Definition
Who is considered a politically exposed person?
Politically exposed persons (PEPs) are at the top of political or public power structures. They can be members of government, parliamentarians, ambassadors, or executives of a state organization. Due to their position, they have a greater influence on political decisions and economic processes. This also means that they are at increased risk of becoming targets for corruption, bribery, or money laundering.
Being classified as a politically exposed person does not imply any presumption of guilt, but is rather an expression of a risk-based protective measure: business relationships with politically exposed persons are subject to strict due diligence requirements. This applies in particular to the financial sector and compliance-relevant business processes.
According to the EU Money Laundering Directive and the German Money Laundering Act (GwG), a politically exposed person is a natural person who holds or has held an important public office in the last twelve months. This includes, for example:
- Heads of state and government
- Ministers and deputy ministers
- Members of parliaments
- Judges of supreme courts
- Directors of state-owned enterprises
- Ambassadors and consular officials
- Members of governing bodies of international organizations
Family members and close associates such as business partners or economically related third parties may also be considered “indirect PEPs” and are therefore subject to extended due diligence requirements.
Legal basis
Why are PEPs particularly relevant?
The obligation to conduct PEP checks arises from international and national anti-money laundering laws, these are specifically:
- The EU Anti-Money Laundering Directives (AMLD)
- The Money Laundering Act (GwG, Germany)
- FATF Recommendations (Financial Action Task Force)
- US regulations such as the Bank Secrecy Act or the USA PATRIOT Act
The aim is to identify and monitor financial transactions at home and abroad with an increased risk of corruption at an early stage.
Companies must therefore check whether a customer or business partner is classified as a politically exposed person during the onboarding process and throughout the entire business relationship.
What needs to be done?
PEP checks in practice
The identification and monitoring of politically exposed persons is part of the Know Your Customer (KYC) process and Business Partner Due Diligence. These follow a risk-based approach. In practice, this means:
- Identification
When establishing a business relationship, it must be checked whether the person concerned holds or has held public office.
- Risk Classification
An individual risk classification is carried out depending on the function, country of origin, and type of transaction (e.g., high-risk country, offshore connections, complex structures).
- Extended due diligence obligations
If a PEP status exists, companies must:
- check the origin of the assets
- monitor the transactions more closely
- have the business relationship approved by management
- establish regular re-checks and monitoring
- Documentation
All checks must be fully documented and, if in doubt, verifiable by supervisory authorities.
Who is required to perform checks?
The obligation to perform PEP identification applies not only to banks and insurance companies, but to all companies subject to the AMLA, including:
- Financial service providers, credit institutions
- Tax advisors, auditors, lawyers
- Real estate agents, notaries
- Art dealers, precious metal dealers
- Gambling providers
- Large companies with an international customer portfolio
Companies with supply chain responsibilities, e.g., those who fall under the EU Supply Chain Directive (CSDDD), should also consider political proximity when assessing business partners.
Challenges
What do I need to look out for when identifying PEPs?
Identifying politically exposed persons is often not a trivial matter, especially in international business relationships or complex ownership structures. The following factors make verification difficult:
- Inconsistent spelling of names
- Language barriers
- Hidden economic ties
- Lack of central PEP registers
- Interactions between PEP status and beneficial ownership
That is why many companies rely on digital PEP verification systems that access international databases, sanctions lists, press sources, and AI-supported risk indicators.
Validity
How long is someone considered a politically exposed person?
The legally prescribed period of consideration in Germany is at least 12 months after they finish holding public office. After that, however, a case-by-case assessment should still be carried out to determine whether the risk persists.
A former minister, for example, may still be considered a risk years later due to their influence, networks, or economic relationships.
Examples
Risk cases from practice
Typical scenarios in which a PEP check becomes relevant:
- A foreign diplomat opens an account: PEP status + country of origin with increased risk
- An LLC is founded by the daughter of a person in government: Indirect PEP relationship via family member
- A former minister participates in an infrastructure project: Ongoing PEP obligation despite end of mandate
- A company has a major customer from an offshore structure with political influence: Complexity + risk flags require more in-depth examination
Significance
Compliance and reputation
Failure to comply with PEP screening requirements can result in heavy fines, regulatory measures, and massive reputational damage. Integration into compliance systems is therefore a must:
- Automated PEP checks in KYC process
- Interfaces to sanctions and watch lists
- Audit-proof documentation
- Employee training
However, with a reliable PEP verification system, clear processes, and a sound risk assessment, companies can maintain control and protect themselves from unexpected revelations in international business.
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