A Politically Exposed Person (PEP) is an individual who holds or has held a prominent public position, either domestically or internationally. This includes government officials, senior executives of state-owned corporations, high-ranking military officers, and influential political party members.
According to the revised KYC master direction from the Reserve Bank of India, PEPs are described as “individuals who are or have been entrusted with prominent public functions by a foreign country, including the heads of states/governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.
PEP screening is crucial for mitigating the risks associated with financial crimes, including money laundering and terrorist financing. By identifying PEPs, financial institutions and businesses can apply enhanced due diligence measures to monitor their transactions and relationships more closely. This proactive approach helps maintain the integrity of the financial system and prevents illicit activities that could jeopardise the organisation’s reputation and legal standing.
In India, the Reserve Bank of India (RBI) mandates that banks and financial institutions implement robust PEP screening procedures as part of their Know Your Customer (KYC) norms. These regulations align with global standards set by FATF and other international bodies to ensure consistency and effectiveness in combating financial crimes. Non-compliance can result in severe penalties, legal repercussions, and reputational damage.
1. Domestic PEPs
Domestic PEPs are individuals who hold or have held prominent public functions within their home country. In India, this includes high-ranking officials such as Members of Parliament, ministers, senior bureaucrats, judges, military leaders, and executives of state-owned enterprises. Given their influence and access to public funds, domestic PEPs are subject to enhanced scrutiny to prevent misuse of their position for personal gain.
2. Foreign PEPs
Foreign PEPs are individuals who hold or have held significant public roles in foreign countries. This category includes foreign heads of state, senior politicians, high-ranking military officials, and executives of international state-owned enterprises. Foreign PEPs pose a higher risk of international money laundering and cross-border corruption, necessitating rigorous due diligence processes.
2. International Organisation PEPs
International Organisation PEPs are those who hold or have held senior management positions in international organisations, such as the United Nations, International Monetary Fund, or the World Bank. Their global reach and influence require financial institutions to monitor their transactions closely to prevent potential abuse of power.
4. Family Members and Close Associates of PEPs
Family members and close associates of PEPs are often considered PEPs themselves due to their potential access to illicit gains and confidential information. This group includes spouses, children, parents, and business partners. Financial institutions must extend their screening to these individuals to mitigate risks associated with indirect misuse of power and influence.
Challenges In PEP Screening In India
- Data Availability: Limited access to comprehensive and up-to-date data can hinder the effectiveness of PEP screening.
- Technological Limitations: Smaller financial institutions may lack the resources to implement advanced PEP screening technologies.
- Regulatory Variations: Differences in regional and international regulatory standards can create inconsistencies in PEP screening practices.
- Operational Costs: Implementing and maintaining robust PEP screening processes can be financially demanding for organisations.
