AML/CFT Policy – Who is a “PEP”?

Politically Exposed Person

The abbreviation “PEP“, commonly used in the vocabulary of AML practitioners, stands for Politically Exposed Person.

It is recognized that individuals from broadly defined political circles may use their positions for money laundering or terrorist financing. This is due, for example, to higher exposure to bribery or access to large public funds. Therefore, PEPs are considered to pose a higher level of risk.

According to the AML Act, the definition of a PEP includes persons holding significant public positions or performing high-level public functions.

We can explain the statutory definition of a PEP using the most basic examples.

Who is considered a PEP according to the AML/CFT Act?

• Politicians – heads of state, heads of government, ministers, state secretaries, members of parliament, members of the European Parliament, senators
• State Treasury Management – members of bodies of state-owned companies or those in which the State Treasury holds more than half of the shares
• Local government – voivodes, deputy voivodes, regional marshals, district governors and their deputies, mayors, commune heads, city presidents
• International organizations – persons holding managerial functions, e.g. heads, directors, and their deputies
• Judiciary – judges of supreme courts, constitutional tribunals
• Foreign policy – ambassadors
• Military and Police – senior military officers, Chief Commander of Police

Why is it important for obliged institutions (OI) to check if someone is a PEP?

Obliged institutions must apply enhanced financial security measures if a PEP or related person is positively verified – under the threat of sanctions!

Does the level of money laundering risk differ between domestic and foreign PEPs?

• A few years ago, the Financial Action Task Force (FATF) considered that a “domestic” PEP posed a lower risk of money laundering
• The current AML Act no longer makes such a distinction – a PEP is a PEP, regardless of origin, and always poses a higher risk

Persons related to a PEP

The AML Act requires obliged institutions to also verify persons related to a PEP. All the same procedures apply to these individuals as for PEPs.

There are two categories of persons related to a PEP:

• Family members of PEPs – not distant relatives, but close family members, i.e. spouses, cohabitants, children, and parents
• Close associates of PEPs – individuals cooperating with PEPs in business, including those who:
  • are joint beneficial owners of companies, trusts, or other entities with a PEP,
  • are closely connected to a PEP due to business activity,
  • are formal beneficial owners, but the actual beneficiary is the “hidden” PEP

PEP verification

The AML Act does not define a specific method for identifying PEPs. This decision is left to obliged institutions, but in practice, the following can be helpful:

• PEP declaration – clients or beneficial owners may be required to declare if they are a PEP or related to one. Such a statement should be made under the penalty of criminal liability for making a false statement.
• Ministry of Finance List – includes a closed list of national PEPs (see: Regulation of the Minister of Finance, Funds and Regional Policy of 27 July 2021 on the list of national public offices and functions considered as politically exposed positions).
• Lists from international organizations – if an international organization is based in Poland, it is required to publish a list of PEP positions/functions on its website.
• Commercial PEP databases – available as search engines, lists, or external AML software tools. They help verify the PEP status by name or position.

Positive verification of a person as a PEP does not exclude the possibility of establishing business relations.

Business relationships with PEPs require special procedures:

1. Obliged institutions must apply enhanced due diligence measures
2. approval of senior management is required to establish or continue a relationship with a PEP
3. determine the origin of the PEP’s wealth and its source
4. enhanced monitoring of the business relationship
5. additional procedures for obliged institutions being insurance companies – prior to transferring rights or paying out benefits, they must verify PEP status
   • If a higher risk of money laundering is identified – an in-depth assessment of the business relationship must be conducted and senior management must be informed before paying the benefit

How long does a PEP stay under the scrutiny of obliged institutions?

Obliged institutions must apply enhanced due diligence even when the client/beneficial owner no longer holds a politically exposed position.

This obligation is not indefinite. Institutions must continuously assess whether the former PEP still poses a high risk of money laundering or terrorist financing.

Important! Once a person ceases to be a PEP, obliged institutions must continue to apply PEP-related procedures as long as necessary – for a minimum of 12 months.

Read the FlipBook from the AML/CFT Policy series, part 4