

an executive of a governmental commercial enterprise formed for their benefit;

close family members;

a publicly known associate of a financial institution.

The FATF also draws distinctions between foreign, domestic and international PEPs.

  • Foreign PEPs: "Individuals who are or have been entrusted with prominent public functions by a foreign country, for example, Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials.”
  • Domestic PEPs: “Individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials.”
  • International organisation PEPs: “Persons who are or have been entrusted with a prominent function by an international organisation, refers to members of senior management or individuals who have been entrusted with equivalent functions, i.e. directors, deputy directors and members of the board or equivalent functions.”

The FATF also provides guidelines and recommendations regarding how Financial Institutions are detect PEPs and process them once detected. 

  • Financial Institutions must begin by identifying PEPs in their customer base. If a PEP is detected, they must be regarded as a high-risk client and, as a result, enhanced due diligence procedures must be put in place and heightened scrutiny applied. 
  • This enhanced due diligence should determine the country associated with them, establish the type of business, industry, and personal financial situation of the PEP, as well as identify the PEP's affiliations, employment, and associations. 
  • Enhanced Due Diligence (EDD) must also ensure continued monitoring of the PEP, which must search for any unusual financial activity and report any suspicious activities to the financial authorities of both the Financial Institution’s country of operation and the PEP’s home country.
  • Additionally, heightened scrutiny has to be applied whenever PEPs, families of PEPs, or closely associated persons of the PEP are the contracting parties or the beneficial owners of the assets concerned, or have power of disposal over assets by virtue of a power of attorney or signature authorisation.

Politically Exposed Person Check for South Africa

Already complex, the global portfolio of legislation related to regulatory issues such as PEPs is further complicated by the fact that every country has its own specific laws and regulations, which are all funnelled through that nation’s specific regulatory bodies. When doing business in a country and ensuring regulatory compliance, it is important to employ experts in the relevant country who are best equipped to operate within the nexus of legislation, law enforcement and economic realities while delivering high-quality and cost-effective solutions for ensuring regulatory compliance.  

As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience our full suite of advanced due diligence services, book a demonstration by contacting our team here