Once a PEP, Always a PEP: Why Financial Systems Keep Tabs on Former Officials

• October 31, 2024
• Rachna Pandya

“Once a PEP, always a PEP” is a rule that drives how banks and other financial institutions handle accounts for politically exposed persons (PEPs).

The term PEP refers to people with public influence—like politicians or top government officials—who could misuse their position for financial gain. Here’s why the rule—once a PEP, always a PEP—matters and how it impacts both PEPs and the institutions that work with them.

Once a PEP, always a PEP: Why financial institutions don’t stop watching ex-officials. Let’s find out in this article!

What’s a PEP?

A politically exposed person (PEP) includes people like:

• Politicians
• Senior government officials
• Heads of state-owned companies

PEPs have power, and with power comes the risk of abusing financial systems. As a result, banks and financial institutions must keep a close eye on PEPs, even if they no longer hold a public position, to prevent financial crimes like money laundering.

What Does “Once a PEP, Always a PEP” Mean?

This rule boils down to a few basic points:

✓ PEP status sticks: If you’re labeled a PEP, you keep that status permanently. Why? Because even after stepping down, a former official can still have influence.

✓ Enhanced due diligence (EDD): Financial institutions need to keep monitoring PEPs closely for any signs of misuse, even years after they’ve left office.

This approach ensures that PEPs, even long after leaving a public role, don’t slip through the cracks in financial monitoring systems.

How Enhanced Due Diligence (EDD) Works in PEP

Of course, money is the motive, so when dealing with PEPs, financial institutions must thoroughly examine each transaction. Here’s what EDD looks like in action:

• Keeping an eye on transactions: Institutions watch PEPs’ accounts for any unusual or unexpected patterns.

• Checking where money comes from: Banks need to confirm the source of funds, making sure the money isn’t coming from questionable places.

• Reporting to authorities: If something looks strange, it’s reported to the right authorities to stay transparent.

EDD enables institutions protect themselves to uphold the safety of the whole financial system.

What Sets EDD for PEPs Apart

Of course, not only PEPs, but also their relatives and close associates, require extra diligence. These steps can be classified as follows:

1. Source of the funds (the origin).

2. The path of the money (money trail).

3. Any unusual transactions (red flags).

4. Alerts on questionable activities (SAR filing).

This extra step keeps high-profile accounts safe and within the rules.

Example Code: Using Machine Learning Snippet to Flag High-Risk PEP Transactions

To put enhanced due diligence (EDD) into action, financial institutions often rely on machine learning to help identify high-risk PEP transactions. This example shows how a simple code snippet can flag risky patterns, like unusually high amounts or transactions from flagged countries.

import pandas as pd

# Load sample transaction data
data = pd.DataFrame({
    'transaction_id': [1, 2, 3, 4],
    'amount': [5000, 15000, 300, 12000],  # Sample amounts
    'country': ['Country_A', 'Country_B', 'Country_X', 'Country_Y'],  # Country of transaction
    'pep_status': [True, True, False, True]  # Whether the transaction is related to a PEP
})

# Set threshold for high-risk criteria
high_amount = 10000  # Flag transactions over $10,000
high_risk_countries = ['Country_X', 'Country_Y']  # Example of flagged countries

# Flag transactions based on criteria
data['is_high_risk'] = data.apply(lambda x: x['amount'] > high_amount or x['country'] in high_risk_countries, axis=1)

# Show only flagged high-risk PEP transactions
high_risk_pep_transactions = data[(data['pep_status']) & (data['is_high_risk'])]
print(high_risk_pep_transactions[['transaction_id', 'amount', 'country', 'is_high_risk']])

What this code does:

• Checks key flags: Flags transactions that are above $10,000 or from high-risk countries.

• Isolates high-risk PEP transactions: Displays only those transactions involving PEPs and matching our high-risk criteria.

This code gives you a simple way to identify transactions needing extra attention, which is a core part of staying compliant with PEP rules.

Where Privacy and Legal Concerns Come In

Although inevitable, PEPs can still create privacy issues. Well, these rules are meant to defend the system, but some people and businesses feel they’re a bit too intrusive. So, here’s how this balance works:

• Privacy worries: PEPs may feel like their transactions are being watched long after they’ve left office, which can be concerning.

• Striking the right balance: Despite privacy concerns, regulators argue that strict monitoring is definitely needed to prevent corruption.

Balancing legal requirements with privacy isn’t easy, especially in countries with strict data protection laws.

How Global Standards Shape PEP Monitoring

To keep things consistent worldwide, groups like the Financial Action Task Force (FATF) push for the “Once a PEP, Always a PEP” rule. Here’s how it works on a global scale:

• FATF’s standards: FATF calls for strong, uniform monitoring of PEPs worldwide.

• Challenges in compliance: Developed nations usually lead the way, but developing countries often struggle with these standards due to fewer resources.

While some countries may find it tough to keep up, FATF’s standards aim to make the rules for PEPs the same everywhere.

Final Thoughts on “Once a PEP, Always a PEP”

The rule “Once a PEP, Always a PEP” is about finding balance. You must manage risks with PEPs, but trust with your clients matters too. Careful monitoring doesn’t mean you block good relationships—it means you take simple, clear steps to handle risks smoothly. By staying open and practical, you protect your business and keep valuable connections strong.

Want to learn the tricks of the trade? You can always reach out, and we’ll walk you through staying compliant. Follow ThePerfectMerchant if AML compliance topics catch your interest!

Related articles:

PEP Screening in AML – Politically Exposed Person Screening

What Is The Difference Between SAR And STR?

SoF vs. SoW—Source of Funds vs. Source of Wealth In AML

What Is an AML Risk-Based Approach?

Top FAQs on “Once a PEP, Always a PEP”

What is considered a PEP?

A PEP is anyone with a high-profile public role, like a politician or senior official, who could influence public funds.

How long does a PEP remain a PEP?

A person keeps PEP status for life, even after leaving their role, to help prevent risks linked to their past influence.

Is “Once a PEP, Always a PEP” true or false?

True. Once someone is marked as a PEP, they stay one permanently under most regulations.

Can a PEP be declassified?

In most cases, no. The status sticks because of the person’s lasting connections and influence.

How to remove PEP status?

Removing PEP status is rare and typically requires legal or regulatory changes, which don’t happen often.