Politically exposed person (PEP) screening is an important part of customer due diligence (CDD) under Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) framework. For conveyancers and property lawyers, it means having a clear process to identify whether a customer or other relevant person is a politically exposed person and understanding what that may mean for their money laundering and terrorism financing (ML/TF) risk.
PEP screening is the process of checking whether a customer, a beneficial owner, or another person connected to a transaction holds a prominent public position that raises their ML/TF risk.
This article explains what a PEP is, the different types of PEPs, how firms can establish PEP status, how to assess possible matches and what to consider when dealing with former PEPs. It follows AUSTRAC’s guidance on politically exposed persons and the customer due diligence obligations set out in the AML/CTF Act.
What is a politically exposed person (PEP)?
A politically exposed person (PEP) is someone who holds a prominent public position or function that gives them significant responsibility, power or influence.
For example, this can include people who have influence over government spending, procurement, development approvals or grants. Because of their position, they may be more exposed to risks such as bribery or corruption.
PEP status is not limited to the person holding the position. An immediate family member or a close associate of a PEP is also treated as a PEP, so your screening needs to cover those people as well.
Being a PEP does not mean someone has done anything wrong. PEP status is a risk factor. Before providing a designated service, firms must establish on reasonable grounds whether the customer, a person acting on their behalf, a beneficial owner, or a person on whose behalf the service is being received is a PEP.
What are the three types of PEPs?
Under the AML/CTF framework, there are three main types of PEP:
- Foreign PEPs: people who hold prominent public positions overseas, such as heads of state, government ministers, senior judges, ambassadors, high-ranking military officers and senior figures in state-owned organisations.
- Domestic PEPs: people who hold certain prominent positions in Australia, including members of parliament, senior judges, heads of government departments, senior defence officials and some senior leaders of government-owned organisations.
- International organisation PEPs: people who hold prominent positions in public international organisations, such as the head, deputy head or board member of a United Nations body.
The distinction matters for what you have to do next. Enhanced customer due diligence is mandatory for a foreign PEP, whether that is the customer, a beneficial owner, a person acting on their behalf or a person on whose behalf the service is received. It applies regardless of the risk rating you give them. For domestic and international organisation PEPs, enhanced measures apply where you assess the ML/TF risk as high.
How to establish if an individual is a PEP
Your AML/CTF policies must outline how you’ll establish if a person is a PEP. The approach your firm takes to identifying PEPs will depend on the size, nature and complexity of your business.
There are several ways to identify a PEP, including:
- asking during onboarding, and throughout the customer relationship, whether the person, a family member or close associate is a PEP
- reviewing publicly available information, including government and sanctions lists, internet searches and social media
- using specialist databases or reports from third-party providers that assess PEP and corruption risks
For domestic PEPs, useful sources may include the Australian Government Directory and the Department of Foreign Affairs and Trade’s list of senior Australian diplomatic appointments.
If you use a third-party provider, check that its screening covers the positions and offices included in the PEP definitions under the AML/CTF Act. You may also need to consider alternative spellings, aliases and other names a person may be known by.
How do you deal with multiple possible matches or false positives?
PEP screening tools compare client information against databases of people who hold, or have held, prominent public positions. Multiple matches can occur because:
- two people have the same or similar name
- names are spelt differently across records
- only limited information is available
- an old or former public role appears in the results
- the database includes people from different countries with similar details.
A potential match does not necessarily mean your customer is a PEP, so each result should be reviewed before confirming or ruling out the match.
Start by comparing the match against your customer’s details, such as their name, date of birth, nationality, location, public position and any alternative names. If the details clearly relate to another person, you may be able to rule out the match. If the match is still unclear, complete further checks using additional information or reliable independent sources.
Can a former PEP still present a high ML/TF risk?
When a person leaves a prominent position, they are no longer considered a PEP. However, the risks connected to their former role may continue, particularly if they retain political influence, important connections or influence over public policy or expenditure.
If a former PEP customer is assessed as high ML/TF risk, enhanced CDD measures must be applied. Your AML/CTF policies must also require senior manager approval before providing a designated service or continuing a business relationship where the customer, a beneficial owner, or a person on whose behalf the customer receives the service was previously a PEP.
When assessing the risk, consider how long it has been since the person held the position, whether they remain prominent or politically connected, whether they still have influence over public policy or expenditure, and any other factors that may indicate a higher ML/TF risk.
Key takeaway
PEP screening is not about treating politically exposed people as suspicious by default. It is about identifying where greater ML/TF risk may exist and applying the appropriate level of due diligence.
Firms should make sure their AML/CTF policies set out how PEPs are identified, how potential matches are reviewed and how higher-risk customers are managed. You must also keep records showing how you established whether a person is a PEP. Clear records of the information considered and the decisions made are how your firm demonstrates it has applied its AML/CTF obligations in practice.
triSearch provides software solutions for conveyancing processes. Users remain responsible for compliance with applicable laws and regulations.
Learn how triSearch can help your firm manage customer due diligence and ML/TF risk here.
