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Politically Exposed Persons (PEP) Under IFSCA (AML, CFT & KYC) Guidelines
Who is a politically exposed person in India?
A politically exposed person (PEP) in India is an individual entrusted with a prominent public function, such as a head of state or government, senior politician, senior government, judicial or military officer, senior executive of a state-owned enterprise, or an important political party official. The designation also extends to the individual’s immediate family members and close associates, as they may present similar money laundering, terrorist financing and proliferation financing risks.
India does not maintain an official government-published list of PEPs. Consequently, reporting entities are expected to adopt a risk-based approach and identify PEPs through a combination of commercial screening databases, adverse media checks and internal due diligence. Because no single authoritative source exists, reporting entities should document the measures to identify PEPs and mitigate the risk associated with PEP.
What does PEP stand for in KYC?
PEP stands for Politically Exposed Person. In a KYC form, it appears as a yes or no declaration asking whether you, or a close relative or associate, hold or have held a prominent public function. The term covers the individual, immediate family (spouse, children, parents, siblings) and known close associates, not just the office holder. Only the Middle-ranking and junior officials are excluded, as the test is prominence of the function, not seniority of grade alone.
Politically Exposed Persons (PEP) Under IFSCA (AML, CFT & KYC) Guidelines
As part of the AML measures, it is crucial for the regulated entities to identify a Politically Exposed Person as per the IFSCA (AML, CFT and KYC) Guidelines.
The identification of the customer as PEP is essential to adequately assess the level of ML/FT risk associated with a business relationship.
To support you with PEP identification, we bring you this infographic providing information regarding:
What is PEP status in KYC?
PEP status in KYC is a customer risk classification indicating that an individual holds, or has held, a prominent public function, or is an immediate family member or close associate of such a person. It does not restrict the customer from opening or maintaining an account but requires the reporting entity to perform enhanced due diligence, subject to the required approval.
A PEP classification typically requires senior management approval before establishing or continuing the relationship, collecting information about source of funds and source of wealth, and applying enhanced ongoing monitoring.
A PEP declaration on a KYC form is a customer’s statement and not a screening result. The reporting must independently identify and screen the customer; the two are separate controls.
The natural person holding the prominent public function in a country, such as the head of the government, senior politicians, head of international organizations, etc.
What is PEP in AML?
In AML, a PEP is a customer category carrying inherently higher money laundering and corruption risk because of the person’s access to public funds, contracts or policy decisions. Making PEP identification a mandatory step in customer risk categorisation, not an optional screen. It is a risk classification that determines the depth of due diligence applied, and firms are expected to justify accepting or exiting the relationship either way.
The FATF standard splits PEPs into three ways: foreign PEPs, domestic PEPs, and persons entrusted with prominent functions by an international organisation, and each attracts different baseline treatment. Failure to identify a PEP is a documented supervisory finding in its own right, separate from any actual suspicious activity.
Is a PEP the same in India as under FATF?
India’s PEP framework is largely aligned with the FATF standard, but the scope is not identical, particularly in relation to domestic PEPs. FATF Recommendation 12 covers foreign PEPs, domestic PEPs and persons entrusted with prominent functions by international organisations and requires appropriate enhanced measures for relationships involving PEPs.
The PML rules governing PEPs under Rule 2(1)(db) also only mention such persons as entrusted by a foreign country; the RBI and SEBI guidelines similarly refer to persons entrusted with prominent public functions by a foreign country. The IFSCA guidelines, however, mention such persons by “any country”.
Accordingli, reporting entities should apply the PEP definition and requirements contained in the specific regulatory instrument applicable to them.
Is there an official PEP list in India?
No. India does not publish an official register of politically exposed persons, so PEP identification relies on commercial screening databases, customer self-declaration and adverse media checks used together.
The absence of an official PEP list does not remove the reporting entity’s responsibility to identify PEPs. Screening should be performed at onboarding and repeated in accordance with the entity’s applicable regulatory requirements and risk-based controls, as a customer’s PEP status may change during the relationship.
What is a PEP declaration in a KYC form?
A PEP declaration in the KYC form is the customer’s confirmation of whether they, or their close relative or close associate, holds or held a prominent public function. It helps the reporting entity identify PEP relationships and determine whether enhanced due diligence measures are required.
A positive declaration does not prevent onboarding but requires the reporting entity to conduct enhanced due diligence with senior management approval. A PEP declaration does not replace independent PEP screening; it supplements it. The declaration is to be retained as part of the customer’s CDD records.
For the purpose of PEP identification, what parties to business relationship must be screened
The regulated entities must check the PEP status of the customer, the beneficial owners and the beneficiaries, including the authorised representatives
What additional measures to be applied with dealing with PEPs
Obtaining information about the PEP customer’s source of funds and wealth, including obtaining senior management approval to establish a business relationship with PEP and subjecting the PEP customers to frequent ongoing monitoring
AML India is an AML consultant, offering end-to-end AML support to IFSCA regulated entities, including designing AML policies and procedures for identifying politically exposed persons and applying robust Customer Due Diligence measures. Overall, for the entire CDD and AML compliance requirements, AML India is always present by your side.
We are committed to assisting proper enforcement of AML and CFT regulations to regulated entities in India by designing a personalised AML framework, policies, internal controls, and procedures and ensuring effective implementation of the same.
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