You must have risk-based procedures in place to identify whether an individual customer or beneficial owner is a PEP. You must carry out the procedures to identify the PEP before providing them with a designated service, or as soon as possible afterwards. What is considered possible will depend on the size, nature and complexity of your business or organisation.

Procedures may include:

• asking the customer if they are a PEP during on-boarding and during the life of the customer relationship.
• checking the customer’s background on the internet, including sanctions lists and social media
• using databases and reports from third party vendors or organisations that specialise in analysing corruption risks

If you often need to conduct more thorough checks, or if you are very likely to have PEPs as customers, you may wish to subscribe to a specialist PEP database. However, you should be aware that these specialist databases are not always comprehensive or reliable as:

• their definition of a PEP may be different to the AML/CTF Act’s definition
• they may not include certain names
• they may not include all categories of PEPs
• they may contain different spellings of names.

Don’t assume that a customer is not a PEP just because their name does not appear in a database search.

As an individual who is or has been entrusted with a prominent public function, a PEP’s status provides a veneer of respectability which can deflect suspicion about their transactions and give them influence due to the respect afforded to PEPs. To conceal the proceeds of crime, PEPs may use corporate vehicles, third parties, professional facilitators, international funds transfers and international trade in services payments.

Not all PEPs have the same level of risk. You must treat every foreign PEP as a high-risk customer. Some domestic PEPs or international organisation PEPs are also high-risk, but others are low-to-medium-risk customers. You must still use your risk-based procedures to assess whether a particular domestic or international organisation PEP poses a higher money laundering/terrorism financing risk.

Your AML/CTF risk assessment and due diligence processes, including transaction monitoring, help you to establish what is a normal pattern of financial behaviour for a particular customer and what is unusual or suspicious. Knowing that your customer is a PEP gives you a better understanding of what is normal, legitimate financial behaviour for that customer so you can identify any unusual or suspicious activity.    

If you are dealing with PEPs from a high-risk country or location, or when your transaction monitoring alerts you to PEPs making transactions that are unusually large or involving funds from an unusual source, you should get more information about the transaction.

The systems and controls you implement under your AML/CTF program are critical to preventing and disrupting the laundering of proceeds of crime. Your AML/CTF program should be regularly reviewed and updated in response to any changing ML/TF risks, including engaging PEPs as customers.

There are different customer identification and verification procedures for medium or low-risk PEPs and high-risk PEPs, including foreign PEPs.

Medium or low-risk PEPs

For domestic PEPs or international organisation PEPs who are customers or beneficial owners of a customer, you must apply the same customer identification and verification procedures that you use for individuals.

High-risk PEPs

For high-risk PEPs, including foreign PEPs, who are customers or beneficial owners of a customer, you must use the same customer identification and verification procedures that you use for individuals, as well as your enhanced customer due diligence program (ECDD). This includes:

• getting senior management approval before starting or continuing a business relationship with the customer, or before providing a designated service to them
• taking reasonable measures to establish the source of the customer’s and each beneficial owner’s wealth (‘reasonable’ means what is practical and necessary in line with your identified money laundering/terrorism financing risk)
• taking reasonable measures to identify the source of the customer’s and each beneficial owner’s funds
• complying with ECDD requirements, such as verifying information and analysing transactions.

Monitoring transactions of high-risk PEPs

You should closely monitor the transactions of all foreign PEPs and of high-risk domestic or international organisation PEPs. If you suspect a transaction involves funds linked to corruption or other criminal activity, you must submit a suspicious matter report (SMR) to AUSTRAC.

Sometimes an existing customer can become a PEP during the course of your business relationship with them. Your ongoing customer due diligence (OCDD) procedures should allow for this possibility, especially if the customer tells you their circumstances have changed. If this happens, you must update their status, carry out ECDD and adjust your transaction monitoring processes to take into account the changed money laundering/terrorism financing risk.

For more information about monitoring transactions and customer behaviour see AUSTRAC’s strategic analysis brief PEPs, corruption and foreign bribery.

The following indicators may assist you to identify potential money laundering activity. Although the existence of a single indicator does not necessarily indicate illicit activity, it should encourage you to conduct further monitoring and examination.

Indicators of suspicious activity relating to PEPs include, but are not limited to:

• Using the bank accounts of dependants to move funds
• Having significant holdings in bank accounts and other high-wealth products in another country, such as in secrecy or tax haven jurisdictions
• Large withdrawals using bank cheques, made payable to a PEP or a third party.
• Cash deposits made in Australia by a PEP or an associate of a PEP, followed by funds withdrawn from the account in high-risk jurisdictions
• Large cash withdrawals from a foreign PEP’s Australian bank account, where the account has been funded by transfers from high-risk jurisdictions
• Bank account showing high-volume activity involving large cash transactions
• Undertaking transactions involving large, unexplained amounts of money
• Receiving multiple cash deposits into a bank account from third parties within a short time frame. The cash deposits may also consist of foreign currency
• International funds transfers where a PEP is both the ordering and beneficiary customer
• Receiving multiple international funds transfers from different ordering customers within a short time frame
• Using multiple bank accounts for no apparent commercial or other reason
• Conducting transactions through a professional facilitator (e.g. lawyers or accountants) for no apparent commercial or other reason
• Unable, or reluctant, to provide details or credible explanations for establishing a business relationship, opening an account or conducting transactions
• Using legal entity structures or corporate vehicles to undertake transactions for no apparent commercial or other reason, and to obscure ownership
• Using trust funds/structures as a vehicle to move funds
• Ownership of property is a foreign PEP’s only link to Australia
• Holding a mortgage or loan account and making high-value payments into the account. Also, the account may have a large positive balance
• Foreign PEPs from countries with poor governance structures and/or known for corrupt practices
• Domestic cash deposits that may be sourced from cross border movement of funds
• Registering domestic companies or businesses that have no apparent commercial activity.