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

The term 'politically exposed person' (PEP) specifically refers to an individual who holds a prominent public position or has been entrusted with a significant public function. This designation is important in the context of anti-money laundering (AML) efforts because PEPs are considered to be at a higher risk for involvement in money laundering and other financial crimes due to their potential access to public funds and influence over decision-making processes.

The heightened risk associated with PEPs stems from the possibility that they may misuse their position for illicit purposes, such as bribery or embezzlement, making it essential for financial institutions and businesses to apply enhanced scrutiny when dealing with them. This scrutiny includes thorough background checks and closer monitoring of transactions.

In contrast, individuals with a significant history of financial issues, connections to criminal organizations, or public servants with no financial dealings are not described by the term PEP and do not carry the same regulatory focus or requirements for due diligence as PEPs do.