Domestic PEP and Foreign PEP

Political exposure is a term that is frequently used in the financial sector. It refers to individuals who hold a prominent public position and may be susceptible to bribery or other types of financial crimes. Such individuals are known as politically exposed persons (PEPs). PEPs can be either domestic or foreign. Domestic PEPs are those who hold high-ranking public positions within their own country, while foreign PEPs hold similar positions in other countries. In this blog post, we will explore the differences between domestic and foreign PEPs, the risks associated with them, and the steps that financial institutions can take to manage these risks and comply with regulations.

Domestic Political Exposed Persons (PEPs)

The Financial Action Task Force (FATF) provides guidance on identifying and managing PEPs. Domestic PEPs are defined as high-risk individuals who hold positions of power within their country of residence and have a connection with a financial institution as its client. Such individuals include senior politicians, heads of state-owned companies, and senior military officials. While factors such as place of residence do not determine the type of PEP, they can be considered when assessing the level of risk associated with the Domestic PEP. It is important to note that financial institutions are more likely to have Domestic PEPs than Foreign PEPs as clients. Some countries publish lists of Domestic PEPs, but the FATF does not require this and sees such lists as potential challenges for effective implementation. Countries may choose to publish either a list of PEP functions or a list of real names. Understanding the differences between Domestic PEPs and Foreign PEPs can help financial institutions better manage their risks when dealing with PEP clients.

Foreign Political Exposed Persons (PEPs)

The FATF defines Foreign PEPs as individuals who hold important public positions on behalf of a foreign government, whose positions are different from the government where the financial institution is located. This includes:

Head of government
Vice president
Council of ministers
Members of the government’s executive board
A senior soldier
Central bank manager
Director of any state-owned company
Senior officials of an important political party
Although Foreign PEPs may have previously performed the same tasks, they are still classified as high-risk and fall under the Foreign PEP category. Their place of birth, residence, or citizenship is not a factor when assessing their risk level as Domestic PEPs. As such, financial institutions need to exercise extra caution when dealing with Foreign PEPs as their risk level is higher than that of domestic PEPs. To mitigate these risks, financial institutions must conduct more thorough scrutiny of Foreign PEPs. Therefore, it is essential to note that Foreign PEPs carry a higher risk than domestic PEPs.