Politically exposed persons (PEPs)
A PEP is an individual who holds a prominent public position or role in a government body or international organisation, either in Australia or overseas. Immediate family members and/or close associates of these individuals are also considered PEPs.
PEPs often have power over government spending and budgets, procurement processes, development approvals and grants. Examples of PEPs include heads of state, government ministers or equivalent politicians, senior government executives, high-ranking judges, high-ranking military officers, central bank governors, or board members or executives of an international organisation. This is not a complete list of PEPs.
Because PEPs hold positions of power and influence, they can be a target for corruption and bribery attempts, and ultimately for money laundering or terrorism financing activities. This is why it’s important to use AML/CTF measures to identify, mitigate and manage any such potential risks. However, you should remember that being a PEP doesn’t automatically mean someone is involved in criminal activities.
As part of your AML/CTF program, you must outline how you identify PEPs and what steps you take when dealing with them.
Types of PEPs
The AML/CTF Act identifies three types of PEPs.
- Domestic PEP – someone who holds a prominent public position or role in an Australian government body.
- Foreign PEP – someone who holds a prominent public position or role with a government body in a country other than Australia. This would include foreign PEPs working or residing in Australia.
- International organisation PEP – someone who holds a prominent public position or role in an international organisation, such as the United Nations (UN), the World Trade Organisation (WTO) or the North Atlantic Treaty Organisation (NATO).
You must have risk-based procedures in place to identify whether an individual customer or beneficial owner is a PEP. You must carry out the procedures to identify the PEP before providing them with a designated service, or as soon as possible afterwards. What is considered possible will depend on the size, nature and complexity of your business or organisation.
Procedures may include:
- asking the customer if they are a PEP during on-boarding and during the life of the customer relationship.
- checking the customer’s background on the internet, including sanctions lists and social media
- using databases and reports from third party vendors or organisations that specialise in analysing corruption risks
If you often need to conduct more thorough checks, or if you are very likely to have PEPs as customers, you may wish to subscribe to a specialist PEP database. However, you should be aware that these specialist databases are not always comprehensive or reliable as:
- their definition of a PEP may be different to the AML/CTF Act’s definition
- they may not include certain names
- they may not include all categories of PEPs
- they may contain different spellings of names.
Don’t assume that a customer is not a PEP just because their name does not appear in a database search.
As an individual who is or has been entrusted with a prominent public function, a PEP’s status provides a veneer of respectability which can deflect suspicion about their transactions and give them influence due to the respect afforded to PEPs. To conceal the proceeds of crime, PEPs may use corporate vehicles, third parties, professional facilitators, international funds transfers and international trade in services payments.
Not all PEPs have the same level of risk. You must treat every foreign PEP as a high-risk customer. Some domestic PEPs or international organisation PEPs are also high-risk, but others are low-to-medium-risk customers. You must still use your risk-based procedures to assess whether a particular domestic or international organisation PEP poses a higher money laundering/terrorism financing risk.
Your AML/CTF risk assessment and due diligence processes, including transaction monitoring, help you to establish what is a normal pattern of financial behaviour for a particular customer and what is unusual or suspicious. Knowing that your customer is a PEP gives you a better understanding of what is normal, legitimate financial behaviour for that customer so you can identify any unusual or suspicious activity.
If you are dealing with PEPs from a high-risk country or location, or when your transaction monitoring alerts you to PEPs making transactions that are unusually large or involving funds from an unusual source, you should get more information about the transaction.
The systems and controls you implement under your AML/CTF program are critical to preventing and disrupting the laundering of proceeds of crime. Your AML/CTF program should be regularly reviewed and updated in response to any changing ML/TF risks, including engaging PEPs as customers.
There are different customer identification and verification procedures for medium or low-risk PEPs and high-risk PEPs, including foreign PEPs.
Medium or low-risk PEPs
For domestic PEPs or international organisation PEPs who are customers or beneficial owners of a customer, you must apply the same customer identification and verification procedures that you use for individuals.
For high-risk PEPs, including foreign PEPs, who are customers or beneficial owners of a customer, you must use the same customer identification and verification procedures that you use for individuals, as well as your enhanced customer due diligence program (ECDD). This includes:
- getting senior management approval before starting or continuing a business relationship with the customer, or before providing a designated service to them
- taking reasonable measures to establish the source of the customer’s and each beneficial owner’s wealth (‘reasonable’ means what is practical and necessary in line with your identified money laundering/terrorism financing risk)
- taking reasonable measures to identify the source of the customer’s and each beneficial owner’s funds
- complying with ECDD requirements, such as verifying information and analysing transactions.
Monitoring transactions of high-risk PEPs
You should closely monitor the transactions of all foreign PEPs and of high-risk domestic or international organisation PEPs. If you suspect a transaction involves funds linked to corruption or other criminal activity, you must submit a suspicious matter report (SMR) to AUSTRAC.
Sometimes an existing customer can become a PEP during the course of your business relationship with them. Your ongoing customer due diligence (OCDD) procedures should allow for this possibility, especially if the customer tells you their circumstances have changed. If this happens, you must update their status, carry out ECDD and adjust your transaction monitoring processes to take into account the changed money laundering/terrorism financing risk.
For more information about monitoring transactions and customer behaviour see AUSTRAC’s strategic analysis brief PEPs, corruption and foreign bribery.
The following indicators may assist you to identify potential money laundering activity. Although the existence of a single indicator does not necessarily indicate illicit activity, it should encourage you to conduct further monitoring and examination.
Indicators of suspicious activity relating to PEPs include, but are not limited to:
- Using the bank accounts of dependants to move funds
- Having significant holdings in bank accounts and other high-wealth products in another country, such as in secrecy or tax haven jurisdictions
- Large withdrawals using bank cheques, made payable to a PEP or a third party.
- Cash deposits made in Australia by a PEP or an associate of a PEP, followed by funds withdrawn from the account in high-risk jurisdictions
- Large cash withdrawals from a foreign PEP’s Australian bank account, where the account has been funded by transfers from high-risk jurisdictions
- Bank account showing high-volume activity involving large cash transactions
- Undertaking transactions involving large, unexplained amounts of money
- Receiving multiple cash deposits into a bank account from third parties within a short time frame. The cash deposits may also consist of foreign currency
- International funds transfers where a PEP is both the ordering and beneficiary customer
- Receiving multiple international funds transfers from different ordering customers within a short time frame
- Using multiple bank accounts for no apparent commercial or other reason
- Conducting transactions through a professional facilitator (e.g. lawyers or accountants) for no apparent commercial or other reason
- Unable, or reluctant, to provide details or credible explanations for establishing a business relationship, opening an account or conducting transactions
- Using legal entity structures or corporate vehicles to undertake transactions for no apparent commercial or other reason, and to obscure ownership
- Using trust funds/structures as a vehicle to move funds
- Ownership of property is a foreign PEP’s only link to Australia
- Holding a mortgage or loan account and making high-value payments into the account. Also, the account may have a large positive balance
- Foreign PEPs from countries with poor governance structures and/or known for corrupt practices
- Domestic cash deposits that may be sourced from cross border movement of funds
- Registering domestic companies or businesses that have no apparent commercial activity.
How to respond to discrepancies
You must have risk-based systems and controls in place to respond to any discrepancies you notice when verifying a PEP’s identity. These controls should help you be sure that the PEP is who they claim to be.
It is important to know your customers and implement strategies to mitigate and manage the money laundering/terrorism financing risk posed by PEPs. You can do this by:
- considering the money laundering/terrorism financing risks posed by PEPs when providing a designated service/s to them
- tailoring your systems and controls, such as staff awareness training and initial and ongoing customer due diligence procedures
- submitting suspicious matter reports to AUSTRAC, where required.
When a PEP leaves their position
A person, or their family members or close associates, are not considered PEPs once they leave their high-profile position that attracted their PEP status. However, they may still be high-risk. Former PEPs may still maintain a degree of influence and therefore pose a money laundering/terrorism financing risk to your business or organisation, especially if they were high-risk PEPs. When you consider a former PEP is a high-risk customer, you must apply your ECDD program. You also may choose to implement other controls to mitigate and manage the risk.
PEPs and other legislative requirements
Sometimes reporting entities believe that they are unable to meet their legal obligations to a customer who is a foreign PEP or other high-risk customer because the AML/CTF legislation prevents them from providing the designated service. However, AUSTRAC’s position is that you may continue to provide the designated service to a customer rated as high money laundering/terrorism financing risk as long as you have applied enhanced customer due diligence procedures and submit a suspicious matter report (SMR) if appropriate.
Privacy law and PEPs
The information you collect and verify about a person’s identity is covered by the Privacy Act, and you should be aware of your obligations under that law. The personal information you collect about a PEP to comply with your AML/CTF obligations may be considered ‘sensitive’ and, according to the Australian Privacy Principles should be given a higher level of privacy protection. For example, the Privacy Act defines information about someone’s political opinions or their membership of a political association as sensitive. You must make sure that the way you manage sensitive information complies with your obligations under the Privacy Act.
The content on this website is general and is not legal advice. Before you make a decision or take a particular action based on the content on this website, you should check its accuracy, completeness, currency and relevance for your purposes. You may wish to seek independent professional advice.