What does the term "politically exposed persons" (PEPs) refer to?

The term "politically exposed persons" (PEPs) refers to individuals who hold prominent public positions and are considered to pose higher risks for money laundering. This classification arises from the understanding that PEPs may have access to significant public funds, political influence, or decision-making powers, which can make them susceptible to exploitation by corrupt practices. Consequently, financial institutions and other entities are required to apply enhanced due diligence measures when dealing with PEPs to mitigate the risk of facilitating money laundering or terrorist financing activities.

The heightened scrutiny over PEPs is due to several factors, including their potential involvement in corrupt activities, the likelihood of receiving bribes, or the handling of public contracts. This regulation is essential for ensuring that financial systems are not misused for illicit purposes, thereby promoting integrity and trust in financial markets.

In contrast, individuals who pose no risk for money laundering would not be classified as PEPs. Business owners with extensive financial transactions may have legitimate reasons for their activities but do not inherently fall under the PEP category unless they also hold prominent public positions. Likewise, people involved in charitable organizations might contribute positively to society, but their role does not automatically place them in the category of PEPs unless they hold significant political influence.