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Not All PEPs Are Created Equal

Politically Exposed Persons (or ‘PEPs’) are non-US individuals who are or have been entrusted with a prominent public or governmental function, as well as their immediate family members and close associates. Due to their position or relationship, PEPs may present a higher risk that their funds are proceeds of corruption or other illicit activity. Accordingly, financial institutions must confirm whether a customer is a PEP and, if so, implement enhanced due diligence requirements based on the type or nature of the relationship.

However, not all PEPs present the same degree of AML risk. To account for this, the US banking regulators issued a Joint Statement on August 21 clarifying how to apply a risk-based approach to assessing a PEP relationship under the customer due diligence (CDD) rule. There’s a few key take-aways. First, US public officials aren’t considered PEPs. Second, the CDD rule doesn’t require checking whether a beneficial owner of a legal entity is a PEP. Third, not all PEPs are high risk solely by virtue of their status; rather, the risk depends on the facts and circumstances. PEPs with limited transaction volume, a low-dollar deposit account or known legitimate source(s) of funds could reasonably be characterized as being lower risk.

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