What does the term 'politically exposed person' (PEP) refer to?

The term 'politically exposed person' (PEP) refers specifically to an individual who holds a prominent public position and is therefore considered to be at a higher risk for money laundering and other forms of financial crime. PEPs can include government officials, senior executives of state-owned enterprises, judicial or military officials, and individuals who hold important functions in international organizations. The increased risk associated with PEPs stems from their potential access to significant public resources and the influence they wield, which can make them targets for bribery or corruption.

Understanding the context of PEPs is crucial for financial institutions and entities that conduct due diligence in compliance with anti-money laundering (AML) regulations. These regulations demand enhanced scrutiny and monitoring of transactions involving these individuals to detect and prevent illicit financial activities effectively.