AcademyGlossary
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Alix DONA
Marketing Manager
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5/22/2024
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Exploring Politically Exposed Person (PEP) in cryptocurrency transactions

Written by
Alix DONA

Know Your Customer (KYC) regulations require Web3 businesses to verify their users. This includes identifying Politically Exposed Persons (PEPs), individuals who hold or have held prominent public functions. These functions typically involve government positions (heads of state, ministers), roles in state-owned enterprises (senior executives), or leadership positions in international organizations (UN, World Bank).

Identifying PEPs is essential because they are considered higher risk for money laundering and corruption due to their positions of power and influence. This risk stems from potential involvement in bribery or corrupt practices, which could be masked through cryptocurrency transactions. By identifying PEPs, Web3 businesses can implement enhanced due diligence procedures. This involves stricter checks on the source of funds and the purpose of transactions, ensuring the platform doesn't unknowingly facilitate illegal activities.

Who is considered a politically exposed person ?

The Financial Action Task Force (FATF), a global organization that sets standards for combating money laundering and terrorist financing, defines categories of PEPs (Politically Exposed Persons) who pose a higher risk due to their positions of power and influence. These categories are used as a baseline by many countries, including the European Union with its MiCA (Markets in Crypto-Assets) regulation

PEPs can be categorized by roles : 

  • Governmental Roles: This includes high-ranking officials like heads of state, cabinet ministers, members of parliament, senior military personnel, and judges. The MICA (Markets in Crypto Assets) regulation specifically highlights these governmental positions as requiring heightened examination due to their potential for influence and abuse.

  • Organizational Roles: FATF recommendations for individuals qualified as PEPs also include individuals holding prominent positions in state-owned enterprises or international organizations. This includes CEOs, board members of major government-controlled companies, and leaders within organizations like the United Nations or World Bank.

  • Associations: Beyond official positions, some jurisdictions extend PEP status to close associates (whether through social or professional connections) of PEPs that could be used to channel illicit funds. They can be family members, close relatives or an owner of an entity in which the government has invested in. MiCA regulations do not directly address family and associates, but national regulations within the EU may have specific guidelines depending on the jurisdiction.

What are the different categories of PEP ?

To provide a clear framework for Web3 businesses, help better assess risks, and to ensure compliance with both international standards and local regulations, the FATF (Financial Action Task Force) and the KYC (Know Your Customer) regulations typically categorize PEPs by jurisdiction as well :

  • Domestic PEPs: Individuals who hold or have held prominent public functions within your business country. This includes high-ranking government officials (heads of state, ministers), members of parliament, senior military officials, judges, and important positions in state-owned enterprises.

  • Foreign PEPs: Individuals who hold or have held prominent public functions in a foreign country. Examples include foreign heads of state, foreign government ministers, and high-ranking military officials in other nations.

  • International Organization PEPs: Individuals who hold or have held prominent public functions in international organizations like the United Nations, the World Bank, the World Health Organization or the International Monetary Fund (IMF).


Beyond these core categories, some jurisdictions can consider additional factors and categories such as  the “national PEPs” category that include well-known individuals who may not hold a formal government position but possess significant influence, such as religious leaders or heads of major corporations.

Risks associated with PEP transactions

Politically Exposed Persons (PEPs) pose a significant risk for money laundering and corruption in cryptocurrency transactions. Due to their positions of power and influence, PEPs may be more susceptible to bribery or corruption. Cryptocurrencies, with their potential for anonymity and ease of transfer across borders, can become a tool to conceal the source and destination of illicit funds. For instance, a PEP could accept bribes in cryptocurrency, then convert them into traditional currency through exchanges with negligent KYC (Know Your Customer) procedures. This ability to mask the origin and movement of funds makes cryptocurrency transactions attractive for money laundering activities involving PEPs.

Web3 businesses have a responsibility to reduce these risks. Implementing a strong crypto KYC solution like NexeraID’s is essential. This solution verifies the identities of users, including PEP screening, to identify and flag high-risk transactions. Additionally, enhanced due diligence for PEPs can involve stricter checks on the source of funds and the purpose of transactions. By adopting a robust and comprehensive KYC tool, Web3 businesses can help prevent potential money laundering, bribery and corruption  via their products/services and platforms

Failing to adequately identify and manage PEP risk can have serious legal and reputational consequences for Web3 businesses. Regulatory bodies may impose heavy fines for non-compliance with KYC and AML (Anti-Money Laundering) regulations. In severe cases, businesses could face license suspensions or even criminal charges.

Furthermore, a reputation for negligent PEP management can damage a Web3 business's image. Investors, partners and users may lose trust in a platform perceived as weak on anti-money laundering measures. This can lead to a loss of business and prevent future growth. By prioritizing robust PEP screening and KYC procedures, Web3 businesses can not only avoid legal repercussions but also build trust and credibility within the industry.

How to identify and check PEP with Nexera ID ?

Identifying and verifying Politically Exposed Persons (PEPs) can be a complex task for Web3 businesses, requiring thorough checks against global databases and watchlists. NexeraID streamlines this challenge with its KYC (Know Your Customer) platform. NexeraID allows for automated PEP screening during user onboarding, with a multi-layered screening process that compares user information against comprehensive PEP databases, including international sanctions lists and politically exposed persons lists maintained by individual countries. When a potential PEP match is identified, NexeraID flags the user for further investigation.

NexeraID's platform doesn't stop at automated checks, its robust case management tool empowers compliance officers to investigate deeper. This includes secure storage and management of user-submitted documents (ID scans, proof of address) for verification purposes. Additionally, NexeraID integrates with risk assessment engines, enabling investigators to analyze the specific risk profile of each potential PEP based on factors like their role, jurisdiction, and any negative media mentions. By combining automated screening with thorough document verification and risk assessments, NexeraID ensures a comprehensive evaluation of PEP status, empowering Web3 businesses to confidently manage PEP risk and promote a compliant and secure trading environment.

Conclusion

In conclusion, navigating PEP (Politically Exposed Person) involvement in cryptocurrency transactions requires a multi-faceted approach. Understanding the different PEP categories and the heightened risk they pose for money laundering and corruption is crucial. Web3 businesses must prioritize robust KYC (Know Your Customer) procedures that incorporate PEP screening using global databases and watchlists. Additionally, implementing enhanced due diligence for PEPs, which involves scrutinizing the source of funds and transaction purposes, further reduces risk. By adopting these practices, Web3 businesses not only comply with regulations but also protect themselves from legal and reputational consequences.

Maintaining vigilance and compliance in PEP-related matters is fundamental within the ever-evolving cryptocurrency landscape. Regulatory frameworks are constantly adapting, and staying updated on the latest guidance is essential. Utilizing KYC solutions like NexeraID can ensure efficient and accurate PEP screening, streamlining compliance efforts. By prioritizing transparency and adhering to the best practices, Web3 businesses can build trust with users and regulators, promoting a secure and sustainable environment for digital asset transactions.

Author
Alix DONA
Marketing Manager