Introduction

Recognising politically exposed persons (PEPs) is a key element of the anti-money laundering framework. Identifying a customer as a PEP should not be viewed merely as the fulfilment of a regulatory requirement, but as the starting point for a more in-depth risk assessment. Otherwise, there is a danger that the assessment will remain a formality and will fail to capture the factors that actually determine the customer’s risk profile.

The heightened attention paid to PEPs stems from their potential access to public resources, their ability to influence decision-making, and the elevated risk of corrupt practices.

Practice shows that cases involving corruption and the subsequent laundering of funds are rarely carried out through direct actions of the political figure themselves. In most cases, complex corporate structures, relatives, close associates or companies are used to conceal the actual control over the assets and the origin of the funds.

This is precisely why the most significant challenge when dealing with PEPs is not establishing the status itself, but understanding the relationships, the sources of wealth and the financial flows surrounding the person.

The Place of Politically Exposed Persons in the Anti-Money Laundering Framework

International standards place particular emphasis on the use of persons connected to PEPs as one of the principal mechanisms for concealing funds acquired through corruption. This is especially relevant in areas such as public procurement, privatisation processes, the absorption of European funds, local government, construction, real estate and other sectors involving access to significant public resources.

A characteristic feature of these schemes is that the funds rarely remain in their original form. Once acquired, they are typically channelled into assets that allow easier integration into the legitimate economy – real estate, construction projects, hotels, luxury vehicles, financial instruments or shareholdings in companies.

This creates a practical challenge for obliged entities: the customer acquiring the asset is not always the person generating the risk. In many cases, the risk becomes visible only when the relationships, the origin of the funds and the connections between the individual participants in the structure are analysed.

Real Cases from International Practice

The scale and mechanisms of PEP-related risk are best illustrated by confirmed cases from international practice – cases that have concluded with final convictions, confiscations or the official return of assets. They demonstrate that the risk indicators described below are not theoretical constructs, but patterns observed repeatedly in real schemes.

Najib Razak (Malaysia). The former Prime Minister was sentenced in 2020 (upheld with final effect in 2022) to 12 years of imprisonment on charges including money laundering and abuse of power in connection with the 1MDB scandal – the state investment fund from which billions of dollars were diverted. The funds passed through shell companies, offshore structures and banks in multiple jurisdictions, making the case one of the largest examples of how funds of corrupt origin can move through entirely legitimate financial institutions.

Sani Abacha (Nigeria). The former head of state is estimated to have diverted between 3 and 5 billion dollars from the state treasury through a network of offshore accounts registered in the names of relatives and close associates. After his death, Switzerland, the United Kingdom, the United States and other countries identified and returned hundreds of millions of dollars to Nigeria. The case is a classic example of the use of family members as nominal holders of assets – a topic examined in detail below.

Pavlo Lazarenko (Ukraine). The former Ukrainian Prime Minister was convicted in the United States in 2004–2006 of money laundering, having moved tens of millions of dollars acquired through corruption through American banks. The case demonstrates that even financial institutions in jurisdictions with well-developed control mechanisms can be used to integrate funds of illicit origin when the verification of the source of wealth is a mere formality.

Teodoro Nguema Obiang Mangue (Equatorial Guinea). The Vice-President and son of the head of state was convicted in France in 2017 (with final effect in 2021) of money laundering and embezzlement. The French state confiscated a Paris mansion, luxury vehicles and other assets worth over 100 million euros, while the United States confiscated additional assets belonging to him. The case illustrates the typical integration of funds through real estate and luxury assets amid a clear discrepancy between official income and net worth.

Ferdinand and Imelda Marcos (Philippines). After 1986, Swiss and Philippine courts established that substantial funds had been moved out of the country through sham foundations in Swiss banks. Switzerland returned over 600 million dollars to the Philippine state, and Imelda Marcos was convicted in 2018 of corruption offences connected with private foundations. The case is an early but telling example of the use of legal arrangements to conceal ownership and control.

Ricardo Martinelli (Panama). The former President was sentenced in 2023 to more than 10 years of imprisonment for money laundering in the “New Business” case, concerning the acquisition of a media group with funds of public origin. The case shows how a seemingly standard corporate transaction can serve as a mechanism for integrating diverted public funds.

What these cases have in common is telling: in none of them do the funds move directly and openly from the public office to the person’s private wealth. Instead, relatives and close associates, shell companies and offshore structures, real estate and luxury assets, and multiple jurisdictions are used. It is precisely these recurring patterns that underpin the risk indicators examined in this article.

How Connected Persons Carry Real Risk

While a PEP is typically included in specialised databases and subject to enhanced scrutiny, connected persons often appear to be entirely ordinary customers. This is precisely what makes them a convenient instrument for concealing actual control over funds or assets.

They may participate in companies, acquire property, receive funds, grant loans or be used as nominal owners of assets and companies. In such cases, the risk is rarely visible at the initial review and usually becomes recognisable only after an analysis of ownership, counterparties, public information and transactional behaviour.

An example is the use of a close relative or business partner as a shareholder in a company that participates in public procurement or acquires significant assets. Formally, the customer may not be a PEP. In context, however, the structure may point to a risk related to influence, access to public resources or the concealment of the person who actually exercises control over the funds or assets.

For this reason, the analysis should not be limited to the customer. It should cover the beneficial owners, representatives, proxies, connected persons, counterparties and the economic logic of the relationships between them.

Identifying Politically Exposed Persons

It is standard practice for the process of establishing whether a customer is a politically exposed person to begin with a declaration from the customer.

The declaration shows what information the customer provides about themselves. It may confirm circumstances that are already known, but it is rarely sufficient on its own to ensure a reliable risk assessment.

An effective approach requires cross-checking the information provided by the customer against other reliable sources – specialised databases, public registers, corporate documents, media publications, internal information and data from ongoing monitoring.

This is particularly important for customers from countries with high levels of corruption, countries under sanctions regimes, jurisdictions with limited transparency, or corporate structures that make it difficult to establish the beneficial owner. In such cases, the use of more than one source is not merely good practice, but an essential element of the risk-based approach.

Example:

A company applies to establish a business relationship and submits a declaration stating that neither the owner nor the beneficial owner is a PEP. A further check in public registers and a specialised database reveals that the ultimate owner is a family member of a person who held a senior public office in another country. Had the institution relied solely on the declaration, this risk would have gone unnoticed.

An effective PEP identification system is measured by the organisation’s ability to combine different sources of information and to form a reasoned conclusion about the real risk.

When a Customer No Longer Needs to Be Treated as a Politically Exposed Person

When dealing with PEPs, the question often arises whether the risk ends together with the mandate or the public office held. In practice, this is not always the case.

Influence, contacts and established relationships do not usually disappear immediately after the person leaves the relevant position. It is necessary to consider what position the person held, how long they performed the relevant functions, and whether circumstances continue to exist that suggest influence, access to certain circles, or connections related to their previous role.

For example, a former minister, senior civil servant or head of a state-owned enterprise may continue to participate actively in business initiatives in a sector that was part of their portfolio of responsibilities. In such cases, the risk should be assessed on the basis of the specific facts and circumstances, rather than solely on the person’s formal status.

This shows why, when dealing with PEPs, what is decisive is not so much the formal status as the real capacity to exercise influence and access resources that may create corruption risk.

Enhanced Due Diligence

Once a person has been identified as a PEP or as connected to one, the analysis is only beginning. It is here that the difference between standard and enhanced due diligence becomes apparent.

It is necessary to understand how the customer’s wealth was formed, what their main sources of income are, and whether the observed financial behaviour is consistent with this information.

Enhanced due diligence includes a higher level of control, a reasoned decision on establishing or continuing the business relationship, clarification of the source of funds and the source of wealth, as well as ongoing and enhanced monitoring throughout the entire duration of the relationship. One of the most frequent challenges is distinguishing between the source of funds and the source of wealth.

Source of Funds and Source of Wealth

The source of funds answers the question of where the funds used for a specific transaction or business relationship come from. The source of wealth looks at the broader picture – how the customer’s overall wealth was accumulated over time. This distinction is particularly important for PEPs.

It is possible for the funds for a specific investment to originate from a lawful bank transfer, the sale of an asset or a dividend received. However, this does not automatically mean that the origin of the wealth that enabled the accumulation of the relevant assets has been clarified.

It is necessary to compare the customer’s known professional activity, their asset position, their declared sources of income, the available documents and their actual financial behaviour.

A significant risk indicator arises when the information is incomplete, contradictory or difficult to verify, and no reasonable and coherent explanation of the origin of the wealth can be constructed.

Risk Indicators for Politically Exposed Persons

A single indicator is rarely sufficient in itself for a definitive conclusion. The purchase of a property, a consultancy contract or the use of a proxy may all have an entirely legitimate explanation. Risk arises when several circumstances begin to connect into a common pattern that does not correspond to the customer’s profile, their known income or the economic logic of the transaction.

Attempts to Conceal Actual Control

The first important indicator is an attempt to distance the PEP from a specific asset, account or transaction. This may manifest itself through the use of a lawyer, accountant, employee, relative, business partner or other connected person who formally acquires property, manages an account or makes payments. Such a structure is not a problem in itself, but it requires additional attention when the intermediary’s role is not clearly explained or when their financial behaviour does not correspond to their own income.

The same risk arises when legal entities or other legal arrangements are used to conceal ownership and control. This may include newly registered companies, shell companies, offshore structures or companies without genuine business activity.

Particular attention should be paid when funds are received by such companies under generic descriptions such as “loan”, “investment purpose”, “consultancy services” or “commission”, without sufficient documentation of the real economic rationale.

Example: An individual without a significant business history acquires a high-value property. The source of the funds is a loan from a company registered abroad. A subsequent analysis reveals a connection to a person connected to a PEP. At first glance, the customer is not politically exposed. In context, however, the transaction raises questions about the actual origin of the funds, the economic logic of the financing, and the person who really stands behind the operation.

Discrepancies Between Wealth and Known Income

These are cases in which the asset position of a PEP or connected person does not correspond to the available information about their income and source of wealth.

The purchase of real estate, luxury vehicles, financial instruments or shareholdings in companies may be entirely legitimate. However, when such acquisitions are not supported by the established sources of funds, a more in-depth analysis becomes necessary. The same applies to a sharp rise in living standards immediately after leaving public office.

Indicators Involving Corporate Structures and Investments

Risk may also be present in transactions involving shares or equity interests where the terms deviate from normal market logic. Examples include the acquisition of shares in exchange for services, financing of the purchase by the seller, purchase below market value, or the realisation of an unusually high profit within a short period.

Such mechanisms can be used to transfer value in the form of ostensibly lawful corporate transactions.

Example: A newly established company without a significant trading history begins to receive funds from several foreign counterparties and subsequently invests in construction projects. An analysis of the ownership reveals the involvement of persons connected to public offices. Although none of them appears as a direct owner, the structure suggests the need for a more thorough review.

Indicators Related to Business Activity

The risk increases when PEPs or connected persons operate in sectors with higher exposure to corruption, such as public procurement, construction, healthcare, energy, extractive industries, privatisation, the financial sector or the defence industry.

In these cases, the analysis should take into account not only the nature of the activity, but also the potential for influence over regulatory decisions, licensing regimes, concessions or the allocation of public resources.

Indicators in Transactional Behaviour

The transactional profile often reveals risk that is not visible at the initial review.

Particular attention is required for transfers to or from offshore companies, complex corporate structures or jurisdictions with limited transparency, unusually large transactions in different currencies, frequent cash transactions, and the rapid movement of funds through the accounts of connected persons.

Risk may also be present when funds are received into the account of a PEP or connected person and are transferred immediately afterwards to other persons or foreign accounts without a clear economic reason.

Use of Products and Channels with Lower Transparency

Certain products and channels require additional attention when dealing with PEPs. These include private banking, cash transactions, remote services, crypto-assets, online gambling and accounts operated through proxies.

These products can make it more difficult to trace the actual origin of the funds and the economic logic of the transactions.

Geographic Risk Factors

The geographic element should also form part of the analysis. Higher risk may exist where there is a connection to countries with high levels of corruption, limited transparency, weak accountability mechanisms, a significant presence of organised crime, or insufficient implementation of international anti-money laundering standards.

In such cases, the assessment should cover not only the customer, but also the country, the source of the funds, the counterparties and the economic logic of the relationships.

Effective Risk Management and Common Mistakes

In an environment in which complex corporate structures, connected persons and international financial flows are increasingly used to conceal actual control over assets, an effective approach requires not merely the collection of information, but the ability to analyse the context and the economic logic behind it.

In practice, effective management of PEP-related risk includes:

• using more than one source to establish PEP status
• analysing beneficial owners and connected persons
• thorough verification of the source of wealth
• periodic risk reviews and updating of information
• transaction monitoring for changes in behaviour
• analysis of corporate relationships
• documenting all decisions

It is particularly important that decisions are defensible. In a supervisory inspection, it is not enough to show that the customer was classified as high-risk. It is necessary to show why the relevant decision was taken, what factors were analysed, what sources were used and what measures were applied.

The most common weaknesses include:

• relying solely on a declaration from the customer
• failing to analyse connected persons
• focusing on the specific transaction rather than on the source of wealth
• insufficient documentation of the checks performed
• lack of follow-up monitoring after the initial identification
• considering risk indicators in isolation, which leads both to an underestimation of the real risk and to overly conservative decisions that are insufficiently substantiated

An effective approach requires an analysis of the full picture – customer, connected persons, structure, transactions, sector, geography and economic logic.

How Compliance Navi Can Support This Process

Effective risk management presupposes building processes that enable the timely identification of PEPs and persons connected to them, a reasoned risk assessment, and the consistent application of control measures throughout the entire duration of the business relationship.

Compliance Navi supports obliged entities in building and refining frameworks for dealing with PEPs, tailored both to regulatory requirements and to the specifics of the particular business and the organisation’s risk profile.

This includes a review of existing processes for identifying PEPs and connected persons, an assessment of enhanced due diligence procedures, an analysis of the mechanisms for establishing the source of funds and the source of wealth, and the development of effective models for ongoing monitoring and periodic risk review.

Staff training is essential. Recognising the risks associated with political exposure requires not only knowledge of the regulatory framework, but also the ability to carry out further analysis. Compliance Navi develops practical training based on real cases and good practices, supporting AML and Compliance teams in making reasoned and defensible decisions.

Should you need a review of your existing processes, an assessment of specific cases, or the development of a framework for dealing with PEPs, the Compliance Navi team is available to assist.