Politically Exposed Persons (PEPs) Explained: Definition, Due Diligence and What the FCA Expects
A politically exposed person, or PEP, is someone entrusted with a prominent public function, such as a government minister, senior judge or ambassador. Because their position could expose them to bribery and corruption, regulated firms must apply enhanced due diligence when they’re customers. Getting PEP treatment right is a core responsibility of every MLRO, and getting it wrong can mean either missed risk or unfair treatment of customers. This guide explains who counts as a PEP, what firms must do, and how the FCA expects them to strike the balance.
What Is a Politically Exposed Person?
Under regulation 35 of the Money Laundering Regulations 2017, a politically exposed person is an individual entrusted with a prominent public function, other than as a middle-ranking or more junior official. The definition covers people in the UK and overseas.
Prominent public functions include:
- heads of state, heads of government, ministers and deputy or assistant ministers
- 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 the boards of central banks
- ambassadors, chargés d’affaires and high-ranking officers in the armed forces
- members of the administrative, management or supervisory bodies of state-owned enterprises
- directors, deputy directors and board members of international organisations
Middle-ranking and junior officials aren’t PEPs, even if they work in the same institutions.
Family Members and Known Close Associates
The enhanced due diligence requirements also apply to a PEP’s family members and known close associates:
| Category | Includes |
|---|---|
| Family members | A spouse or civil partner (or equivalent), children and their spouses or partners, and parents |
| Known close associates | Individuals with joint beneficial ownership of a legal entity or arrangement with the PEP, or other close business relationships; and individuals who are sole beneficial owners of an entity set up for the PEP’s benefit |
Firms aren’t expected to search for people they have no reason to suspect are associates. The test is whether the relationship is known, or publicly known.
What Firms Must Do
When a customer, or the beneficial owner of a customer, is a PEP, or a PEP’s family member or close associate, the firm must apply enhanced due diligence. That includes:
Enhanced due diligence for PEPs
- Have appropriate risk management systems to identify PEPs, family members and close associates
- Obtain senior management approval before establishing or continuing the relationship
- Take adequate measures to establish the source of wealth and source of funds involved
- Conduct enhanced ongoing monitoring of the business relationship
- Record the assessment and the reasons for the decision
The level of enhanced due diligence should reflect the risk. A low-risk PEP with a simple product needs less than a high-risk PEP from a country with significant corruption concerns.
Domestic and Foreign PEPs
The regulations apply to both UK (domestic) and foreign PEPs. However, the law has been amended so that, where a customer is a domestic PEP, or a family member or associate of one, and no other high-risk factors are present, firms should treat them as presenting a lower level of risk than a foreign PEP, and apply a correspondingly lower level of enhanced due diligence. Firms should check the current wording of the regulations and the FCA’s guidance on this point.
How Long Does Someone Remain a PEP?
When a person stops holding a prominent public function, firms must continue to apply enhanced due diligence for at least 12 months, and for longer if they consider the person still presents a higher risk. After that, family members and close associates also cease to be treated as PEP-related, unless other risk factors apply.
What the FCA Expects
The FCA’s guidance on the treatment of PEPs, FG17/6, explains how firms should apply the requirements proportionately. Key messages include:
- firms should take a risk-based approach, not treat all PEPs as high risk
- PEPs and their families shouldn’t be refused services or treated unfairly simply because of their status
- the “senior management” approving a PEP relationship should have enough seniority and knowledge of the risks, but doesn’t have to be a board member
- firms should be able to explain their decisions
The FCA has reviewed how firms treat UK PEPs, after concerns that some were being treated too harshly. Firms should make sure their policies reflect the latest guidance, and that customer-facing staff apply them proportionately. Industry guidance from the Joint Money Laundering Steering Group also covers PEPs in detail.
PEP Screening in Practice
| Stage | What good practice looks like |
|---|---|
| Onboarding | Screen customers and beneficial owners against reliable PEP data, and ask customers directly |
| Assessment | Assess the risk of each PEP relationship individually, considering role, country, product and wealth |
| Approval | Senior management approval, with a documented rationale |
| Ongoing monitoring | Periodic re-screening, transaction monitoring and periodic reviews proportionate to risk |
| Exit from PEP status | Review at least 12 months after the person leaves office |
Screening tools produce many false positives, so firms need trained staff to review matches and decide which are true PEPs. Poor-quality screening, or reviewers who escalate everything, both create problems.
The MLRO’s Role
The MLRO is usually responsible for the firm’s PEP policy, the quality of its screening and enhanced due diligence, and reporting PEP exposure to the board. Many firms route high-risk PEP approvals through the MLRO or a financial crime committee. The MLRO’s annual report should cover the firm’s PEP population, how it’s managed, and any issues found. Our guide to the Money Laundering Regulations 2017 sets out the wider framework.
A wealth manager is approached by a former finance minister from an overseas country, who has recently left office. Screening confirms PEP status. The MLRO’s team gathers evidence of the client’s source of wealth, including public records of salary and a documented family business sale, and assesses the source of the funds being invested. The relationship is approved by a senior manager with a written rationale, the client is placed on enhanced monitoring, and a review is scheduled for 12 months after the client left office.
Common Weaknesses
- treating all PEPs as high risk, leading to unnecessary refusals and complaints
- weak evidence of source of wealth, accepted without challenge
- approvals by people without enough seniority or understanding of the risks
- failure to identify PEPs among beneficial owners of corporate customers
- no process for reviewing customers who’ve left office
The People Behind PEP Compliance
Strong PEP controls depend on experienced financial crime people: MLROs, enhanced due diligence analysts and screening specialists, particularly in private banking, wealth management, payments and crypto-asset firms. Our MLRO recruitment service and fractional and interim cover support firms building or strengthening their financial crime teams.
Financial Crime Leadership
Recruitment for the people who manage PEP and financial crime risk. Every SMF search is led personally by Adrian Lawrence FCA
MLRO Recruitment
Permanent, interim and fractional.
→ MLRO recruitment (SMF17)
→ Fractional and interim cover
Financial Crime Guides
The wider framework.
→ Money Laundering Regulations 2017
→ Sanctions screening
High-Risk Sectors
Where PEP exposure is highest.
→ Wealth management
→ Payments and fintech
Getting It Right
Oversight and accountability.
→ Section 166 reviews
→ FCA enforcement trends
Every SMF search is led personally by Adrian Lawrence FCA
Frequently Asked Questions
What is a politically exposed person?
An individual entrusted with a prominent public function, such as a minister, MP, senior judge, ambassador or senior official of a state-owned enterprise or international organisation.
Are family members of PEPs also PEPs?
They’re not PEPs themselves, but firms must apply enhanced due diligence to family members and known close associates.
Can a firm refuse a customer because they’re a PEP?
PEP status alone shouldn’t be a reason to refuse. Firms should assess the risk and apply proportionate enhanced due diligence.
Are UK politicians PEPs?
Yes. UK PEPs are covered, but where no other risk factors are present, firms should treat domestic PEPs as lower risk than foreign PEPs.
How long does PEP status last?
Firms must apply enhanced due diligence for at least 12 months after the person leaves their prominent public function, and longer if risk remains.
Who approves a PEP relationship?
Senior management with enough seniority and understanding of the risks, often the MLRO or a senior manager designated in the firm’s policy.
About the Author
Adrian Lawrence FCA is the founder of SMF Capital. He is a Chartered Accountant and Fellow of the ICAEW, holds a practising certificate in his own name, and is a former listed-company Finance Director with a BSc from Queen Mary College, University of London. He founded FD Capital in 2018 and has since built a network of five specialist recruitment practices. He leads every SMF Capital search personally, including MLROs and financial crime leaders for wealth, payments and crypto-asset firms. View Adrian’s ICAEW profile.
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