PEP Talk: Dealing with a Politically Exposed Person on your Team

Abstract

The concept of Politically Exposed Person (PEP) figures prominently in the know-your-customer due diligence required of financial institutions in the fight against bribery, corruption, money laundering and terrorism finance. By its function, the term is broad and vague. Now assume you are negotiating a major project loan. One morning, you learn that two individuals closely connected with the project have turned into PEPs. What does this mean for the project; and how to deal with it? The article discusses the concept of PEP and how to address the situation in a practical manner. Since the concept is vague, it is not possible to proceed on the basis of a check-list, nor are there clear lines separating the safe from the problematical. As a policy consideration, the article seeks to raise awareness for the problems presented in legislation, regulation and practice by innocuous PEP situations, where a mechanical, undiffe¬ren¬tiated approach leads to unfair outcomes, especially for individuals. This may not be intended, yet by the logic of the prevailing dynamics in the regulation of the standard of care in financial transactions, and unless common sense prevails, this is the direction we are heading.