Short overview: What is a Politically Exposed Person (PEP)?
Strict conditions apply to business relationships and financial transactions involving politically exposed persons (PEPs). The reason: PEPs are a group of people with an increased risk of terrorist financing, money laundering and corruption. According to the definition
a) PEPs currently hold or have held influential positions (e.g. important public offices with high social responsibility) within the past twelve months
b) or are close to persons from group a) for family or other reasons.
Companies and financial institutions must therefore carefully check (potential) business relationships for their PEP status and comply with documentation and reporting obligations in order to ensure their legal compliance.
Definition: Who is classified as a Politically Exposed Person (PEP)
PEP status is automatically assigned on the basis of a risk-based approach. This is because people who hold influential political positions have a particularly high risk of becoming involved in money laundering. However, this does not mean that a PEP necessarily engages in illegal activities. Rather, classification as a PEP is a preventative precautionary measure.
So who is considered a politically exposed person? Section 1 (12) of the Money Laundering Act (GwG) states:
“Politically exposed person within the meaning of this Act is any person who holds or has held high-ranking important public office at international, European or national level or who holds or has held public office below national level of comparable political importance.”
But beware: For the compliance guarantee, not only PEPs themselves, but also persons in their immediate environment must be taken into account. Three groups of people are therefore important in the risk assessment:
1. Main group: People with influential positions
a) “Persons are politically exposed (i.e. exposed to potential risks) in particular if they hold or have held one of the following offices within the last twelve months in accordance with Section 1 (12) of the Money Laundering Act (GwG):
b) Heads of state, heads of government, ministers, members of the European Commission, deputy ministers and state secretaries,
c) members of parliament and members of comparable legislative bodies,
d) members of the governing bodies of political parties,
e) members of supreme courts, constitutional courts or other high courts against whose decisions there is normally no longer any right of appeal,
f) members of the governing bodies of courts of audit,
g) members of the governing bodies of central banks,
h) ambassadors, chargés d’affaires and defence attachés,
i) members of the administrative, management and supervisory bodies of state-owned companies,
j) directors, deputy directors, members of the governing body or other heads with a comparable function in an intergovernmental international or European organization”
These persons are also included on certain PEP lists.
2. Extended group of persons A: Family members
Extended group of persons A: Family membersEven if close family relationships exist with a person named in the main group, increased due diligence obligations apply to business relationships with this person. Section 1 (13) of the Money Laundering Act (GwG) lists in detail:
a) “the spouse or registered partner,
b) a child and its spouse or registered partner and
c) each parent.”
3. Extended group of persons B: related parties
Also important for due diligence audits are persons who are not related to a PEP, but who nevertheless have – publicly known – significant relationships with them. Section 1 (14) of the Anti-Money Laundering Act (AMLA) refers to such persons as “known related parties” and defines them as follows:
” […] a natural person in respect of whom the obliged person must have reason to believe that this person
- together with a politically exposed person
a) is the beneficial owner of an association pursuant to Section 20(1) or
b) is the beneficial owner of a legal arrangement pursuant to Section 21, - maintains other close business relationships with a politically exposed person or
- is the sole beneficial owner
a) of an association pursuant to Section 20 (1) or
b) of a legal arrangement pursuant to Section 21,
where the obligated party must have reason to believe that the establishment was de facto for the benefit of a politically exposed person.”
Attention: Observe country information
Caution should also be exercised with regard to possible links to countries in which inadequate measures are taken to combat money laundering. The Financial Action Task Force lists, for example, provide information on such countries.
Due diligence: What do companies or financial institutions need to consider when dealing with PEP?
Special restrictions for PEP
The purpose of classifying individuals as politically exposed is to make it easier for companies and financial institutions to assess the risks of potential business relationships and thus prevent money laundering and corruption. Conversely, this means that PEP checks must be carried out in the same way as sanctions list checks in order to prevent or uncover problematic business and transactions. Otherwise, companies and financial institutions could face legal consequences and high fines.
Background: the Money Laundering Act (GwG)
The central national legal basis for the topic of politically exposed persons in Germany is the Money Laundering Act (GwG). It regulates how financial flows are controlled and whether these are to be assessed as criminal acts and must be punished by the authorities. Money laundering itself is a means of bringing money from illegal transactions into the legal money cycle and is punishable under Section 1 (1) GwG in conjunction with Section 261 StGB.
The PEP inspection obligation applies in these cases
The following must check business relationships and financial transactions for contacts with politically exposed persons:
- Credit institutions such as banks and savings banks
- Financial service providers including crypto value service providers
- Asset managers, investment advisors, fee-based advisors
- Tax advisors and auditors
- Lawyers and notaries
- Insurance companies
- Real estate agents (for valuations, sales and rentals and large projects)
- Dealers in particularly valuable precious metals, works of art, antiques, vehicles, jewelry and gemstones
- Gambling providers
Details can be found in § 2 of the Money Laundering Act.
PEP check: How do you find out who is a PEP?
Systematic screening of databases is necessary to avoid criminal transactions with politically exposed persons. The best way for companies to do this is as follows:
- Collect data on the person to be checked (name, date of birth, nationality, family members, etc.)
- Comparison with PEP lists, e.g. automatically with suitable tools
- Exclusion of false positive hits and out-of-date hits
- Documentation of the check procedure and the check results (incl. sources, time of the check and result evaluation)
- Initiate measures if necessary in the event of PEP hitsPEP check: How do you find out who is a PEP?
Our recommendation:
- Check existing business contacts regularly and after political events
- Always check new potential business contacts
- Ensure that PEP lists are up to date
- Train employees
These PEP lists are available
The official PEP list of the European Commission is particularly important for the PEP test. The following can also be helpful
- Lists of German members of parliament, members of the federal government and state governments
- List of the Financial Action Task Force (FATF list)
- UN Security Council Consolidated List
- plus any lists of other countries, such as the OFAC Specially Designated Nationals List of the USA
PEP testing with suitable tools
Instead of searching through PEP lists manually, you can simply connect your ERP system to a suitable tool. The practical BEX add-on SANSCREEN, for example, enables an automated and secure PEP check in combination with the PEP-03 extension.
Hits in the PEP compliance check – what to do
Have you checked your business contacts for politically exposed persons and landed a real, current hit? Here’s what to do:
- Internal company reaction: Notify management and compliance / money laundering experts and, if necessary, the legal department
- Immediately report the hits to the Central Financial Transaction Investigation Unit
Important contact points
The Central Office for Financial Transactions, which is the national central office for the receipt, collection and evaluation of suspicious transaction reports, offers a hotline for obliged entities. The contact details and further information can be found under the following link on the customs website: https://www.zoll.de/DE/Home/home_node.html
The interpretation and application notes on the Money Laundering Act can be downloaded from the website of the German Federal Financial Supervisory Authority (BaFin) at the following link: www.bafin.de
