PEP (Politically Exposed Person) – What Is It?

PEP stands for Politically Exposed Person. Under the Polish AML Act, this term refers to a person holding a prominent public position or performing a prominent public function.

PEP status does not mean that a person is suspected of money laundering, corruption or any other offence. However, due to the nature of the function performed, AML regulations require obliged institutions to apply additional measures to such persons. These obligations do not apply only to the customer. As part of the KYC process, it is also necessary to determine whether the customer’s beneficial owner has PEP status, and certain rules also apply to family members and close associates of a PEP.

What is a PEP?

A PEP, or Politically Exposed Person, is a person holding a prominent political position. Under the AML Act, this includes persons holding prominent public positions or performing prominent public functions. Positions at middle and lower levels are excluded from this definition. The distinction of this group in AML regulations results primarily from the nature of the functions they perform.

Persons who have significant influence over public decisions, public funds or the activities of certain institutions may be more exposed to risks related, among other things, to corruption or abuse of influence. However, this does not mean that a PEP is automatically considered a suspicious customer. PEP status is a regulatory category that requires an obliged institution to apply certain additional measures.

Who is considered a politically exposed person?

The AML Act identifies examples of positions and functions that may result in PEP status. Politically exposed persons include, among others:

• heads of state and heads of government,
• ministers, deputy ministers and secretaries of state,
• members of parliament or similar legislative bodies,
• members of the governing bodies of political parties,
• members of supreme courts, constitutional courts and other high-level judicial bodies,
• members of courts of auditors and boards of central banks,
• ambassadors and chargés d’affaires,
• senior officers of the armed forces,
• members of certain bodies of state-owned enterprises and companies in which the State Treasury holds shares,
• directors, deputy directors and members of the bodies of international organisations,
• directors-general of certain public offices,
• other persons holding prominent public positions or performing prominent public functions in state bodies.

PEP therefore does not mean only a politician in the everyday sense of the word.

Example: an ambassador or a member of the board of a central bank may have PEP status even though they are not a member of parliament, a senator or a member of the government.

On the other hand, merely being employed in public administration does not automatically result in PEP status. The Act expressly excludes middle- and lower-ranking positions. Importantly, PEP status does not depend on a person’s citizenship or place of residence. The General Inspector of Financial Information indicates that the regulations do not divide PEPs into “domestic” and “foreign” persons – what matters is the function performed.

Does PEP status also apply to family members and close associates?

Yes. The rules concerning politically exposed persons also apply accordingly to their family members and persons known to be close associates of a PEP. The AML Act specifies who belongs to both of these groups.

Family members of a PEP include:

• a spouse or person cohabiting with the PEP,
• a child of the PEP and that child’s spouse or person cohabiting with them,
• the parents of the PEP.

The concept of a close associate of a PEP is more closely connected with business and ownership relationships. It may include, among others, a natural person who is jointly with the PEP a beneficial owner of a company, another entity or a trust, or a person maintaining other close business relationships with the PEP. This category may also include a person who is the sole beneficial owner of an entity known to have been established for the actual benefit of the PEP.

This does not mean that every friend, colleague or contractor of a PEP is automatically subject to the same rules. The nature of the specific relationship is what matters.

How to check whether a customer or beneficial owner is a PEP?

An obliged institution should have procedures in place to determine whether its customer or the customer’s beneficial owner is a politically exposed person. The Act requires these procedures to be based on a risk assessment.

1. Determine the status of the customer and beneficial owner

PEP status checks should not be limited solely to the person with whom the institution directly enters into an agreement. If the customer is a company, its beneficial owners should also be identified and checked to determine whether any of them is a PEP.

Example: the customer of an institution is a limited liability company. The company itself obviously cannot be a PEP because PEP status applies to natural persons. However, if its beneficial owner is a person serving as a minister, this information is relevant to the further KYC process.

2. Obtain information from the customer

To determine PEP status, an obliged institution may obtain a written or documentary declaration from the customer. The declaration may state whether the customer is or is not a politically exposed person. The Act provides that such a declaration is made under pain of criminal liability for making a false statement.

However, merely obtaining a declaration should not be treated as the entire process of determining PEP status. The Act requires the use of procedures based on risk assessment, so the scope of measures should be adjusted to the circumstances of the particular relationship.

3. Verify the information obtained

Information concerning PEP status may be verified using, among other things, reliable public sources, appropriate databases and information collected during the KYC process. The scope of verification should take into account the customer’s risk. In straightforward cases, determining the status may not raise any doubts. In others, it may be necessary to examine more closely the function performed by the customer, the beneficial owner or a person connected with them.

4. Monitor changes in status

PEP status is not information that should be checked only during onboarding. A customer who was not a PEP when the relationship began may acquire that status later.

Example: a customer has maintained a relationship with the institution for several years and is then appointed as a minister. This change should be taken into account in the KYC process and in the way the customer is handled going forward.

For this reason, PEP verification should form part of the ongoing update of customer information.

What obligations apply in relation to a PEP customer?

Determining that a customer or beneficial owner is a PEP does not automatically mean that the obliged institution cannot establish or continue a relationship with them. However, the AML Act imposes additional obligations in such cases.

In the case of business relationships with a PEP, the obliged institution:

• obtains approval from senior management to establish or continue the business relationship,
• applies appropriate measures to establish the source of the customer’s wealth and the source of funds at the customer’s disposal within the relationship or transaction,
• intensifies ongoing monitoring of the business relationship.

In practice, this means that handling a PEP customer should not end with simply ticking the relevant box in the KYC system.

Senior management approval

Establishing or continuing a business relationship with a PEP requires appropriate approval. The Act defines senior management as, among others, a member of the management board, a director or an employee with knowledge of the AML risk associated with the institution’s activities and who makes decisions affecting that risk. It therefore does not always have to mean the institution’s management board alone.

Establishing the source of wealth and funds

The institution should also take appropriate measures to establish the source of the customer’s wealth and the source of the funds at their disposal. These are two related but distinct issues.

Source of wealth refers more broadly to how a person accumulated their wealth.

Source of funds refers to the specific funds used within the relationship or transaction.

Example: a PEP customer has substantial wealth resulting from many years of business activity, but carries out a specific transaction using funds obtained from the sale of real estate. The source of wealth and the source of funds relate to different information in this case.

Enhanced monitoring of the relationship

A relationship with a PEP also requires more intensive ongoing monitoring. In practice, this may include, among other things, more frequent updating of information, more detailed analysis of transactions or closer attention to changes in the customer’s business profile and behaviour. The scope of the measures should be adjusted to the specific relationship and the identified risk.

Does being a PEP always mean high risk?

PEP status does not automatically mean that a person is engaged in illegal activity or that there is suspicion of money laundering. It also does not automatically prohibit establishing or continuing a relationship. However, PEP is a special category under the AML Act and entails additional obligations for the obliged institution.

The assessment of a particular relationship should therefore not be limited solely to the answer “PEP – yes” or “PEP – no”. The institution should continue to analyse other risk factors related, among other things, to the customer, their activities, ownership structure, geography, product and the manner in which transactions are conducted.

Example: two customers may both have PEP status, but their risk profiles may be completely different. One may have a simple and transparent ownership and wealth structure and carry out typical transactions consistent with their profile. The other may use multi-layered foreign structures and carry out transactions that are difficult to justify economically.

PEP status alone therefore does not replace an individual assessment of the customer’s risk.

How long do special rules apply to a former PEP?

Ceasing to perform a function does not mean that the risk associated with a person’s previous PEP status can automatically be disregarded the following day. The AML Act provides that, from the moment a person ceases to hold a prominent political position, the obliged institution applies measures that take into account the higher risk associated with that person until it determines that the risk no longer exists.

However, this period may not be shorter than 12 months.

This means that 12 months is a minimum period, not an automatic date after which all additional measures should end. If, after one year, the circumstances still indicate the existence of higher risk connected with the person’s former function, the relevant measures should continue to be applied.

PEP and KYC – where does status verification fit into the customer verification process?

PEP status verification is one element of the broader KYC process. An obliged institution should not only establish the customer’s identity, but also identify their beneficial owner, assess the risk of the relationship and verify information that affects the manner in which customer due diligence measures are applied. PEP status may be relevant both at the beginning of the relationship and later. For this reason, PEP screening should not be treated as a one-off “check” carried out during onboarding.

In practice, the process should make it possible to detect situations in which:

• the customer acquires PEP status after the relationship has already begun,
• the beneficial owner changes and the new person is a PEP,
• information appears indicating a connection between the customer and a family member or close associate of a PEP,
• a person who previously held a prominent political position continues to present elevated risk.

Proper PEP verification is therefore part of the ongoing process of understanding the customer and monitoring the relationship, rather than merely a formality performed when entering into an agreement.

More articles about AML

• AML – what is it and how does it work?
• Who is an AML Officer and what do they do?
• Beneficial owner – who is it and how to identify one?