PEP Verification: “No, I’m not a PEP.” Great. Now let's check it.
PEP declarations are useful. There, I said it. If a client ticks “Yes, I am a politically exposed person”, your job becomes considerably easier. You know that additional scrutiny may be required, and you can move towards the appropriate PEP risk assessment and enhanced due diligence (EDD). The more interesting box is the other one: “No, I’m not a PEP.”
What exactly does that answer tell us? It might mean the client is not a PEP. It might also mean they misunderstood the definition, did not recognise their particular public function in your beautifully drafted three-paragraph explanation, forgot about a relevant family relationship or simply preferred the answer “No”. And sometimes, of course, it may just be wrong.
The declaration has value. Just not that much value.
A PEP declaration can be a useful part of KYC and customer due diligence. It gives you information directly from the client, creates a documented record and can help identify political exposure early in the onboarding process. What I would question is treating it as the entire PEP risk assessment.
FATF Recommendation 12 requires firms to have appropriate risk management systems to determine whether a customer or beneficial owner is a PEP. The interesting word is determine. My interpretation is simple: if the only PEP check performed was asking the client and recording the answer, it is difficult to argue that much determining actually took place.
One of my favourite examples of why declarations should not operate alone is Sergei Roldugin, the Russian cellist and businessman who has long been associated with Vladimir Putin. As revealed through the Panama Papers, when an account was being opened with a Swiss bank for one of “his” companies, Roldugin was asked whether the owner (him) was a PEP or VIP (or Senior Public Figure, SPF, for those who read my other article). His answer was “No”. He was then asked whether the owner had any relationship with a PEP or VIP. Again, “No”. The second answer is particularly interesting considering that Roldugin was a close friend of Vladimir Putin and godfather to Putin’s daughter. If someone with significant publicly documented political connections can answer “No”, perhaps the declaration should be treated as one source of information rather than the final verdict. If individuals with Wikipedia pages like Roldugin can provide incomplete declarations, placing blind faith in less visible clients requires a rather impressive level of optimism.
More on PEP Verification
PEP declaration is just one of the PEP problems I explore in my book, Due Diligence Horizon. There is an entire 70+ page chapter on PEPs – or “Politically Exposed Panic”, as I called it. The book is focused on practical AML, KYC and due diligence and also explores Ultimate Beneficial Ownership (UBO), Source of Wealth (SoW) and Source of Funds (SoF). The idea is not simply to explain what these concepts mean, but to look at how to verify them more effectively: where to search for information, how to assess what the client tells you and what to do when the procedure does not provide a straightforward answer.
Trust, but do your homework
Independent PEP verification does not always require procuring a PEP screening platform or launching a compliance investigation worthy of a Netflix documentary. Depending on the client, risk level and jurisdiction, useful sources can include government and parliamentary websites, public registers, credible media, professional profiles and other open-source information. It sounds basic because it is. Large institutions screening significant numbers of potential PEPs will probably need something more sophisticated, such as a good screening platform. But smaller AML-obliged entities with limited client populations should not simply take the client’s “No” as the final answer. If the client later turns out to be a PEP, how would you explain during an audit or regulatory inspection that nobody checked even the most basic publicly available sources?
For foreign clients, I also like one simple addition to the declaration: ask them for a source. If someone declares a public function, ask for a link to the relevant ministry, municipality, parliament, employer or professional profile. It can make verification considerably easier, particularly when conducting KYC checks across unfamiliar jurisdictions.
The declaration itself can also be improved. Instead of presenting clients with a dense legal definition and asking them to decide whether they satisfy it, ask understandable questions. Do you hold a public function? What is your occupation? Do close family members hold public functions? Give clients space to describe their professional reality rather than expecting them to perform the legal classification for you. The client provides the information. Compliance determines the risk. A client may select “No” simply because the definition was misunderstood, particularly when dealing with foreign clients or legal wording that is difficult even for professionals to interpret confidently.
There will, of course, be situations where independent research produces nothing useful. Sometimes the declaration really may be the only information available. But there is an important difference between “we checked and could not find anything” and “the client ticked No, so we did not check.” The first is a limitation of available information. The second is a limitation of the control.
“No” should be the beginning, not the end
A PEP declaration therefore has value. I would keep it. I would make the questions clearer and use the answers to guide the assessment. I just would not confuse collecting a declaration with performing KYC due diligence. A single unchecked box can determine whether enhanced due diligence, source of wealth or source of funds verification, escalation and additional monitoring happen at all. It may also affect how closely you examine the client’s beneficial ownership structure, particularly where political exposure and ownership or control intersect. That makes independent verification a relatively small control with potentially significant consequences.
A declaration is not a system. And “No” is not due diligence.
Source for Sergei Roldugin declaring false PEP status: The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money by Bastian Obermayer and Frederik Obermaier.
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